Employment of funds /assets of bank

Cash in hand and with Reserve bank

1. Cash balance maintained by a bank with itself. 2. Cash with Reserve Bank Balance with other banks and Money at call and short

notice 1.Balance with other banks :is termed as the first line of defence Money at call and short notice: is termed as second line of defence

 Investments
Advances :

.. Loans, Cash Credits and overdrafts .. Bills discounted and purchased. Fixed assets Other assets: comprises of inter-office adjustments tax paid in advance, stationary and stamps, non-banking assets in satisfaction of claims.

 Non baking assets: represents those assets which a banking

company have to take in its possession because of the failure of a customer to repay the loan in time. Such an asset should be disposed of by a banking company within seven years of its acquisition. Contingent liabilities: it comprises of the following
Liability for partly paid investment. Liability on account of outstanding forward exchange

contracts. Guarantees given on behalf of constituents: in India and outside india. Acceptances, endorsement and other obligations.

Non-Performing Assets (NPAs)

A non performing assets basically means an asset

which has ceased to generate income for the bank. With effect from march 31, 2001, a NPA is an advance where: i) Interest and /or instalment of principal remain overdue for a period of more than 180days in respect of term loan. ii) the account remains overdue for a period of more than 180 days in respect of an Overdraft/cash credit (OD/CC)

 The bills remain out of order for a period of more

than 180 days in case of the bills purchased and discounted. Any amount to be received for a period of more than 180 days in respect of any other accounts. In order to move closer to international best practices, and to ensure greater transparency, the duration for treating and asset as NPA is proposed to be reduced from 180 days to 90 days with effect from march ,31, 200

 Sub-standard: asset is one which remains NPA for a

period less than or equal to 18 months NPAs are classified into

Doubtful: asset is one which remains NPA for more than

18 months Loss: asset is one where the loss has been identified by the bank or internal /external auditors or the RBI inspection but the amount has not been written off.

INVESTMENT POLICY OF C.B

Investment policy of a CB involves appropriate allocation and distribution of funds among various assets in such a way that the main objectives of liquidity, solvency and profitability are achieved.

Funds of a bank may be deployed for

Investment in government and corporate securities;
Extending loans and advances to the customer in the

form of cash credits, OD term loans, bills purchased and discounted; Purchase of fixed assets; and Keeping cash in hand and with RBI etc.

The obligations which have to be kept in mind while deciding investment policy are:
Towards owners: the bank has the obligation to pay a

fair return on investment. Towards workers: workers should have a share in the surplus created. Towards depositors: the banks have the obligation to give expected standards of services to the depositors. To create good financial base: to strengthen internal financial structures To create and make best use for growth in size and geographical spread.

Factors affecting investment policy

Portfolio consideration:

The total deployment of funds should be such that any gradual or sudden change in economic environment should not affect the aggregate funds adversely. The requirement for a balanced portfolio decision policy are: i. The person and activity ii. Time roll-over of funds and possibility to withdraw from commitment;

iii. Income generated from deployment of funds; iv. Expected environmental changes. The objective is safety of funds deployed in the long run. Marketing of Funds: Portfolio needs will decide the need for deployment of funds. The bank has to reach the market to make desirable deployment of funds rather than being dictated by the market. The lending policy has to be evolved from marketing point of view. The experience shows that most of the borrowing units go through the stages of initial development, growth to maturity, stability and stagnation.

 The policy should aim at having maximum number of

growing stage accounts and minimum number of stagnating accounts, a good number of initial development stage accounts and a fair number of steady accounts. This will require policy decision regarding: New activities, areas and borrowers Review of stagnating accounts, Promotional activities in worth while assets.

 Flexibility in deployment of funds: The deployment of funds should meet the

expectations of depositors, borrowers and society. The funds available should match with the demand of borrowers. The desire and need to generate returns may push banks towards making commitments for longer period and doubtful cash inflows.

 Human resources:

-human factors like attitudes, skill equation, and leadership will also influence the policies of a commercial bank. No policy can be successfully implemented unless, the problems in this area adequately tackled. Much depends on the ability and expertise of officials.

 Credits needs of the area:

- the lending policy shall take note of the credit needs of the area served by it. -If a bank is located in agricultural belt, it should be able to meet the credit needs of farmers, otherwise it will result into funds drain to other areas.

Principles/objectives of investment policy

1.Liquidity the proportion of the assets required to be maintained as liquid assets will be guided by the following : 1.Ownership of demand deposits 2. Requisite cash or liquid reserves 3. Banking habits of the population 4.Seasonal requirements 5. State of the money market

2.Solvency: The capacity of the bank to meet its demand liabilities is its liquidity and the capacity to meet its liabilities in the long run is its solvency. The value of assets is not constant or fixed. A substantial fall in the realisable value of assets will threaten the solvency of the bank.

Factors that cause change in the value of assets are:

Loss or misappropriation of assets
Risk of default Risk of interest rate fluctuation

3.Profitability: it must earn sufficient revenue to meet the costs and then yield a reasonable return for the owners. -income consideration is a sub-ordinate to liquidity and solvency. However, it must be appreciated that in the long run higher income can be ensured only by maintaining a sound liquidity and solvency position.

Conflicts in investments Objectives

Conflict between income and solvency Conflict between liquidity and income

Commercial bank and economic development

Mobilisation of savings
Role in implementation of monetary policy Directing funds into desired channels Implementation of the policies of the government.

Banking Reforms
Foundation Phase:

- the foundation phase is the period up to first Nationalisation of banks in this period focus was on laying of a foundation for sound banking system Imperia bank of India was converted into the state bank of India in 1955. The role of the banking sector in the Indian economy was redefined.

Expansion phase
This phase started in mid 1960s but gained

importance after the nationalisation of 14 banks. This is phase of mass banking. The network of branches was expanded at a rapid speed. During this period the credit was directed into priority sectors.

Consolidation phase
This phase started in 1985.
the RBI started some initiatives. Some relaxation in control was started. The branch expansion was slowed down. Banks were asked to tone up internal management.

Reform Phase:
India faced a macro-economic crisis in 1991.
The foreign exchange reserves fund touched very low. The economy was growing at a very low rate . This set the government of India on a path of

liberalisation and globalisation.

Recommendation of the committee on the financial system(1991 Narasimham committee I)

SLR and CRR
Phasing out of Directed credit Deregulated interest rates: Deregulate interest rates to reflect emerging market

condition. Concessional interest rates be phased out. Structure of interest rates should bear a broad relationship with bank rate. Capital Adequacy Norms

Adoption of uniform accounting practices Income recognition Provisioning: The assets should be classified into four categoriesTransparency Asset reconstruction fund Structure of banking system Branch licensing Comuperisation Development of financial institution.

Implementation

Interest rate deregulation Reduction in CRR and SLR Directed credit Capital Adequacy Ratio(CAR) Prudential accounting standards Private and foreign banks Branch licensing banks access to capital market Supervision Customer services Merger of Banks Recovery tribunal computerisation.

Recommendation of committee -II

Need for strong banking system Merger of strong banks Confine area of local banks Review Govt.s Role in public sector banks Review of legislations Integrate lending activities Speed up computerisation Review of personnel policies. Asset reconstruction company. System for asset-liability and risk management. Money market rate.

The Khan committee recommendations 1998

Need for a super regulator Move towards universal banking Redefine priority sector Mergers between FIs and Banks Co-ordination committee. Removal of certain restrictions on FIs Other recommendations: -quick legal reforms in the area of debt recovery. -there should be no CRR for financial institutions. Institutional neutral regulatory framework for both foreign and local entities