BANKING events UPDATE Vol XII No.04 Apr 2009 The window on banking in India (for HARD COPY of the news-magazine, readers may contact us at 0172 2665623 – India or visit our website www.bankingindiaupdate.com) LEAD ARTICLE Basel-2 Supervisory Review Process Basel II framework rests on the 3 mutually- reinforcing pillars and Pillar 2 (Supervisory Review Process) envisages the establishment of suitable risk management system in banks and its review by the supervisory authority. The Basel II lays down 4 key principles in regard to the SRP and the principles 2 and 4 deal with the role of the supervisors. In India, as per RBI directives, the SRP requires an Indian bank to implement an internal process, called the Internal Capital Adequacy Assessment Process (ICAAP), for assessing their capital adequacy in relation to their risk profiles as well as a strategy for maintaining the capital levels. The Pillar 2 requires RBI also to subject all the banks to an evaluation process, called Supervisory Review and Evaluation Process (SREP). …………..…………for Complete feature, you can refer to the Printed Version of the magazine. BANKING POLICY Treatment of Provisions of NPAs RBI as per circular of Mar 24, 2009 has decided as under, in regard to the prudential treatment of different types of provisions in respect of loans portfolios. RBI has clarified that the relative provisions can only be reckoned for the purpose listed there against. (i) Additional Provisions for NPAs at higher than prescribed rates: The regulatory norms for provisioning represent the minimum requirement. Therefore, banks may voluntarily make specific provisions for NPAs at rates which are higher than the rates prescribed under existing regulations if such higher rates are based on a policy approved by the Board of Directors to provide for estimated actual loss in collectible amount and the policy is consistently adopted from year to year. The additional provisions for NPAs, like the minimum regulatory provision on NPAs, may be netted off from gross NPAs to arrive at the net NPAs (ii) Excess Provisions on sale of Standard Asset/NPAs : (a) If sale consideration is higher than the book value in respect of Standard …………..…………for Complete feature, you can refer to the Printed Version of the magazine. BASIC BANKING ISSUES Branch Banking – Business Hours RBI in its guidelines on customer service vide Circular Oct 31, 2008 has indicated the time for offering services to customers. The summary of these guidelines is provided as under: Banking hours: Banks should normally function for public transactions at least for 4 hours on week days and 2 hours on Saturdays in interest of public and trading community. In the case of extension counters, satellite offices, one man offices or other special class of branches which may remain open for such shorter hours as may be considered necessary. Changes in banking hours: No particular banking hours have been prescribed by law and a bank may fix, after due notice to its customers, whatever business hours are convenient to it i.e. to work in double shifts, to observe weekly holiday on a day other than Sunday or to function on Sundays in addition to the normal working days. In order to safeguard banks’ own interest, a bank closing any of its offices on a day other than a public holiday, will have to give due and sufficient notice to all the parties concerned who are or are likely to be affected by such closure. Thus, in all the above cases, it is necessary for a bank to give sufficient notice to the public/its customers of its intention. What is sufficient or due notice is a question of fact, depending on the circumstances of each case. It is also necessary to avoid any infringement of any other relevant local laws such as Shops and Establishment Act, etc. …………..…………for Complete feature, you can refer to the Printed Version of the magazine. BANKING FEATURES Authorised Money Changers Authorised Money Changers (AMCs) are entities authorised by RBI u/s 10 of the Foreign Exchange Management Act, 1999. An AMC may either be a Full Fledged Money Changer (FFMC) or a Restricted Money Changer (RMC scheme discontinued but certain RMCs functioning within 10 km from Pakistan and Bangladesh border, specifically permitted for the time being to operate). FFMCs are authorised by RBI to deal in foreign exchange for specified purposes. RBI revised the scheme on Mar 9, 2009. Entry Norms for AMC: The applicant has to be a company under the Companies Act, 1956. The minimum Net Owned Funds required for a single branch FFMC is Rs. 25 lakh and for Multiple branch FFMC, Rs. 50 lakh. FFMC should commence its operations within a period of 6 months from the date of issuance of licence by RBI. No fresh authorization will be issued to Urban Cooperative Banks (UCBs) to function as FFMCs. …………..…………for Complete feature, you can refer to the Printed Version of the magazine. BANKING FEATURES Global Economy – Current Status The global financial and economic situation started showing adverse signals in the year 2008 and it deteriorted in many areas since Sept 2008. In the year 2009 the conditions have further deteriorated. The US real GDP contracted at an annualised rate of 6.2% in the 4th quarter of 2008 and the unemployment rate moved up to 7.6%. The real GDP in the Euro area also declined by 1.5%. The Japanese economy also contracted sharply by 3.3% during this period. The 4th quarter real GDP numbers of several advanced economies have turned out to be worse than expected leading to uncertainty. As a response, the governments all over the world continue to unveil expansionary fiscal policies. Central banks have also taken several measures to stimulate demand and moderate the impact of the global downturn and credit crunch. The US Fed and the Bank of Japan have increased quantitative and credit easing measures. The UK further reduced its policy rate by 50 basis points to 1%. Among emerging market economies, Korea, Indonesia, Thailand, Chile and Mexico reduced their policy rates. Position in India: India’s financial sector continues to be resilient in the face of global financial turmoil. Our financial markets continue to function in an orderly manner. India’s growth trajectory has been impacted both by the financial crisis and the follow-on of global economic downturn. This impact has turned out to be deeper and wider than anticipated earlier. Concurrently, because of global developments coupled with supply and demand management measures at home, WPI inflation is on the decline and touched 0.27% during March 2009. …………..…………for Complete feature, you can refer to the Printed Version of the magazine. Banking Features Nomination for Banking Transactions Nomination facility was introduced by a notification dated 29th March 1985 (Sections 45Z A to 45Z F of the Banking Regulations Act, 1949). Nomination procedures are as per Banking Companies Nomination Rules 1985. Nomination facility is available for (a) Deposit accounts (b) Safe Deposit of Articles and (c) Lockers. Compulsory nomination: Nomination is compulsory in all single named accounts. Where the account holder is not willing to nominate, he is to give his refusal in writing. If he refuses to give the refusal in writing, the bank officials are required to record the fact of such refusal, on account opening form itself. Acknowledgement: In terms of Rules 2 (9), 3 (8) and 4 (9) of the Banking Companies Nomination (Rules), 1985, banks are required to acknowledge in writing to the depositor(s) / locker hirers (s) the filing of the relevant duly completed form of nomination, cancellation and / or variation of the nomination. Indication of nominee's name : Banks are required to record on the face of the passbooks/FDRs, the position regarding availment of nomination facility with the legend 'Nomination Registered'. Further, the banks should also indicate the name of the nominee in the Pass Books / Statement of Accounts / FDRs, in case the customer is agreeable to the same. Banking Features Lending Rates in India RBI started prescribing the minimum rate of interest on advances wef Oct 1, 1960. The ceiling rate on advances to be charged by banks was re-introduced effective March 15, 1976. The banks were also advised, to charge interest at quarterly intervals. Later on, various sector-specific, programme-specific and purpose-specific interest rates were introduced. General guidelines on rates of interest 1. Banks should charge interest on loans in accordance with the directives on interest rates on advances issued by RBI from time to time. 2. The interest at the specified rates should be charged at monthly rests and rounded off to the nearest rupee. 3. Banks should club term loans and working capital advances together for determining the size of the loan and the applicable rate of interest. Benchmark Prime Lending Rate (BPLR) and Spreads 1. With effect from Oct 18, 1994, RBI deregulated the interest rates on advances above Rs.2 lakh to be determined by the banks themselves subject to BPLR and Spread guidelines. Banks can offer loans at below BPLR to exporters or other creditworthy borrowers, including public enterprises, on the basis of a transparent and objective policy approved by their respective Boards. Banking Features Financial Glossary Accrual Basis Accounting : In accrual-based accounting, revenues are recorded at the time they are earned (payment may be received in another period); and expenses are recorded when incurred (often not in the period when they are paid). Acid Test Ratio : it indicates the extent to which the business could pay current liabilities without relying on the sale of inventory. Some financial planners also exclude Prepaid Expenses when counting current assets and Bank Overdraft when counting current liabilities. ALCO: Asset Liability Committee; this is the top management committee charged with the overall formulation of AL strategies and oversight of AL organization. American depository receipt (ADR): A special, negotiable certificate issued by a US depository bank which represents a specific number of shares of stock issued in a foreign country and traded on a US stock exchange. American Option: An option contract that can be exercised at any time between the date of purchase and the expiration date. Most of the traded options are American options. Annuity : An annuity is a series of equal payments or receipts that occur at evenly spaced intervals. Examples are leases and rental payments. …………..…………for Complete feature, you can refer to the Printed Version of the magazine. BANKING PROBLEMS Problems on Calculation of capital fund as per Basel II 1.Popular Bank provides the following information about its profit and loss account for the last 3 years: 2007 2008 2009 Interest income 3000 cr 3600 cr 4200 cr Non-interest income 400 cr 450 cr 600 cr Interest expenses 1800 cr 2000 cr 2600 cr Operating expenses 600 cr 750 cr 800 cr Provisions & contingencies 300 cr 500 cr 500 cr Net profit 700 cr 800 cr 900 cr Specify the rules for calculation for capital charge under basic indicator approach and also calculate the amount of capital charge for operational risk. Answer: The capital charge for operational risk under Basic Indicator Approach is calculated as under: …………..…………for Complete feature, you can refer to the Printed Version of the magazine. BANKING DEVELOPM ENTS E-REGISTRY OF MORTGAGED HOMES : In a bid to overcome the menace of home loan frauds, IBA proposes to set up a committee to work out the modalities for establishing a Central Electronic Registry that will list all mortgages created by deposit of title/sale deeds with banks. FOREIGN EQUITY IN DOMESTIC INSURANCE COS: The Insurance Regulatory and Development Authority (IRDA) has clarified that the equity held by a foreign company in domestic insurance companies can not exceed 26% as laid down in the IRDA Regulations,2000. SUPREME COURT ON COMPANY LIQUIDATION: The Supreme Court has ruled that the buyer of assets of a company in liquidation had no liability to clear the arrears of property tax. GUIDELINES FOR PREFERENTIAL ISSUES RELAXED: SEBI has relaxed norms for Preferential Issue of Shares to those target companies whose Boards have been superseded by Government and which have already been exempted from strict compliance of certain provisions of SEBI’s takeover regulations. …………..…………for Complete feature, you can refer to the Printed Version of the magazine. MULTI-OPTION QUESTIONS 1 The due date for repayment of a term loan instalment expires on Feb 10, 2009, but borrower fails to make the payment. The account becomes sub standard wef: a May 13, 2009 b May 12, 2009 c May 11, 2009 d May 10, 2009 2 An amount of Rs.30000 was payable in a term loan on account of interest and principal latest by Jan 22, 2009. The borrower paid Rs.24500 on April 20, 2009. The accounts becomes NPA wef: a Apr 23, 2009 b Apr 22, 2009 c since part amount has been paid, account does not become NPA d since major portion has been paid, account does not become NPA 3 In which of the following situations, the account was out of order as on Mar 31, 2009: a the balance in the account exceeded the sanctioned limit wef Mar 30, 2009. b the balance in the account was within the limit and drawing power but there was no credit in the account since Jan 05, 2009 c the balance in the account was within the limit and drawing power but total interest debited wef Jan 01, 2009 was Rs.1 lac and credit in the account Rs.1.10 lac. d the stock report was not received for two months. 4 In the following situations regarding doubtful account, which one is not correct: . . . . . . . 47 For imports in to India, the banks are required to obtain the exchange control copy of bill of entry form. But exemption is available if the value is up to: a $ 100000 b $ 300000 c $ 500000 d $ 1000000 48 Where submission of bill of entry forms is delayed by the importers, RBI is required to be informed through a statement (which of the following is not correct): a on half yearly basis for June and December b statement is to be submitted within 15 days from close of half year c statement should cover only those bills where amount is above US $ 100000 d statement should be submitted on Form XOS. …………..…………for Complete feature, you can refer to the Printed Version of the magazine. GENERAL AWARENESS SBI freezes new car loans at 10% and farm loans at 8% for a year. The Central Board of Trustees of the Employees Provident Fund Organisation (EPFO) decided to retain the previous year’s interest rate of 8.5% for the current fiscal. According to RBI, Outward Remittances by Indians climbed manifold from a mere $10 million in 2004-05 to $441 million in 2007-08. The Royal Bank of Scotland reported a net loss of $24.1 billion in 2008, the Largest Annual Shortfall ever recorded by a British Company. Union Commerce Minister Mr. Kamal Nath has lowered the Export Target for 2008-09 to $175 billion against $200 billion announced in April 2008. The French banks Banque Populaire and Caisse d’Epargne have announced for their merger, creating the Country’s Second Largest Bank. The Centre has appointed Mr. S.Sridhar as the CMD of Bank of India . Previously he has been CMD of National Housing Bank. …………..…………for Complete feature, you can refer to the Printed Version of the magazine. BANKING RATIONALES 1: Write down the details of steps taken by RBI to enhance/encourage financial inclusion in the recent past. Rationale : Banks have been advised to make available a basic ‘no-frills’ account either with ‘nil’ or very low minimum balances as well as charges. Banks have also been advised to provide a simplified general purpose credit card (GCC) facility without insistence on collateral or purpose, with a revolving credit limit up to Rs.25,000 based on cash flow of the household to enable hassle-free access to credit to rural households. A simplified mechanism for one-time settlement (OTS) of loans with principal amount up to Rs.25,000 which have become doubtful and loss assets as on September 30, 2005 was suggested for adoption. Banks have been specifically advised that borrowers with loans settled under the OTS scheme will be eligible to re-access the formal financial system for fresh credit. Banks are urged to give effect to these measures at all branches for achieving greater financial inclusion. 2: RBI has launched a financial education website for children. …………..…………for Complete feature, you can refer to the Printed Version of the magazine. LAST COLUMN Deflation Deflation is a situation where a sustained decline in the general price level of goods and services takes place. The deflation occurs when the inflation rate falls below zero percent. Deflation does not represent a temporary fall in prices. Deflation can also be called a negative inflation rate. While the inflation reduces the real value of money over time, the deflation increases the real value of money. Examples of deflation: UK experienced deflation of approx 10% in 1921, 14% in 1922, and 3 to 5% in the early 1930s.US faced the deflation between 1930-1933 when the rate was around 10%. A part of the US slide into the Great Depression, where banks failed and unemployment peaked at 25%. In Japan the deflation started in the early 1990s. The Bank of Japan and the government have tried to eliminate it by reducing interest rates to zero percent, but this was unsuccessful for over a decade. …………..…………for Complete feature, you can refer to the Printed Version of the magazine.