Overview of Banking-Liability Products

7/31/2019 Overview of Banking-Liability Products

1/30

Overview of BankingLiability Products


2/30

Overview of BankingLiability ProductsWhat are the sources of funds for bankers?--equity and reserves--deposits (retail, institutional and corporate deposits)--borrowings (domestic, foreign currency)--float funds

Which source will a bank choose?

It depends mainly on the following:--cost--maturity--availability of funds (market environment)

--regulatory requirements--investment opportunities--required NIM ( net interest margin)

Based upon the above factors, banks decide the pricing of the

sources


3/30

Overview of BankingLiability ProductsWhat is the regulatory position regarding acceptance ofdeposits and paying interest?

There is no restriction on banks for accepting deposits.Payment of interest is deregulated except for current account balances.

Interest on term deposits can be decided by individual banks.Periodicity of payment of interest is flexible depending upon the natureof the product and depositors requirement.

Interest on Savings Bank has to be paid on half yearly basis.

Banks do not pay interest on current account balances.

Acceptance of deposits under Certificate of Deposits is fully regulatedby RBI. Under CD also, payment of interest is left to the individual

Banks.


4/30

Overview of BankingLiability Products

Deposits are accepted as--demand deposits and--time deposits

Demand deposits can be accepted only by Banks.Non-banking companies, authorised to accept deposits,

can accept only time deposits.

Demand deposits are accepted as savings deposit and current accountdeposits. (CASA)Every Bank is striving for increasing the share of CASA to its total

deposits.

What is the upside potential and down side risk in CASA?

What are the operational features of deposit accounts?


5/30

Overview of BankingLiability ProductsWhat are the operational features of deposit accounts?--Opening of accounts is a contract between banks and customers

under the Indian Contract Act.--Therefore accounts will be opened only for those who can legally

enter in to a contract.

--Before opening accounts Banks will complete KYC formalities as

per RBI regulation.

--Accounts can be opened for any type of customers as individuals,firms, companies, Trusts, Societies, Clubs,JHFs etc.

--Accounts can also be opened for NRIs (non resident individuals) alsOpening of such accounts are governed by FEMA.Such accounts can not be opened for non resident firms withoutRBI prior approval.

--Banks will prescribe separate account opening formalities and

documents for different class of customers.


6/30

Overview of BankingLiability ProductsMode of operationIndividuals

Can be opened in single or joint names

In case of joint accounts, can be operated as--both or all or survivor--either or survivor

--former or survivor--latter or survivor

Nomination facility is available for all individual accounts.In fact, wide publicity is given by banks about this facility, as it helps

in hassle free passing on the funds to legal heirs, in case of death ofthe depositor.

Savings Bank account and term deposit can be opened in the nameof minor if the minor is of 10 years and above.For minors below that age, it will be opened in the name of the naturalor court appointed guardian, as the case may be.


7/30

Overview of BankingLiability ProductsMode of operationIn the case of NRI individuals, the mode of operation is governed by

FEMA which we shall discuss later separately.For accounts other than individualsPartnership accountsAs agreed between the partners and evidenced in the partnership deed.Limited companies

As authorised by the Board of Directors, evidenced by the BoardresolutionJHF (Joint Hindu Family)The eldest male member (Kartha) of the family and evidenced by theJoint Hindu Family Letter

TrustsAs provided for in the Trust DeedClubs, SocietiesAs per the by-laws

There are certain other features for demand deposits and term depositsseparately


8/30

Overview of BankingLiability ProductsOther features of demand deposits and term depositsDemand deposits--opened as savings bank, current account--payable on demand--savings bank may be cheque operated or not cheque operated--each bank can stipulate minimum balance requirement

--overdrafts can be allowed in current account,

but not in savings account--the balance in savings bank can never go to zero,

but in current account it can occasionally go to zero.--In savings bank, number of withdrawals is restricted , but no such

restriction in current accounts

--savings bank account is generally opened only for individuals--for customers other than individuals and business establishments,current account is opened

--current account can be opened for individuals also depending upontheir requirement

--interest is payable on daily product basis.


9/30

Overview of BankingLiability ProductsOther features of demand deposits and term depositsDemand deposits--if there are no withdrawals for certain minimum period in SB andcurrent accounts, they are treated as dormant accounts for

closer scrutiny.--if there are no operations in the account (debit or credit) for a

minimum period, they are treated as inoperative accounts.

Time Deposits--accepted for periods from 7 days and above.--though no restriction on maximum period, banks generally restrict

term deposits to not more than ten years

What is the rationale for 7 days and 10 years?--rate of interest payable on time deposits can be fixed by banks

individually--mode of payment of interest as monthly, quarterly etc is flexibledepending upon the features of the product and depositors intention.

--a term deposit receipt issued by the bank is not transferable.It is payable only to the depositor


10/30

Overview of BankingLiability ProductsOther features of demand deposits and term depositsTime Deposits--Time deposit holders can ask for payment before maturity.

Called as embedded option for depositorsLevying penalty for such pre payments is at the discretion of banksBut in such cases interest will be paid only up to the period for which

the deposit has run.

--A overdraft or demand loan can be availed against the security oftime deposit.

--Time deposit can be opened as ordinary term deposit whereperiodical interest is paid and the principal is paid on maturity

--It can be opened as special term deposit, where interest is

compounded at quarterly intervals and the principal andaccumulated interest paid on maturity

--On the due date, if the depositor does not communicate anything,the deposit will be automatically renewed for a further period ofsame maturity at the ongoing rate of interest.


11/30

Overview of BankingLiability ProductsOther features of demand deposits and term depositsTime Deposits

--time deposits can also be opened as Recurring Deposits.

--in such accounts, the depositor credits an agreed fixed amountmonthly for a certain number of months and gets the maturity amount,(principal and interest) on maturity date.

--rate of interest is the same as term deposits.

--normally available for periods from 6 months to 120 months.

--ideally suitable for salaried class and regular wage earners, who wishto save a fixed amount for a particular purpose or time.

--this can also be closed before maturity at the request of the depositor

What is certificate of deposit?


12/30

Overview of BankingLiability ProductsCertificate of deposit

Fully regulated by RBIA short term instrument available for banks to raise resources and forinvestors to park temporary surplus.

-- a debt instrument, tradable in financial market.

-- issued at discount to face value-- only Banks and some select All India Financial Institutions permitted

by RBI can issue certificates of deposit.-- while a normal deposit is not transferable, CD is negotiable.-- interest rate is slightly more than the normal deposit rate.

-- maturity period7 days to one year.

-- FIs can issue for minimum period of I year and maximum 3 years-- minimum amount of deposit Rs1.00 lac and multiples of 1 lac.-- investors can be individuals, companies ,firms etc-- NRIs also can invest in CDs, but only on non-repatriable basis.-- No loan against CDs or buy back of CDs permitted

-- can be issued in physical or demat form


13/30


14/30

Overview of BankingLiability ProductsDeposit InsuranceDeposit Insurance and Credit Guarantee Corporation (DICGC) is a

wholly owned subsidiary of RBI.

Established under the DICGC Act 1961 to protect the interest ofdepositors especially small depositors, against bank failures.

Originally it had two purposes:1. To guarantee the loans provided by banks to SSIs andSmall Business enterprises

2. To provide insurance cover to depositors of Banks

Now, DICGC provides only insurance cover to depositors as under:1. Maximum cover Rs100,000 per depositor with a bank2. Cover is provided against default in case of failure of a bank.3. The maximum includes both principal and interest4. All deposits held with various branches of the same bank will be

treated as deposits with one bank for deciding the maximum cover.


15/30

Overview of BankingLiability ProductsNo-frills' accountWith a view to achieving the objective of greater financial inclusion,

banks have been advised by RBI to make available a basic banking'no-frills' account either with 'nil' or very low minimumbalances as well as charges that would make such accounts accessibleto vast sections of population.

The nature and number of transactions in such accounts couldbe restricted, but made known to the customer in advance in atransparent manner.

All banks should give wide publicity to the facility of such'no-frills' account including in the local media indicating the facilities

and charges in a transparent manner.

A few banks have already initiated certain pilot projects in differentremote parts of the country utilizing smart cards / mobile technologyto extend banking services similar to those dispensed from branches.

Rural kiosks, engagement of business correspondents are two suchinitiatives


16/30

Overview of BankingNon Fund Based Loan Products

What do we understand by the term non fund based loan?

A loan product by which, the Bank enables the customer to acquirean asset, or a service contract by extending an undertaking to theseller of the asset or the provider of the service contract.

Bank steps in to pay only in case of need.

Why do we call such undertakings as loan products?

Since the Bank provides a promise to pay, it is treated as a loanextended to the customer.

Since funds are not extended immediately, such advances are calledas non fund based advances.


17/30

Overview of BankingNon Fund Based Loan ProductsLet us answer certain questions

These advances are treated as contingent liability by the banks. Why?

Whether the banks have to provide capital to cover suchadvances also? If so, why?

What are the broad categories of non fund based advances and howthey are accounted for by the banks?

What are the benefits for customers from out of non fund based

loans?

What are the risk and benefits for the banks from out of suchadvances?


18/30


What are the various types of non fund based advances?

GuaranteesFinancial guarantees

Performance guarantees

Deferred Payment Guarantees

Guarantees can be inland guarantees as well as guarantees inforeign currency.

What are the various purposes for which guarantees are given?How they are assessed and issued?What are the various features of guarantees?How they are regulated?


19/30

Overview of BankingNon Fund Based Loan ProductsBefore we discuss letter of credit, let us understand the term

settlementWhat is settlement?Settlement means exchange of values traded.In trade transactions where buyer and seller are in different locations,goods move from one centre through some mode of transport as road,

rail, sea, or air and payment has to be received from the buyer.

When seller has parted with the goods, one leg of the transaction iscompleted.What is the other leg?

Receipt of payment from the buyer.Only after completion of the second leg, we say that the transaction issettled.

What are the various methods by which trade transactions are normall

settled?


20/30

Overview of BankingNon Fund Based Loan ProductsWhat are the various methods by which trade transactions are normally

settled?

Open AccountAdvance PaymentCollection through a Bank

Letters of Credit

What are the features, of each of the above methods?


21/30


Open AccountThe seller has full trust in the buyerThey are related entitiesThe buyer is operating in a buyers market.

Advance PaymentThe buyer has full trust in the sellerThey are related entitiesThe seller is operating in sellers market.


22/30

Overview of BankingNon Fund Based Loan ProductsCollection through a Bank (Documentary Collection)

Documents sent to buyers Bank through sellers Bank.Can be either DP or DA basis.Contains all documents.

Advantages

Seller has reasonable assurance of getting payment.Buyer has evidence of shipment before payment.The system can handle sale on credit also.ShortfallsIn case of refusal of payment of a sight bill by the buyer,or if the buyer goes insolvent or his credit quality weakens after

acceptance of a usance bill, seller will be at distress.


23/30

Overview of BankingNon Fund Based Loan ProductsLetters of Credit(LC)

How do we define a letter of credit?

A letter of credit is an arrangement by whatever name called

a) under which one Bank

b) acting at the request of its customerc) promises to pay to a third partyd) against submission of stipulated documents.

Banks issue both inland and foreign LCs.In an LC, presentation of documents as called for in the LC is themost important. The LC opening Banks undertaking is onlysubject to this.

What are the advantages of LC?To whom it is advantageous? buyer or seller?


24/30


Advantages for the sellerNo worry about the credit worthiness of the buyer.Enables him to sell anywhere in the world, provided

credit is availableEnables him to avail finance from his banker

Advantages for the buyerHe is assured of the right quality and quantity of goodsHe can pay after shipment is madeHe can get favorable credit terms

How many parties are there for a letter of credit?


25/30


How many parties are there for a letter of credit?

ApplicantOpening BankBeneficiaryAdvising Bank

Negotiating BankConfirming BankReimbursing BankTransferring BankSecond beneficiary

What are the different types of letters of credit?


26/30


What are the different types of letters of credit?

All LCs are irrevocable

Confirmed

TransferableCleanRed ClauseGreen ClauseRevolving

Stand by

How the transactions under documentary credit are regulatedthrough out the globe?


27/30

Overview of BankingNon Fund Based Loan ProductsLetters of Credit(LC)How the transactions under documentary credit are regulatedthrough out the globe?ICC, International Chamber of Commerce has its headquartersin Paris.

To ensure that all parties to an LC have common understanding of

the various aspects of LC transactions, ICC has developed a set ofcodified rules to be observed by all parties throughout out the Globe.

This codified rules is called asUniform Customs and Practice for Documentary Credits (UCPDC).

It was first published in year 1933. It underwent various revisionsin tune in with the changes taking place in international trade andindustry. The current version is UCP 600 effective from 1.7.2007.

What are the contents of UCPDC?


28/30


Letters of Credit

(LC)What are the contents of UCPDC?It contains 39 Articles.Defines various terms used in documentary credits.Provides uniform interpretation for various terms used in credit.

Defines roles and responsibilities of various parties.Gives uniform guidelines for examining various documents.Provides uniform rules to be followed in various situations.

Any person dealing with LC, should also understand Incoterms.


29/30


International Commercial Terms (Incoterms)

Introduced by ICC in 1936Revised six times since thenThe last revision in 2000

The current version is 2010, to come in to force from 1.1.2011.

An incoterm, when incorporated in the contract, clearly specifies--who has the obligation to arrange for carriage or insurance--which cost each party is responsible for

--when the seller delivers the goods to the buyer--who bears the risk for the goods at a particular pointIt does not say anything about--the price to be paid by the buyer--transfer of ownership on the goods


30/30


International Commercial Terms (Incoterms)Rules for any mode or modes of transportEXW Ex worksFCA Free carrierCPT carriage paid to

CIP carriage and insurance paid to

DAT delivered at terminalDAP delivered at placeDDP delivered duty paid

Rules for sea and inland waterway transportFAS free along side shipFOB free on board

CFR cost and frightCIF cost insurance and freight