What is Adjusted Net Bank Credit?What are ‘Off – Balance Sheet’

exposures? Critical terms used for understanding

Priority Sector Lending

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Adjusted Net Bank Credit

To Understand ANBC, we need to understand certain other terms

first…..So here we go….

Bill discounting

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For e.g. a customer of a Bank, has purchased a service or a product from his supplier. The supplier has raised a bill to the customer for the services provided. (A bill is a document like a Bill of Exchange or a Promissory note and is payable on a due date and / or on demand).

Bill discounting is a process whereby a Bank (a) Accepts a Bill before the due date and(b) credits the value of the bill after a discount charge to the

customer’s account.

The transaction is practically an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill until it is due for payment.

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Bill Purchasing

• Banks, sometimes, purchase bills instead of discounting them. • The bankers purchase bills, which are accompanied by

documents of title to goods such as bills of landing or railway receipt.

• In such cases, the banker grants loans in the form of overdraft or cash credit against the security of the bills.

• The term 'Bills Purchased' implies that the bank becomes the purchaser/owner of such bills. But in almost all cases the bank holds the bill only as a security for the advances.

Bill Rediscounted

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• Rediscounting refers to the act of discounting a short-term negotiable debt instrument for a second time.

• Banks may rediscount these short-term debt securities to assist the movement of a market that has a high demand for loans.

• When there is low liquidity in the market, banks can generate cash by rediscounting short-term securities. A central bank's discount facility is often called a discount window.

• The term comes from the days when a clerk would go to a window at the central bank to rediscount a company's securities.

Held To Maturity (HTM)

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Any investment by scheduled commercial banks in the long-term bonds issued by companies engaged in executing infrastructure projects and having a minimum residual maturity of seven years may be classified under HTM category.

The intention of the bank should be to hold the bonds till maturity.

Statutory Liquidity Ratio (SLR)

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• SLR Refers to the amount that the commercial banks are required to maintain in the form of cash, gold or investments in govt. approved securities before providing credit to the customers.

Approved securities refer to, bond and shares of different companies.

• SLR is measured as a % of total demand and time liabilities.

Statutory Liquidity Ratio (SLR)

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Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to

• Control the expansion of bank credit.• Ensure the solvency of commercial banks.• Compel the commercial banks to invest in government

securities like government bonds.

Current SLR is 23% as prescribed by RBI.

BANK CREDIT IN INDIA

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Calculation is done as prescribed in item No.VI of Form ‘A’ (Special Return as on March 31st) under Section 42 (2) of the RBI Act, 1934.

Bank Credit in India = Sum of the following

• Total Loans, cash credits and overdrafts provided by the bank in India

• Inland Bills purchased and discounted: Bills Purchased (Full amount paid and Interest deducted when actual

payment comes, typically for sight drafts) Bills Discounted (Interest deducted upfront and maturity calculated as per

tenor)

• Foreign Bills purchased and discounted Bills Purchased (Full amount paid and Interest deducted when actual

payment comes, typically for sight drafts) Bills Discounted (Interest deducted upfront and maturity calculated as per

tenor)

Note – Bank Credit in India excludes Inter-Bank Advances

*ANBC – ADJUSTED NET BANK CREDIT

STEPS IN CALCULATION OF ANBCBank Credit in India (As prescribed in item No.VI of Form ‘A’ (Special Return as on March 31st) under Section 42 (2) of the RBI Act, 1934. I

Bills Rediscounted with RBI and other approved Financial Institutions II

Net Bank Credit (NBC) III (I-II)

Bonds/debentures in Non-SLR (Statutory Liquidity Ratio) categories under HTM (Held to Maturity) category + other investments eligible to be treated as priority sector.

IV

ANBC III+IV

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Calculate the ANBC for the bank assuming the following:- Term Loans = Rs 200 Cr- Cash credit = Rs 100 Cr- Inland Bills Purchased = Rs 50 Cr- Foreign Bills Discounted = Rs 100 Cr- Bills rediscounted = Rs 60 Cr- Investment in Debentures of an Infrastructure company having a balance maturity period of 10 years which are HTM = Rs 200 Cr

EXERCISE 1 ON ANBC

SOLUTION TO EXERCISE 1 ON ANBC

(I) BANK CREDIT IN INDIA = (200+100+50+100) = 450 Cr

(II) BILLS REDISCOUNTED = 60 Cr

(III) NET BANK CREDIT = (I) – (II) = 450-60 = 390 Cr

(IV) DEBENTURES HELD UNDER NON SLR UNDER HTM CATEGORY = 200 Cr

(V) ADJUSTED NET BANK CREDIT = (III) + (IV) = 590 Cr

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Off – Balance Sheet exposures

OFF BALANCE SHEET EXPOSURES

• Off Balance Sheet item, refers to an asset or debt that does not appear on a bank’s balance sheet.

• Items that are considered off balance sheet are generally ones in which the bank does not have legal claim or responsibility for.

OFF BALANCE SHEET EXPOSURES

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EXAMPLES of Off Balance Sheet items : 1. loans issued by a bank are typically kept on the bank's books. If those loans are

securitized and sold off as investments, however, the securitized debt is not kept on the bank's books. One of the most common off-balance sheet items is Collateralised Debt Obligations (CDOs).

2. Contingent Liabilities3. Direct credit substitutes in which a bank substitutes its own credit for a third

party, including standby letters of credit4. Irrevocable letters of credit that guarantee repayment of commercial paper or tax-

exempt securities5. Risk participations in bankers' acceptances6. Sale and repurchase agreements7. Asset sales with recourse against the seller8. Interest rate swaps; interest rate options and currency options, and so on

You just picked up some information about some technical definitions in Banking….

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