Bank Interview Questions and Answers

Disinvestment

2012-03-08T11:44:00.001-08:00

In finance and economics, divestment or divestiture is the reduction of some kind of asset for either financial or ethical objectives or sale of an existing business by a firm. A divestment is the opposite of an investment.

Motives:

Firms may have several motives for divestitures.

First, a firm may divest (sell) businesses that are not part of its core operations so that it can focus on what it does best. For example, Eastman Kodak, Ford Motor Company, and many other firms have sold various businesses that were not closely related to their core businesses.

A second motive for divestitures is to obtain funds. Divestitures generate funds for the firm because it is selling one of its businesses in exchange for cash. For example, CSX Corporation made divestitures to focus on its core railroad business and also to obtain funds so that it could pay off some of its existing debt.

A third motive for divesting is that a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. In other words, the sum of a firm's individual asset liquidation values exceeds the market value of the firm's combined assets. This encourages firms to sell off what would be worth more when liquidated than when retained.

A fourth motive to divest a part of a firm may be to create stability. Philips, for example, divested its chip division called NXP because the chip market was so volatile and unpredictable that NXP was responsible for the majority of Philips's stock fluctuations while it represented only a very small part of Philips NV.

A fifth motive for firms to divest a part of the company is that a division is under-performing or even failing.

A sixth reason to divest could be forced on to the firm by the regulatory authorities, for example in order to create competition.

Securitization

2012-03-08T11:41:00.002-08:00

Securitisation is the process of conversion of existing assets or future cash flows into marketable securities. In other words, securitisation deals with the conversion of assets which are not marketable into marketable ones.

For the purpose of distinction, the conversion of existing assets into marketable securities is known as asset-backed securitisation and the conversion of future cash flows into marketable securities is known as future-flows securitisation.

Some of the assets that can be securitised are loans like car loans, housing loans, et cetera and future cash flows like ticket sales, credit card payments, car rentals or any other form of future receivables.

Suppose Mr X wants to open a multiplex and is in need of funds for the same. To raise funds, Mr X can sell his future cash flows (cash flows arising from sale of movie tickets and food items in the future) in the form of securities to raise money.

This will benefit investors as they will have a claim over the future cash flows generated from the multiplex. Mr X will also benefit as loan obligations will be met from cash flows generated from the multiplex itself.

CRR reduced by 0.5 points today, 23rd Jan

2012-01-24T10:50:00.000-08:00

Current CRR is 5.5, it was 6 earlier. Repo, Reverse repo etc remains the same

Money Laundering

2012-01-22T11:28:00.001-08:00

Money laundering refers to the process of concealing the source of illegally obtained money. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount of money laundered, either worldwide or within their national economy. In 1996 the International Monetary Fund estimated that two to five percent of the worldwide global economy involved laundered money. However, the FATF, an intergovernmental body set up to combat money laundering, admitted that "overall it is absolutely impossible to produce a reliable estimate of the amount of money laundered and therefore the FATF does not publish any figures in this regard."[1] Academic commentators have likewise been unable to estimate the volume of money with any degree of assurance.[2]

Regardless of the difficulty in measurement, the amount of money laundered each year is in the billions (US dollars) and poses a significant policy concern for governments.[2] As a result, governments and international bodies have undertaken efforts to deter, prevent and apprehend money launderers. Financial institutions have likewise undertaken efforts to prevent and detect transactions involving dirty money, both as a result of government requirements and to avoid the reputational risk involved.

But in simple terms it is the Conversion of Black money into white money. This takes you back to cleaning the huge piles of cash. Indian newspapers frequently report the money laundering scams perpetrated by the Political leaders and some of the prominent stars are the chief ministers of UP, Punjab and Kerala. UP chief minister ms. Mayawati as per the Indian Express reports used some innovative techniques to launder the money by avoiding the tax in legitimate manner. She accepted the donations from persons who were road side heroes. When CBI raided these guys were found in no position to donate huge sums for political motives.

Other Indian star in the laundering Business is Ketan Parekh.It is believed that he shifted the proceeds of money received from the BoI pay order scam to various tax heavens and ultimately in the Swiss Banks.These transactions are believd to be just the tip of the iceberg.

If done successfully, it allows the criminals to maintain control over their proceeds and ultimately to provide a legitimate cover for their source of income. Money laundering plays a fundamental role in facilitating the ambitions of the drug trafficker, the terrorist, the organised criminal, the insider dealer, the tax evader as well as the many others who need to avoid the kind of attention from the authorities that sudden wealth brings from illegal activities. By engaging in this type of activity it is hoped to place the proceeds beyond the reach of any asset forfeiture laws.

US GAAP v/s Indian GAAP

2012-01-22T11:24:00.001-08:00

In the U.S., Generally Accepted Accounting Principles are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly traded and privately held companies, non-profit organizations, and governments. The term is usually confined to the United States; hence it is commonly abbreviated as US GAAP or simply GAAP. However, in the theoretical sense, Generally Accepted Accounting Principles encompass the entire industry of accounting, and not only the United States. Outside the academic context, GAAP means US GAAP.

Similar to many other countries practicing under the common law system, the United States government does not directly set accounting standards, in the belief that the private sector has better knowledge and resources. US GAAP is not written in law, although the U.S. Securities and Exchange Commission (SEC) requires that it be followed in financial reporting by publicly traded companies. Currently, the Financial Accounting Standards Board (FASB) is the highest authority in establishing generally accepted accounting principles for public and private companies, as well as non-profit entities. For local and state governments, GAAP is determined by the Governmental Accounting Standards Board (GASB), which operates under a set of assumptions, principles, and constraints, different from those of standard private-sector GAAP. Financial reporting in federal government entities is regulated by the Federal Accounting Standards Advisory Board (FASAB).

The US GAAP provisions differ somewhat from International Financial Reporting Standards (IFRS), though former SEC Chairman Christopher Cox set out a timetable for all U.S. companies to drop GAAP by 2016, with the largest companies switching to IFRS as early as 2009.[1]

There are significant differences between Indian GAAP and US GAAP. US GAAP stipulate stringent accounting treatment as well as disclosure norms, whereas their Indian GAAP in many cases have relaxed requirements ( AS 18,17,AS 3). Similarly, there are several areas where no Accounting Standard have been issued by ICAI . These differences lead to wide variations when Financial Results of Indian Companies are computed under US GAAP and it is found that Profits computed under US GAAP are generally lower

Some of these major differences between US GAAP and Indian GAAP which give rise to differences in profit are highlighted hereunder:

1. Underlying assumptions: Under Indian GAAP, Financial statements are prepared in accordance with the principle of conservatism which basically means “Anticipate no profits and provide for all possible losses”. Under US GAAP conservatism is not considered, if it leads to deliberate and consistent understatements.

2. Prudence vs. rules : The Institute of Chartered Accountants of India (ICAI) has been structuring Accounting Standards based on the International Accounting Standards ( IAS) , which employ concepts and `prudence' as the principle in contrast to the US GAAP, which are "rule oriented", detailed and complex. It is quite easy for the US accountants to handle issues that fall within the rules, while the International Accounting Standards provide a general framework of accounting standards, which emphasise "substance over form" for accounting. These rules are less descriptive and their application is based on prudence. US GAAP has thus issued several Industry specific GAAP , like SFAS 51 ( Cable TV), SFAS 50 (Record and Music Industry) , SFAS 53 ( Motion Picture Industry) etc.

3. Format/ Presentation of financial statements: Under Indian GAAP, financial statements are prepared in accordance with the presentation requirements of Schedule VI to the Companies Act, 1956. On the other hand , financial statements prepared as per US GAAP are not required to be prepared under any specific format as long as they comply with the disclosure requirements of US GAAP. Financial statements to be filed with SEC include

4. Consolidation of subsidiary companies: Under Indian GAAP (AS 21), Consolidation of Accounts of subsidiary companies is not mandatory. AS 21 is mandatory if an enterprise presents consolidated financial statements. In other words, the accounting standard does not mandate an enterprise to present consolidated financial statements but, if the enterprise presents consolidated financial statements for complying with the requirements of any statute or otherwise, it should prepare and present consolidated financial statements in accordance with AS 21.Thus, the financial income of any company taken in isolation neither reveals the quantum of business between the group companies nor does it reveal the true picture of the Group . Savvy promoters hive off their loss making divisions into separate subsidiaries, so that financial statement of their Flagship Company looks attractive .Under US GAAP (SFAS 94),Consolidation of results of Subsidiary Companies is mandatory , hence eliminating material, inter company transaction and giving a true picture of the operations and Profitability of the various majority owned Business of the Group.

5. Cash flow statement: Under Indian GAAP (AS 3) , inclusion of Cash Flow statement in financial statements is mandatory only for companies whose share are listed on recognized stock exchanges and Certain enterprises whose turnover for the accounting period exceeds Rs. 50 crore. Thus , unlisted companies escape the burden of providing cash flow statements as part of their financial statements. On the other hand, US GAAP (SFAS 95) mandates furnishing of cash flow statements for 3 years – current year and 2 immediate preceding years irrespective of whether the company is listed or not .

6. Investments: Under Indian GAAP (AS 13), Investments are classified as Current and Long term. These are to be further classified Government or Trust securities ,Shares, debentures or bonds Investment properties Others-specifying nature. Investments classified as current investments are to be carried in the financial statements at the lower of cost and fair value determined either on an individual investment basis or by category of investment, but not on an overall (or global) basis. Investments classified as long term investments are carried in the financial statements at cost. However, provision for diminution is to be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually. Under US GAAP ( SFAS 115) , Investments are required to be segregated in 3 categories i.e. held to Maturity Security ( Primarily Debt Security) , Trading Security and Available for sales Security and should be further segregated as Current or Non current on Individual basis. Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealised gains and losses included in earnings. All Other securities are classified as available-for-sale securities and reported at fair value, with unrealised gains and losses excluded from earnings and reported in a separate component of shareholders' equity

7. Depreciation: Under the Indian GAAP, depreciation is provided based on rates prescribed by the Companies Act, 1956. Higher depreciation provision based on estimated useful life of the assets is permitted, but must be disclosed in Notes to Accounts.( Guidance note no 49) . Depreciation cannot be provided at a rate lower than prescribed in any circumstance. Similarly , there is no compulsion to provide depreciation at a higher rate, even if the actual wear and tear of the equipments is higher than the rates provided in Companies Act. Thus , an Indian Company can get away with providing with lesser depreciation , if the same is in compliance to Companies Act 1956. Contrary to this, under the US GAAP , depreciation has to be provided over the estimated useful life of the asset, thus making the Accounting more realistic and providing sufficient funds for replacement when the asset becomes obsolete and fully worn out.

8. Foreign currency transactions: Under Indian GAAP(AS11) Forex transactions ( Monetary items ) are recorded at the rate prevalent on the transaction date .Year end foreign currency assets and liabilities ( Non Monetary Items) are re-stated at the closing exchange rates. Exchange rate differences arising on payments or realizations and restatements at closing exchange rates are treated as Profit /loss in the income statement. Exchange fluctuations on liabilities incurred for fixed assets can be capitalized. Under US GAAP (SFAS 52), Gains and losses on foreign currency transactions are generally included in determining net income for the period in which exchange rates change unless the transaction hedges a foreign currency commitment or a net investment in a foreign entity . Capitalization of exchange fluctuation arising from foreign liabilities incurred for acquiring fixed assets does not exist. Translation adjustments are not included in determining net income for the period but are disclosed and accumulated in a separate component of consolidated equity until sale or until complete or substantially complete liquidation of the net investment in the foreign entity takes place . US GAAP also permits use of Average monthly Exchange rate for Translation of Revenue, expenses and Cash flow items, whereas under Indian GAAP, the closing exchange rate for the Transaction date is to be taken for translation purposes.

9. Expenditure during Construction Period: As per the Indian GAAP (Guidance note on ‘Treatment of expenditure during construction period' ) , all incidental expenditure on Construction of Assets during Project stage are accumulated and allocated to the cost of asset on completion of the project. Contrary to this, under the US GAAP (SFAS 7) , such expenditure are divided into two heads – direct and indirect. While, Direct expenditure is accumulated and allocated to the cost of asset, indirect expenditure are charged to revenue.

10. Research and Development expenditure: Indian GAAP ( AS 8) requires research and development expenditure to be charged to profit and loss account, except equipment and machinery which are capitalized and depreciated. Under US GAAP ( SFAS 2) , all R&D costs are expenses except intangible assets purchased from others and Tangible assets that have alternative future uses which are capitalised and depreciated or amortised as R&D Expense. Under US GAAP, R&D expenditure incurred on software development are expensed until technical feasibility is established ( SOP 81.1) . R&D Cost and software development cost incurred under contractual arrangement are treated as cost of revenue.

11. Revaluation reserve : Under Indian GAAP, if an enterprise needs to revalue its asset due to increase in cost of replacement and provide higher charge to provide for such increased cost of replacement, then the Asset can be revalued upward and the unrealised gain on such revaluation can be credited to Revaluation Reserve ( Guidance note no 57). The incremental depreciation arising out of higher book value may be adjusted against the Revaluation Reserve by transfer to P&L Account. However for window dressing some promoters misutilise this facility to hoodwink the shareholders on many occasions. US GAAP does not allow revaluing upward property, plant and equipment or investment.

12. Long term Debts: Under US GAAP , the current portion of long term debt is classified as current liability, whereas under the Indian GAAP, there is no such requirement and hence the interest accrued on such long term debt in not taken as current liability.

13. Extraordinary items, prior period items and changes in accounting policies: Under Indian GAAP( AS 5) , extraordinary items, prior period items and changes in accounting policies are disclosed without netting off for tax effects . Under US GAAP (SFAS 16) adjustments for tax effects are required to be made while reporting the Prior period Items.

14. Goodwill: Under the Indian GAAP goodwill is capitalized and charged to earnings over 5 to 10 years period. Under US GAAP ( SFAS 142) , Goodwill and intangible assets that have indefinite useful lives are not amortized ,but they are tested at least annually for impairment using a two-step process that begins with an estimation of the fair value of a reporting unit. The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any. However, if certain criteria are met, the requirement to test goodwill for impairment annually can be satisfied without a remeasurement of the fair value of a reporting unit.

15. Capital issue expenses: Under the US GAAP, capital issue expenses are required to be written off when incurred against proceeds of capitals, whereas under Indian GAAP , capital issue expense can be amortized or written off against reserves.

16. Proposed dividend: Under Indian GAAP , dividends declared are accounted for in the year to which they relate. For example, if dividend for the FY 1999-2000 is declared in Sep 2000 , then the corresponding charge is made in 2000-2001 as below the line item . Contrary to this , under US GAAP dividends are reduced from the reserves in the year they are declared by the Board. Hence in this case under US GAAP , it will be charged Profit and loss account of 2000-2001 above the line.

17. Investments in Associated companies: Under the Indian GAAP( AS 23) , investment in associate companies is initially recorded at Cost using the Equity method whereby the investment is initially recorded at cost, identifying any goodwill/capital reserve arising at the time of acquisition. The carrying amount of the investment is adjusted thereafter for the post acquisition change in the investor’s share of net assets of the investee. The consolidated statement of profit and loss reflects the investor’s share of the results of operations of the investee.are carried at cost . Under US GAAP ( SFAS 115) Investments in Associates are accounted under equity method in Group accounts but would be held at cost in the Investor’s own account.

18. Preoperative expenses: Under Indian GAAP, (Guidance Note 34 - Treatment of Expenditure during Construction Period), direct Revenue expenditure during construction period like Preliminary Expenses, Project related expenditure are allowed to be Capitalised. Further , Indirect revenue expenditure incidental and related to Construction are also permitted to be capitalised. Other Indirect revenue expenditure not related to construction, but since they are incurred during Construction period are treated as deferred revenue expenditure and classified as Miscellaneous Expenditure in Balance Sheet and written off over a period of 3 to 5 years. Under US GAAP ( SFAS 7) , the concept of preoperative expenses itself doesn’t exist. SOP 98.5 also madates that all Start up Costs should be expensed. The enterprise has to prepare its balance sheet and Profit and Loss Account as if it were a normal running organization. Expenses have to be charged to revenue and Assets are Capitalised as a normal organization. The additional disclosure include reporting of cash flow, cumulative revenues and Expenses since inception. Upon commencement of normal operations, notes to Statement should disclose that the Company was but is no longer is a Development stage enterprise. Thus , due to above accounting anomaly, Accounts prepared under Indian GAAP , contain higher charges to depreciation which are to be adjusted suitably under US GAAP adjustments for indirect preoperative expenses and foreign currencies.

19. Employee benefits: Under Indian GAAP, provision for leave encashment is accounted based n actuarial valuation. Compensation to employees who opt for voluntary retirement scheme can be amortized over 60 months. Under US GAAP, provision for leave encashment is accounted on actual basis. Compensation towards voluntary retirement scheme is to be charged in the year in which the employees accept the offer.

20. Loss on extinguishment of debt: Under Indian GAAP, debt extinguishment premiums are adjusted against Securities Premium Account. Under US GAAP, premiums for early extinguishment of debt are expensed as incurred.

Bank Stress Test

2012-01-22T11:19:00.001-08:00

Stress testing is a form of testing that is used to determine the stability of a given system or entity. It involves testing beyond normal operational capacity, often to a breaking point, in order to observe the results. Stress testing may have a more specific meaning in certain industries, such as fatigue testing for materials.

Instead of doing financial projection on a "best estimate" basis, a company or its regulators may do stress testing where they look at how robust a financial instrument is in certain crashes, a form of scenario analysis. They may test the instrument under, for example, the following stresses:

What happens if equity markets crash by more than x% this year?

What happens if GDP falls by z% in a given year?

What happens if interest rates go up by at least y%?

What if half the instruments in the portfolio terminate their contracts in the fifth year?

What happens if oil prices rise by 200%?

This type of analysis has become increasingly widespread, and has been taken up by various governmental bodies (such as the FSAin the UK) or inter-governmental bodies such as the European Banking Authority and the International Montetary Fund) as a regulatory requirement on certain financial institutions to ensure adequate capital allocation levels to cover potential losses incurred during extreme, but plausible, events. This emphasis on adequate, risk adjusted determination of capital has been further enhanced by modifications to banking regulations such as Basel II. Stress testing models typically allow not only the testing of individual stressors, but also combinations of different events. There is also usually the ability to test the current exposure to a known historical scenario (such as the Russian debt default in 1998 or 9/11 attacks) to ensure the liquidity of the institution.

Stress testing reveals how well a portfolio is positioned in the event forecasts prove true. Stress testing also lends insight into a portfolio's vulnerabilities. Though extreme events are never certain, studying their performance implications strengthens understanding.

Defining stress tests

Stress testing defines a scenario and uses a specific algorithm to determine the expected impact on a portfolio's return should such a scenario occur. There are three types of scenarios:

Extreme event: hypothesize the portfolio's return given a catastrophic event, often the recurrence of a historical event. Current positions and risk exposures are combined with the historical factor returns.

Risk factor shock: shock any factor in the chosen risk model by a user-specified amount. The factor exposures remain unchanged, while the covariance matrix is used to adjust the factor returns based on their correlation with the shocked factor.

External factor shock: instead of a risk factor, shock any index, macro-economic series (e.g., oil prices, property prices), or custom series (e.g., exchange rates). Using regression analysis, new factor returns are estimated as a result of the shock.

In an exponentially weighted stress test, historical periods more like the defined scenario receive a more significant weighting in the predicted outcome. The defined decay rate lets the tester manipulate the relative importance of the most similar periods. In the standard stress test, each period is equally weighted.

Stress tests in payment and settlement systems

Another form of financial stress testing is the stress testing of financial infrastructure. As part of Central Banks' market infrastructure oversight functions, stress tests have been applied to payment and securities settlement systems.[2][3][4] Since ultimately, the Banks need to meet their obligations in Central Bank money held in payment systems that are commonly operated or closely supervised by central banks[5] (e.g. CHAPS, FedWire, Target2, which are also referred to as large value payment systems)[, it is of great interest to monitor these systems' participants' (mainly banks) liquidity positions.

The amount of liquidity held by banks on their accounts can be a lot less (and usually is) than the total value of transferred payments during a day. The total amount of liquidity needed by banks to settle a given set of payments is dependent on the balancedness of the circulation of money from account to account (reciprocity of payments), the timing of payments and the netting procedures used.[6] The inability of some participants to send payments can cause severe falls in settlement ratios of payments. The failure of one participant to send payments can have negative contagion effects on other participants' liquidity positions and their potential to send payments.

By using stress tests it is possible to evaluate the short term effects of events such as bank failures or technical communication breakdowns that lead to the inability of chosen participants to send payments. These effects can be viewed as direct effects on the participant, but also as systemic contagion effects. How hard the other participants will be hit by a chosen failure scenario will be dependent on the available collateral and initial liquidity of participants, and their potential to bring in more liquidity.[7] Stress test conducted on payment systems help to evaluate the short term adequacy and sufficiency of the prevailing liquidity levels and buffers of banks, and the contingency measures of the studied payment systems.[8]

A financial stress tests is only as good as the scenarios on which it is based. Those designing stress tests must literally imagine possible futures that the financial system might face. As an exercise of the imagination, the stress test is limited by the imaginative capacities of those designing the stress test scenarios. Sometimes, the stress test's designers fail to imagine plausible future scenarios, possibly because of professional peer pressure or groupthink within a profession or trade (witness the failure of the great majority of financial "experts" to envisage the crash of 2008)or because some things are just too horrible to imagine. The successive financial stress tests conducted by the European Banking Authority and the Committee of European Banking Supervisors in 2009, 2010 and 2011 illustrate this dynamic. The 2009 and 2010 stress tests assumed even in their adverse scenarios a relatively benign macro-economic environment of -0.6% economic growth in the Euro area; by 2011 it was clear that such assumptions were no longer just plausible, they were almost certain to happen; the adverse scenario had to be adjusted to a -4.0% growth scenario. Those reviewing and using the results of stress tests must cast a critical eye on the scenarios used in the stress test.

India is to ‘stress test’ its banks twice a year following the example of similar exercises being undertaken in the US and Europe.

India’s banks emerged remarkably unscathed from the global financial crisis in spite of suffering a widespread liquidity squeeze.

But the Reserve Bank of India says that it had conducted stress tests during the global financial crisis and would continue to do so regularly in the future to build confidence in its banking system.India’s move shows a growing acknowledgement among central bankers of the value of stress tests, in which bank balance sheets are checked to see how much financial pressure they can withstand in the event of simulated future crises. But Indian regulators, unlike their US and European counterparts, are not making the results public.

A senior RBI official told the Financial Times that the central bank had so far conducted two stress tests on the country’s commercial banks, and had undertaken several sector-specific tests.

Duvvuri Subbarao, RBI governor, speaking in Mumbai on Tuesday said that India was “learning on the job” in its review of capital, liquidity and leverage standards.

He said India needed to have more rigorous stress tests, acknowledging that what the RBI had introduced was not as searching as stress tests adopted in the US and Europe.

Only ICICI Bank, India’s largest private sector bank, required explicit help from the Reserve Bank of India during the global financial crisis. It received liquidity support after an exposure to some ‘toxic assets’ caused a mini- run on deposits.

Most of India’s banking sector is state controlled. There has been some concern about the capitalisation of smaller banks. The Indian goverment has availed itself of World Bank loans to help inject capital into some of them.

George Osborne, the UK’s finance minister, said heads of UK banks had accompanied him on a visit to Mumbai to learn from the resilience of Indian banks.

“Stress tests have been a very important moment,” Mr Osborne said. “They have enhanced confidence in the European banking system.”

Osborne said both the UK and India were involved in discussions at the G20 over capital and liquidity standards to protect the global banking system.

IFRS - International Financial Reporting Standard

2012-01-22T11:15:00.000-08:00

International Financial Reporting Standards (IFRS) are principles-based standards, interpretations and the framework (1989)[1] adopted by the International Accounting Standards Board (IASB).

Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards IFRS.

The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be mandatory in India for financial statements for the periods beginning on or after 1 April 2011. This will be done by revising existing accounting standards to make them compatible with IFRS.

Reserve Bank of India has stated that financial statements of banks need to be IFRS-compliant for periods beginning on or after 1 April 2011...

The ICAI has also stated that IFRS will be applied to companies above Rs.1000 crore from April 2011. Phase wise applicability details for different companies in India:

Phase 1: Opening balance sheet as at 1 April 2011*

i. Companies which are part of NSE Index – Nifty 50

ii. Companies which are part of BSE Sensex – BSE 30

a. Companies whose shares or other securities are listed on a stock exchange outside India

b. Companies, whether listed or not, having net worth of more than INR1,000 crore

Phase 2: Opening balance sheet as at 1 April 2012*

Companies not covered in phase 1 and having net worth exceeding INR 500 crore

Phase 3: Opening balance sheet as at 1 April 2014*

Listed companies not covered in the earlier phases

If the financial year of a company commences at a date other than 1 April, then it shall prepare its opening balance sheet at the commencement of immediately following financial year.

On January 22, 2010 the Ministry of Corporate Affairs issued the road map for transition to IFRS. It is clear that India has deferred transition to IFRS by a year. In the first phase, companies included in Nifty 50 or BSE Sensex, and companies whose securities are listed on stock exchanges outside India and all other companies having net worth of Rs 1,000 crore will prepare and present financial statements using Indian Accounting Standards converged with IFRS. According to the press note issued by the government, those companies will convert their first balance sheet as at April 1, 2011, applying accounting standards convergent with IFRS if the accounting year ends on March 31. This implies that the transition date will be April 1, 2011. According to the earlier plan, the transition date was fixed at April 1, 2010.

The press note does not clarify whether the full set of financial statements for the year 2011–12 will be prepared by applying accounting standards convergent with IFRS. The deferment of the transition may make companies happy, but it will undermine India’s position. Presumably, lack of preparedness of Indian companies has led to the decision to defer the adoption of IFRS for a year. This is unfortunate that India, which boasts for its IT and accounting skills, could not prepare itself for the transition to IFRS over last four years. But that might be the ground reality. Transition in phases Companies, whether listed or not, having net worth of more than Rs 500 crore will convert their opening balance sheet as at April 1, 2013. Listed companies having net worth of Rs 500 crore or less will convert their opening balance sheet as at April 1, 2014. Un-listed companies having net worth of Rs 500 crore or less will continue to apply existing accounting standards, which might be modified from time to time. Transition to IFRS in phases is a smart move. The transition cost for smaller companies will be much lower because large companies will bear the initial cost of learning and smaller companies will not be required to reinvent the wheel. However, this will happen only if a significant number of large companies engage Indian accounting firms to provide them support in their transition to IFRS. If, most large companies, which will comply with Indian accounting standards convergent with IFRS in the first phase, choose one of the international firms, Indian accounting firms and smaller companies will not benefit from the learning in the first phase of the transition to IFRS. It is likely that international firms will protect their learning to retain their competitive advantage. Therefore, it is for the benefit of the country that each company makes judicious choice of the accounting firm as its partner without limiting its choice to international accounting firms. Public sector companies should take the lead and the Institute of Chartered Accountants of India (ICAI) should develop a clear strategy to diffuse the learning. Size of companies The government has decided to measure the size of companies in terms of net worth. This is not the ideal unit to measure the size of a company. Net worth in the balance sheet is determined by accounting principles and methods. Therefore, it does not include the value of intangible assets. Moreover, as most assets and liabilities are measured at historical cost, the net worth does not reflect the current value of those assets and liabilities. Market capitalisation is a better measure of the size of a company. But it is difficult to estimate market capitalisation or fundamental value of unlisted companies. This might be the reason that the government has decided to use ‘net worth’ to measure size of companies. Some companies, which are large in terms of fundamental value or which intend to attract foreign capital, might prefer to use Indian accounting standards convergent with IFRS earlier than required under the road map presented by the government. The government should provide that choice. Conclusion The government will come up with a separate road map for banking and ice companies by February 28, 2010. Let us hope that transition in case of those companies will not be deferred further.

Euro Crisis or European Debt Crisis

2012-01-21T09:31:00.000-08:00

The European debt crisis is the shorthand term for the region’s struggle to pay the debts it has built up in recent decades. Five of the region’s countries – Greece, Portugal, Ireland, Italy, and Spain – have, to varying degrees, failed to generate enough economic growth to make their ability to pay back bondholders the guarantee it’s intended to be. Although these five were seen as being the countries in immediate danger of a possible default, the crisis has far-reaching consequences that extend beyond their borders to the world as a whole. In fact, the head of the Bank of England referred to it as “the most serious financial crisis at least since the 1930s, if not ever,” in October 2011.

This is one of most important problems facing the world economy, but it is also one of the hardest to understand. Below is a Q&A to help familiarize you with the basics of this critical issue.

Q: How did the crisis begin?

The global economy has experienced slow growth since the U.S. financial crisis of 2008-2009, which has exposed the unsustainable fiscal policies of countries in Europe and around the globe. Greece, which spent heartily for years and failed to undertake fiscal reforms, was one of the first to feel the pinch of weaker growth. When growth slows, so do tax revenues – making high budget deficits unsustainable.

The result was that the new Prime Minister George Papandreou, in late 2009, was forced to announce that previous governments had failed to reveal the true size of the nation’s deficits. In truth, Greece’s debts were so large that they actually exceed the size of the nation’s entire economy, and the country could no longer hide the problem.

Investors responded by demanding higher yields on Greece’s bonds, which raised the cost of the country’s debt burden and necessitated a series of bailouts by the European Union and European Central Bank (ECB). The markets also began driving up bond yields in the other heavily indebted countries in the region, anticipating problems similar to what occurred in Greece.

Q: Why do bonds yields go up in response to this type of crisis, and what are the implications?

The reason for rising bond yields is simple: if investors see higher risk associated with investing in a country’s bonds, they will require a higher return to compensate them for that risk. This begins a vicious cycle: the demand for higher yields equates to higher borrowing costs for the country in crisis, which leads to further fiscal strain, prompting investors to demand even higher yields, and so on. A general loss of investor confidence typically causes the selling to affect not just the country in question, but also other countries with similarly weak finances – an effect typically referred to as “contagion.”

Q: What did European governments do about the crisis?

The European Union has taken action, but it has moved slowly since it requires the consent of all 17 nations in the union. The primary course of action thus far has been a series of bailouts for Europe’s troubled economies. The first occurred in spring, 2010, when the European Union and International Monetary Fund disbursed 110 billion euros (the equivalent of $163 billion) to Greece. Greece required a second bailout in mid-2011, this time worth about $157 billion. Ireland and Portugal also received bailouts, in November 2010 and May 2011, respectively. The Eurozone member states also created the European Financial Stability Facility (EFSF) to provide emergency lending to countries in financial difficulty.

The European Central Bank also has become involved, although it is resisting the so-called "bazooka" option of printing money to buy up the region's distressed debt. The ECB announced a plan, in August 2011, to purchase government bonds if necessary in order to keep yields from spiraling to a level that countries such as Italy and Spain could no longer afford. In December 2011, the ECB made €489 ($639 billion) in credit available to the region’s troubled banks. Numerous financial instituions had debt coming due in 2012, causing them to hold on to their reserves rather than extend loans. Slower loan growth, in turn, could weigh on economic growth and make the crisis worse. While the ECB's action did not alleviate the core of Europe's problem - high government debt - investors cheered a move designed to prop up the region's economy.

Although the actions by European policy makers usually helped stabilize the financial markets in the short term, they were widely criticized as merely “kicking the can down the road,” or postponing a true solution to a later date. In addition, a larger issue loomed: while smaller countries such as Greece are small enough to be rescued by the European Central Bank, Italy and Spain are too large to be saved. The perilous state of the countries’ fiscal health was therefore a key issue for the markets throughout 2010 and 2011.

Q: Why is default such a major problem? Couldn’t a country just walk away from its debts and start fresh?

Unfortunately, the solution isn’t that simple for one critical reason: European banks remain one of the largest holders of region’s government debt, although they reduced their positions through out the second half of 2011. Banks are required to keep a certain amount of assets on their balance sheets relative to the amount of debt they hold. If a country defaults on its debt, the value of its bonds will plunge. For banks, this could mean a sharp reduction in the amount of assets on their balance sheet – and possible insolvency. Due to the growing interconnectedness of the global financial system, a bank failure doesn’t happen in a vacuum. Instead, there is the possibility that a series of bank failures will spiral into a more destructive “contagion” or “domino effect.”

The best example of this is the U.S. financial crisis, when a series of collapses by smaller financial institutions ultimately led to the failure of Lehman Brothers and the government bailouts or forced takeovers of many others. Since European governments are already struggling with their finances, there is less latitude for government backstopping of this crisis compared to the one that hit the United States.

Q: How did the European debt crisis impact the financial markets?

The possibility of a contagion made the European debt crisis a key focal point for the world financial markets in the 2010-2011 period. With the market turmoil of 2008 and 2009 in fairly recent memory, investors’ reaction to any bad news out of Europe was swift: sell anything risky, and buy the government bonds of the largest, most financially sound countries. Typically, European bank stocks – and the European markets as a whole – performed much worse than their global counterparts during the times when the crisis was on center stage. The bond markets of the affected nations also performed poorly, as rising yields means that prices are falling. At the same time, yields on U.S. Treasuries fell to historically low levels in a reflection of investors’ "flight to safety."

Q: What are the political issues involved?

The political implications of the crisis are enormous. In the affected nations, the push toward austerity – or cutting expenses to reduce the gap between revenues and outlays – has led to public protests in Greece and Spain and in the removal of the party in power in both Italy and Portugal. On the national level, the crisis has led to tensions between the fiscally sound countries, such as Germany, and the higher-debt countries such as Greece. Germany pushed for Greece and other affected countries to reform the budgets as a condition of providing aid, leading to elevated tensions within the European Union. After a great deal of debate, Greece ultimately agreed to cut spending and raise taxes. However, an important obstacle has been Germany’s unwillingness to agree to a region-wide solution – such as the issuance of bonds by all 17 countries in the Eurozone – since it would have to foot a disproportionate percentage of the bill.

The tension has created the possibility that the region would eventually abandon the euro (the region’s common currency). On one hand, this would allow each country to pursue its own independent policy rather than trying to adopt a common policy for the 17 nations using the currency. But on the other, it would be an event of unprecedented magnitude for the global economy and financial markets. This concern contributed to periodic weakness in the euro relative to other major global currencies during the crisis period.

Q: Is fiscal austerity the answer?

Not necessarily. Germany’s push for austerity (higher taxes and lower spending) measures in the region’s smaller nations is problematic in that reduced government spending can lead to slower growth, which means lower tax revenues for countries to pay their bills. In turn, this makes it more difficult for the high-debt nations to dig themselves out. The prospect of lower government spending has led to massive public protests and made it more difficult for policymakers to take all of the steps necessary to resolve the crisis. In addition, the entire region slipped toward a recession in late 2011 due in part to these measures and the overall loss of confidence among businesses and investors.

Nevertheless, Europe’s richer countries have little choice but to pressure the smaller nations to tighten their belts since they are facing pressure from their own citizens. Taxpayers in countries such as Germany and France balk at using their money to fund what is seen as the overspending of Greece and the other troubled European countries. This type of fundamental, high-level disagreement has made a solution more difficult to achieve.

Q: From a broader perspective, does this matter to the United States?

Yes – The world financial system is fully connected now – meaning a problem for Greece, or another smaller European country, is a problem for all of us. The European debt crisis not only affects our financial markets, but also the U.S. government budget. Forty percent of the International Monetary Fund’s (IMF) capital comes from the United States, so if the IMF has to commit too much cash to bailout initiatives, U.S. taxpayers will eventually have to foot the bill. In addition, the U.S. debt is growing steadily larger – meaning that the events in Greece and the rest of Europe are a potential warning sign for U.S. policymakers.

FDI - Foriegn Direct Investment in India and about WallMart's entry

2012-01-21T09:22:00.001-08:00

With strong governmental support, FDI has helped the Indian economy grow tremendously. But with $34 billion in FDI in 2007, India gets only about 25% of the FDI in China.

Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has in a lot of ways enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that needed a boost and economic attention, and address the various problems that continue to challenge the country.

India has continually sought to attract FDI from the world’s major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage and promote a favorable business environment for investors.

FDIs are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal or mining industries.

A number of projects have been implemented in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors.

The Indian national government also granted permission for FDIs to provide up to 100% of the financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately $352.5 million.

Currently, FDI is allowed in financial services, including the growing credit card business. These also include the non-banking financial services sector. Foreign investors can buy up to 40% of the equity in private banks, although there is condition that these banks must be multilateral financial organizations. Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased.

In 2007, India received $34 billion in FDI, a huge growth compared to the previous years, but significantly less than the $134 billion that flowed into China. Although the Chinese approval process is complex, China continues to outshine India as a choice destination for foreign investors. Why does India, a country with resources and a skilled workforce, lag so far behind China in FDI amounts?

Physical infrastructure is the biggest hurdle that India currently faces, to the extent that regional differences in infrastructure concentrates FDI to only a few specific regions. While many of the issues that plague India in the aspects of telecommunications, highways and ports have been identified and remedied, the slow development and improvement of railways, water and sanitation continue to deter major investors.

Federal legislation is another perverse impediment for India. Local authorities in India are not part of the approval process and the large bureaucratic structure of the central government is often perceived as a breeding ground for corruption. Foreign investment is seen as a slow and inefficient way of doing business, especially in a paperwork system that is shrouded in red tape.

How will Wal-Mart affect other Indian retailers?

In all of the countries Wal-Mart has set up shop it has put other retailers out of business and driven down wages. Wal-Mart has a clearly defined anti-union policy aimed at preventing its work force from gaining any collective bargaining power which could result in increased wages, covered health benefits and job security. Many reports have been written documenting the economic and eventual social and environmental degradation which occurs when Wal-Mart “comes to town”.

“Over the course of [a few years after Wal-Mart entered a community], retailers' sales of men’s' and boys' apparel dropped 44% on average, hardware sales fell by 31%, and lawn and garden sales fell by 26%. In towns without Wal-Marts that are close to towns with Wal-Marts, sales in general merchandise declined immediately after Wal-Mart stores opened. After ten years, sales declined by a cumulative 34%.”

[Kenneth Stone at Iowa State University, “Impact of the Wal-Mart Phenomenon on Rural Communities”].

Wal-Mart and India

• Wal-Mart is seeking to open its own retail chain throughout India.

• India's $250 billion retail business is the eighth largest in the world and has the potential to grow 7 per cent by 2011. [McKinsey Report] For a company already dominating the world markets, this is an un-passable opportunity.

• The owners of Wal-Mart stand to gain enormous profits from this move while India’s economy will suffer and its workers will be subjugated to the unfair work practices of this Multinational Behemoth.

Until now, foreign companies have been restricted to serving only as wholesalers in India. That has already helped create more modern distribution networks, often while generating better prices for farmers and other producers, and giving customers better deals, too.

But expanding the foreign presence to retailing has been seen as the necessary next step for modernists like Singh, who has been urging the move for years. Praise for his announcement came from India's corporations and some of its 175 million farmers, who see the move as part of a wave of changes that might help jolt a slowing economy.

And opponents – representing the 34 million people who work in retail and wholesale businesses, as well as left-leaning politicians – were just as loud.

On Monday, leaders of two opposition parties said finance minister, Pranab Mukherjee, had agreed to a delay. Mukherjee is expected to make a statement in Parliament on Wednesday.

All of this places Wal-Mart in a position hardly new to the company: at the center of a raging debate that pits the multinational giant from Bentonville, Ark., against local mom-and-pop businesses.

For more than a year, Wal-Mart has been operating a wholesale outlet in this northern city known for its fertile farms and hearty food. Local businessmen like Ravi Mahajan, whose family has had a wholesale general store in the narrow alleys of the Imam Nasir market for 40 years, say their sales have been cut in half as their customers – retail shopkeepers – stock up at Wal-Mart.

If the government eventually lets foreign firms expand beyond wholesaling to open retail stores, Mahajan said, many of his retail customers would be forced out of business, while squeezing out traders like himself who have long served as the crucial middleman in Indian commerce.

"We'll be destroyed," Mahajan said last week, minutes after he and dozens of other traders burned an effigy with a bloated belly and a crudely drawn face, meant to represent multinational marauders.

But Indian business is far from united in opposing foreign retailers.

Farmers like Avtar Singh Sidhu, who sells potatoes to PepsiCo for its Lays chips and has sold baby corn and other vegetables to Wal-Mart's local partner, the Indian conglomerate Bharti, argues that foreign retailers will be a boon to India's struggling agricultural sector. The multinationals, he said, will buy directly from farmers and pay better prices than local wholesalers.

Already, he said, PepsiCo is offering 6 rupees per kilo (or 11 cents) for his potatoes, while local traders offer only 3 rupees (6 cents). "We need more competition," Sidhu said.

The announcement by Singh's administration on Nov. 24 called for allowing foreign companies like Wal-Mart to team up with Indian partners to open retail stores in metropolitan areas with more than 1 million people. Jalandhar has 2.1 million people.

The plan ran counter to the views of many politicians who say a slower approach is needed to protect indigenous firms and the rural poor.

But Singh and his backers have argued that foreign retailers could help reduce chronically high food inflation – which has run around 10 percent for the last year, on top of 20 percent increases the year before. The retail proposal, proponents say, could improve the lot of the more than a half billion Indians still tied to the land, by improving the supply system from farms to consumers. An estimated one-third of some types of vegetables and fruits rot before ever reaching retail shelves.

Speaking of the Nov. 24 announcement, an adviser to Singh, Raghuram Rajan, an economist at the University of Chicago, said, "This is a bold move, and I think this is a necessary move."

At present, barely 6 percent of India's $470 billion in retail sales takes place in organized retail stores, according to Technopak, a Indian consulting firm. The rest takes place in small shops. By contrast, organized retail makes up more than 20 percent of sales in China and 36 percent in Brazil – the two emerging economies to which India most frequently compares itself. (The figure is 85 percent in the United States.)

Fiscal deficit

2012-01-21T09:10:00.001-08:00

Fiscal deficit is an economic phenomenon, where the Government's total expenditure surpasses the revenue generated . It is the difference between the government's total receipts (excluding borrowing) and total expenditure. Fiscal deficit gives the signal to the government about the total borrowing requirements from all sources.

Components of fiscal deficit

The primary component of fiscal deficit includes revenue deficit and capital expenditure.

Revenue deficit: It is an economic phenomenon, where the net amount received fails to meet the predicted net amount to be received.

Capital expenditure: It is the fund used by an establishment to produce physical assets like property, equipments or industrial buildings. Capital expenditure is made by the establishment to consistently maintain the operational activities.

In India, the fiscal deficit is financed by obtaining funds from Reserve Bank of India, called deficit financing. The fiscal deficit is also financed by obtaining funds from the money market (primarily from banks).

Arguments: Fiscal deficit lead to inflation

According to the view of renowned economist John Maynard Keynes, fiscal deficits facilitates nations to escape from economic recession. From another point of view, it is believed that government need to avoid deficits to maintain a balanced budget policy.

In order to relate high fiscal deficit to inflation, some economists believe that the portion of fiscal deficit, which is financed by obtaining funds from the Reserve Bank of India, directs to rise in the money stock and a higher money stock eventually heads towards inflation.

Expert recommendation

Financial advisors recommend that the Government should not promote disinvestment to reduce fiscal deficits. Fiscal deficit can be reduced by bringing up revenues or by lowering expenditure.

Impact

Fiscal deficit reduction has an impact over the agricultural sector and social sector. Government's investments in these sectors will be reduced.

Financial Inclusion

2012-01-19T23:13:00.001-08:00

Financial inclusion is the availability of banking services at an affordable cost to disadvantaged and low-income groups. In India the basic concept of financial inclusion is having a saving or current account with any bank. In reality it includes loans, insurance services and much more.

The first-ever Index of Financial Inclusion to find out the extent of reach of banking services among 100 countries, India has been ranked 50. Only 34% of Indian individuals have access to or receive banking services. In order to increase this number the Reserve Bank of India had the Government of India take innovative steps. One of the reasons for opening new branches of Regional Rural Banks was to make sure that the banking service is accessible to the poor. With the directive from RBI, our banks are now offering “No Frill” Accounts to low income groups. These accounts either have a low minimum or nil balance with some restriction in transactions. The individual bank has the authority to decide whether the account should have zero or minimum balance. With the combined effort of financial institutions, six million new ‘No Frill’ accounts were opened in the period between March 2006-2007. Banks are now considering FI as a business opportunity in an overall environment that facilitates growth.

The main reason for financial exclusion is the lack of a regular or substantial income. In most of the cases people with low income do not qualify for a loan. The proximity of the financial service is another fact. The loss is not only the transportation cost but also the loss of daily wages for a low income individual. Most of the excluded consumers are not aware of the bank’s products, which are beneficial for them. Getting money for their financial requirements from a local money lender is easier than getting a loan from the bank. Most of the banks need collateral for their loans. It is very difficult for a low income individual to find collateral for a bank loan. Moreover, banks give more importance to meeting their financial targets. So they focus on larger accounts. It is not profitable for banks to provide small loans and make a profit.

Financial inclusion mainly focuses on the poor who do not have formal financial institutional support and getting them out of the clutches of local money lenders. As a first step towards this, some of our banks have now come forward with general purpose credit cards and artisan credit cards which offer collateral-free small loans. The RBI has simplified the KYC (Know your customer) norms for opening a ‘No frill’ account. This will help the low income individual to open a ‘No Frill’ account without identity proof and address proof.

In such cases banks can take the individual’s introduction from an existing customer whose full KYC norm procedure has been completed. And the introducer must have a satisfactory transaction with the bank for at least 6 months. This simplified procedure is available to those who intend to keep a balance not exceeding Rs.50,000 in all accounts taken together. With this facility we can channel the untapped, considerable amount of money from the low income group to the formal economy. Banks are now permitted to utilize the service of NGOs, SHGs and other civil society organizations as intermediaries in providing financial and banking services through the use of business facilitator and business correspondent models.

Self Help Groups are playing a very important role in the process of financial inclusion. SHGs are usually groups of women who get together and pool money from their savings and lend money among them. Usually they are working with the support of an NGO. The SHG is given loans against the group members’ guarantee. Peer pressure within the group helps in improving recoveries. Through SHGs nearly 40 million households are linking with the banks. Micro finance is another tool which links low income groups to the banks.

Yet, banks are fighting to fulfill the Financial Inclusion dream. The main reason is that the products designed by the banks are not satisfying the low income families. The provision of uncomplicated, small, affordable products will help to bring the low income families into the formal financial sector. Banks have limitations to reach directly to the low income consumers. Correspondents can be considered to be an excellent channel which banks can use to distribute their product information. Educating the consumers about the financial benefits and products of banks which are beneficial to low income groups will be a great step to tap their potential.

Banks are now using new technologies like mobile phones to reach low income consumers. It is possible that the telephone providers themselves will start basic banking services like savings and payments. Indian telecom consumers have few links to financial institutions. So without much difficulty telecom providers can win the battle with banks. Banks should therefore be proactive about transferring this technology into an opportunity.

The Indian Government has a long history of working to expand financial inclusion. Nationalization of the major private sector banks in 1969 was a big step. In 1975 GOI established RRBs with the same aim. It encouraged branch expansion of bank branches especially in rural areas. The RBI guidelines to banks shows that 40% of their net bank credit should be lent to the priority sector. This mainly consists of agriculture, small scale industries, retail trade etc. More than 80% of our population depends directly or indirectly on agriculture. So 18% of net bank credit should go to agriculture lending. Recent simplification of KYC norms are another milestone.

Financial inclusion is a great step to alleviate poverty in India. But to achieve this, the government should provide a less perspective environment in which banks are free to pursue the innovations necessary to reach low income consumers and still make a profit. Financial service providers should learn more about the consumers and new business models to reach them.

In India Financial inclusion will be good business ground in which the majority of her people will decide the winners and losers.

Buyers Credit

2012-01-19T23:08:00.001-08:00

Buyer's credit is the credit availed by an Importer (Buyer) from overseas Lenders i.e. Banks and Financial Institutions for payment of his Imports on due date. The overseas Banks usually lend the Importer (Buyer) based on the Letter of comfort (a Bank Guarantee) issued by the Importers (Buyer's) Bank. Importers Bank / Buyers Credit Consultant / Importer arranges buyers credit from international branches of a domestic Bank or international banks in foreign countries. For this services Importers Bank / Buyers credit consultant charges a fee called arrangement fee.

Buyers credit helps local importers access to cheaper foreign funds close to LIBOR rates as against local sources of funding which are costly compared to LIBOR rates.

The duration of Buyer's credit may vary from country to country, as per the local regulations. For example in India, Buyers credit can be availed for 1 year in case the Import is for trade-able goods and for 3 years if the Import is for Capital Goods. Every six months the interest on Buyers credit may get reset.

LC, L/C or LOC - Letter of Credit

2012-01-19T23:07:00.000-08:00

A letter of credit is a promise to pay. Banks issue letters of credit as a way to ensure sellers that they will get paid as long as they do what they've agreed to do.

Letters of credit are common in international trade because the bank acts as an uninterested party between buyer and seller. For example, importers and exporters might use letters of credit to protect themselves. In addition, communication can be difficult across thousands of miles and different time zones. A letter of credit spells out the details so that everybody's on the same page.

Letter of Credit Lingo

To better understand letters of credit, it may help to know the following:

•Abbreviations for 'letter of credit' include L/C, LC, and LOC

•Applicant - the buyer in a transaction

•Beneficiary - the seller or ultimate recipient of funds

•Issuing bank - the bank that promises to pay

•Advising bank - helps the beneficiary use the letter of credit

The Money Behind a Letter of Credit

A bank promises to pay on behalf of a customer, but where does the money come from?

The bank will only issue a letter of credit if they know the buyer will pay. Some buyers have to deposit (or already have) enough money to cover the letter of credit, and some customers use a line of credit with the bank. Sellers must trust that the bank issuing the letter of credit is legitimate.

Executing a Letter of Credit

A seller only gets paid after performing specific actions that the buyer and seller agree to.

For example, the seller may have to deliver merchandise to a shipyard in order to satisfy requirements for the letter of credit. Once the merchandise is delivered, the seller receives documentation proving that he made delivery. The letter of credit now must be paid even if something happens to the merchandise. If a crane falls on the merchandise or the ship sinks, it's not the seller's problem.

To pay on a letter of credit, banks simply review documents proving that a seller performed his required actions. They do not worry about the quality of goods or other items that may be important to the buyer and seller.

Pitfalls of Letters of Credit

Letters of credit make it possible to do business worldwide. They are important and helpful tools, but you should be careful when using letters of credit.

As a seller, make sure you:

•Carefully review all requirements for the letter of credit before moving forward with a deal

•Understand all the documents required

•Can get all the documents required for the letter of credit

•Understand the time limits associated with the letter of credit, and whether they are reasonable

•Know how quickly your service providers (shippers, etc) will produce documents for you

•Can get the documents to the bank on time

•Make all documents required by the letter of credit match the letter of credit application exactly

Getting a Letter of Credit

To get a letter of credit, visit your bank. Ask if they can help you with a letter of credit, or if they have any suggestions. Small banks and credit unions might not be able to accommodate you.

About Currency

2012-01-18T23:42:00.001-08:00

What are the present denominations of banknotes in India?

At present, banknotes in India are issued in the denomination of Rs.10, Rs.20, Rs.50, Rs.100, Rs.500 and Rs.1000. These notes are called banknotes as they are issued by the Reserve Bank of India (Reserve Bank). The printing of notes in the denominations of Re.1, Rs. 2 and Rs.5 has been discontinued as these denominations have been coinised. However, such banknotes issued earlier can still be found in circulation and these banknotes continue to be legal tender.

What is the meaning of "I promise to pay" clause?

As per Section 26 of Reserve Bank of India Act, 1934, the Bank is liable to pay the value of banknote. This is payable on demand by RBI, being the issuer. The Bank's obligation to pay the value of banknote does not arise out of a contract but out of statutory provisions.

The promissory clause printed on the banknotes i.e., "I promise to pay the bearer an amount of X" is a statement which means that the banknote is a legal tender for X amount. The obligation on the part of the Bank is to exchange a banknote for coins of an equivalent amount

What is the role of the Reserve Bank of India in currency management?

The Reserve Bank derives its role in currency management from the Reserve Bank of India Act, 1934.The Reserve Bank manages currency in India. The Government, on the advice of the Reserve Bank, decides on various denominations of banknotes to be issued. The Reserve Bank also co-ordinates with the Government in the designing of banknotes, including the security features. The Reserve Bank estimates the quantity of banknotes that are likely to be needed denomination-wise and accordingly, places indent with the various printing presses. Banknotes received from banks and currency chests are examined and those fit for circulation are reissued and the others (soiled and mutilated) are destroyed so as to maintain the quality of banknotes in circulation.

What is a currency chest?

To facilitate the distribution of banknotes and rupee coins, the Reserve Bank has authorised select branches of scheduled banks to establish Currency Chests. These are actually storehouses where banknotes and rupee coins are stocked on behalf of the Reserve Bank. As on June 30, 2006, there were 4428 Currency Chests and 4102 Small Coin Depots. The currency chest branches are expected to distribute banknotes and rupee coins to other bank branches in their area of operation.

Why are Re.1, Rs.2, Rs.5 banknotes not being printed?

Volume-wise, the share of such small denomination banknotes in the total banknotes in circulation was very high but in terms of value they constituted a very small percentage. The average life of these banknotes was found to be less than a year. The cost of printing and servicing these banknotes was, thus, not commensurate with their life, and printing of these banknotes was, therefore, discontinued. These denominations were coinised. However, Rs.5 was re-introduced in 2001 to supplement the gap between the demand and supply of coins in this denomination. The printing of Rs.5 banknotes has been discontinued from the year 2005.

What are soiled, mutilated and imperfect banknotes?

(i) "soiled note:" means a note which, has become dirty due to usage and also includes a two piece note pasted together wherein both the pieces presented belong to the same note, and form the entire note.

(ii) Mutilated banknote is a banknote, of which a portion is missing or which is composed of more than two pieces.

(iii) Imperfect banknote means any banknote, which is wholly or partially, obliterated, shrunk, washed, altered or indecipherable but does not include a mutilated banknote.

Can soiled and mutilated banknotes be exchanged for value?

Yes. Such banknotes can be exchanged for value.

Where are soiled/mutilated banknotes accepted for exchange?

All banks are authorized to accept soiled banknotes for full value. They are expected to extend the facility of exchange of soiled notes even to non-customers. All currency chest branches of commercial banks are authorised to adjudicate mutilated banknotes and pay value for these, in terms of the Reserve Bank of India (Note Refund) Rules, 2009

CP - Commercial Paper

2012-01-18T23:28:00.001-08:00

1. What is Commercial Paper (CP)?

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.

2. When it was introduced?

It was introduced in India in 1990.

3. Why it was introduced?

It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations.

4. Who can issue CP?

Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP.

5. Whether all the corporates would automatically be eligible to issue CP?

No. A corporate would be eligible to issue CP provided –

a. the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore

b. company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and

c. the borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s.

Automated Data Flow (ADF) from banks to Reserve Bank of India

2012-01-18T23:25:00.000-08:00

1. WHAT IS THE BACKGROUND FOR ADF?

In several of its functions, Reserve Bank of India relies on data submitted by banks and quality of data is of great importance. In order to meet the need for correct and consistent data, the Reserve Bank of India has initiated the project on Automated Data Flow (ADF).

2. WHAT IS THE OBJECTIVE OF ADF?

ADF seeks to ensure submission of correct and consistent data from the banks straight from their systems to Reserve Bank without any manual intervention.

3. WHY IS ADF THOUGHT OF NOW?

With CBS in banks, it is felt that time has come to utilize CBS system capabilities to meet requirements like MIS, ADF, etc, in addition to regular transactional activities.

4. WHETHER ANY SPECIFIC APPROACH HAS BEEN RECOMMENDED?

No specific approach has been recommended for achieving ADF due to the reason that various banks are at different levels of IT and Process maturity. However, the Approach Paper on ADF clearly articulates the common end state for achieving the objectives of ADF.

5. WHETHER ANY PARTICULAR TECHNOLOGY OR PROCESS HAS BEEN RECOMMENDED FOR ADF?

No specific Technology, Vendor, Service Provider or Process has been recommended for achieving ADF and it has been left to the banks to decide on these issues on the basis of internal requirements.

DICGC - Deposit Insurance and Credit Guarantee Corporation (DICGC)

2012-01-18T23:22:00.000-08:00

Q1 Which banks are insured by the DICGC?

Commercial Banks: All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are insured by the DICGC.

Cooperative Banks: All State, Central and Primary cooperative banks, also called urban cooperative banks, functioning in States / Union Territories which have amended the local Cooperative Societies Act empowering the Reserve Bank of India (RBI) to order the Registrar of Cooperative Societies of the State / Union Territory to wind up a cooperative bank or to supersede its committee of management and requiring the Registrar not to take any action regarding winding up, amalgamation or reconstruction of a co-operative bank without prior sanction in writing from the Reserve Bank are covered under the Deposit Insurance System. At present all co-operative banks other than those from the States of Meghalaya, and the Union Territories of Chandigarh, Lakshadweep and Dadra and Nagar Haveli are covered under the deposit insurance system of DICGC. Primary cooperative societies are not insured by the DICGC.

Q 2 What does the DICGC insure?

In the event of a bank failure, DICGC protects bank deposits that are payable in India.

The DICGC insures all deposits such as savings, fixed, current, recurring, etc. except the following types of deposits.

(i) Deposits of foreign Governments;

(ii) Deposits of Central/State Governments;

(iii)Inter-bank deposits;

(iv) Deposits of the State Land Development Banks with the State co-operative bank;

(v) Any amount due on account of any deposit received outside India

(vi) Any amount, which has been specifically exempted by the corporation with the previous approval of Reserve Bank of India.

Q 3 What is the maximum deposit amount insured by the DICGC?

Each depositor in a bank is insured upto a maximum of Rs.1,00,000 (Rupees One Lakh) for both principal and interest amount held by him in the same capacity and same right as on the date of liquidation/cancellation of bank's licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.

Q 4 How will I know whether my bank is insured by the DICGC or not?

The DICGC while registering the banks as insured banks furnishes them with printed leaflets for display giving information relating to the protection afforded by the Corporation to the depositors of the insured banks. In case of doubt, depositor should make specific enquiry from the branch official in this regard.

RBIs Role as a Banker to Government

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1. What is RBI's role with regard to conduct of Government's banking transaction?

In terms of Section 20 of the RBI Act 1934, RBI has the obligation to undertake the receipts and payments of the Central Government and to carry out the exchange, remittance and other banking operations, including the management of the public debt of the Union. Further, as per Section 21 of the said Act, RBI has the right to transact Government business of the Union in India.

State Government transactions are carried out by RBI in terms of the agreement entered into with the State Governments in terms of section 21 A of the Act. As of now, such agreements exist between RBI and all the State Governments except Government of Sikkim.

2. How does Reserve Bank of India discharge its statutory obligation of being 'Banker to Government'?

Reserve Bank of India maintains the Principal Accounts of Central as well as State Governments at its Central Accounts Section, Nagpur. It has put in place a well structured arrangement for revenue collection as well as payments on behalf of Government across the country. A network comprising the Public Accounts Departments of RBI and branches of Agency Banks appointed under Section 45 of the RBI Act carry out the Govt. transactions. At present all the public sector banks and three private sector banks viz. ICICI Bank Ltd., HDFC Bank Ltd. and Axis Bank Ltd. act as RBI's agents. Only authorised branches of Agency banks can conduct Govt. business.

3. How payment into Government account is made?

All monies for credit to Government account like taxes or other remittances can be made by filling the prescribed challans of the Government/Department concerned. These challans along with the requisite amount (by way of cash, cheque or DD) are required to be tendered with the authorised bank branches.

4. When is the receipted challan for payment made into Government Account made available?

The receipted challans in case of cash tender are generally handed over to the remitter immediately across the counter. In case of payments made by cheque/DD, the receipted challan is issued only on realization of the instruments based on the clearing cycle of the local Clearing House. In all such cases, a paper token is issued to the depositor indicating the date on which the receipted challan will be ready for delivery. The receipted challan will have to be collected within 15 days from the date indicated on the paper token by surrendering the paper token.

KYC - Know Your Customer

2012-01-18T06:20:00.001-08:00

1. What is KYC?

KYC is an acronym for “Know your Customer”, a term used for customer identification process. It involves making reasonable efforts to determine true identity and beneficial ownership of accounts, source of funds, the nature of customer’s business, reasonableness of operations in the account in relation to the customer’s business, etc which in turn helps the banks to manage their risks prudently. The objective of the KYC guidelines is to prevent banks being used, intentionally or unintentionally by criminal elements for money laundering.

KYC has two components - Identity and Address. While identity remains the same, the address may change and hence the banks are required to periodically update their records.

2. Is there any legal backing for verifying identity of clients?

Yes. Reserve Bank of India has issued guidelines to banks under Section 35A of the Banking Regulation Act, 1949 and Rule 7 of Prevention of Money-Laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005. Any contravention thereof or non-compliance shall attract penalties under Banking Regulation Act.

3. I want to keep a fixed deposit in a bank. Is KYC - applicable to me?

Yes. KYC is applicable to customers of the bank. For the purpose of KYC following are the ‘Customers of the bank.

a person or entity that maintains an account and/or has a business relationship with the bank;

one on whose behalf the account is maintained (i.e. the beneficial owner);

beneficiaries of transactions conducted by professional intermediaries, such as Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and

any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, say, a wire transfer or issue of a high value demand draft as a single transaction.

4. Is there any procedure specified for Customer Identification?

Customer identification means identifying the customer and verifying his/her identity by using reliable, independent source documents, data or information. Banks have been advised to lay down Customer Identification Procedure to be carried out at different stages i.e. while establishing a banking relationship; carrying out a financial transaction or when the bank has a doubt about the authenticity/veracity or the adequacy of the previously obtained customer identification data.

5. Once KYC requirements are complied with while opening the account, whether the bank can again ask for KYC compliance from me?

Yes. To ensure that the latest details about the customer are available, banks have been advised to periodically update the customer identification data based upon the risk category of the customers.

Banks create a customer profile based on details about the customer like social/financial status, nature of business activity, information about his clients’ business and their location, the purpose and reason for opening the account, the expected origin of the funds to be used within the relationship and details of occupation/employment, sources of wealth or income, expected monthly remittance, expected monthly withdrawals etc. When the transactions in the account are observed not consistent with the profile, bank may ask for any additional details / documents as required. This is just to confirm that the account is not being used for any Money Laundering/Terrorist/Criminal activities.

6. I had submitted my driving licence as a proof of identity and address but still the bank asked for telephone / electricity bill.

There are two aspects of Customer Identification. One is establishing identity and the other is establishing present residential address.

For establishing identity, the bank requires any authentic document carrying photo of the customer such as driving licence/ passport/ pan card/ voters' card etc. Though these documents carry the residential address of the customer, it may not be the present address. Therefore, in order to establish the present address of the customer, in addition to passport/ driving licence / voters' card / pan card, the bank may ask for utility bills such as Telephone / Electricity bill etc.

ACU - Asian Clearing Union

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Q1. What is the Asian Clearing Union (ACU)?

A. The Asian Clearing Union (ACU) was established with its head quarters at Tehran, Iran, on December 9, 1974 at the initiative of the United Nations Economic and Social Commission for Asia and Pacific (ESCAP), for promoting regional co-operation. The main objectives of a clearing union are to facilitate payments among member countries for eligible transactions on a multilateral basis, thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade among the participating countries.

Q2. Who are the members of the ACU?

A. The Central Banks and the Monetary Authorities of Iran, India, Bangladesh, Bhutan, Nepal, Pakistan, Sri Lanka, Myanmar and Maldives are currently the members of the ACU.

Q3. Where are the instructions, relating to the ACU, available?

A. The detailed procedural instructions issued by RBI are contained in the A.P. (DIR Series) Circular No.35 dated February 17, 2010.

Indo-Nepal Remittance Facility Scheme

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Q.1. What are the salient features of Indo-Nepal Remittance Facility Scheme?

Ans : Indo-Nepal Remittance Facility is a cross-border remittance scheme to transfer funds from India to Nepal, enabled under the NEFT Scheme. The scheme was launched to provide a safe and cost-efficient avenue to migrant Nepalese workers in India to remit money back to their families in Nepal. A remitter can transfer funds up to Indian Rupees 50,000 (maximum permissible amount) from any of the NEFT-enabled branches in India..The beneficiary would receive funds in Nepalese Rupees. Further details on the NEFT system and the NEFT-enabled branches are available on the website of Reserve Bank of India at http://www.rbi.org.in/scripts/neft.aspx.

Q.2. Is it necessary for the remitter to maintain an account with a bank branch in India?

Ans : No, this is not a mandatory requirement. Under the Scheme, even a walk-in customer can transfer funds upto Rs 50,000 by depositing the cash at the remitting bank branch..

Q.3. Does the beneficiary need to maintain an account with a bank branch in Nepal?

Ans : No, even this is not mandatory. It would, however, be ideal if the beneficiary maintains an account with a bank branch in Nepal to which the credit could be afforded. In Nepal, the Indo-Nepal Remittance Facility Scheme is handled by Nepal SBI Ltd. (NSBL). If the beneficiary does not have a bank account with NSBL or resides in a locality/ area in Nepal not serviced by a NSBL bank branch, an arrangement has been entered into by NSBL with a money transfer company in Nepal (called Prabhu Money Transfer) who would make arrangements for delivery of cash (in Nepalese Rupees) to the beneficiary.

Q.4. What are the minimum documents needed to be presented by the remitter?

Ans : If the remitting customer maintains an account with a bank branch in India, there is no need for any additional information, documents or identification. Else, the remitter has to submit documents for proof of identification such as Passport / Permanent Account Number / Driving License / Telephone Bill / Certificate of Identification issued by his employer with photograph and other details. The information will be captured in the NEFT system as part of compliance with the Know Your Customer (KYC) requirements. Complete address and telephone / mobile number of the beneficiary in Nepal will also be required.

NBFC - Non-Banking Financial Companies

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QUES -1 What is a Non-Banking Financial Company (NBFC)?

ANS -1 A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (Residuary non-banking company).

QUES 2. NBFCs are doing functions similar to banks. What is difference between banks & NBFCs ?

ANS 2. NBFCs are doing functions akin to that of banks; however there are a few differences:

(i) an NBFC cannot accept demand deposits;

(ii) an NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheques drawn on itself; and

(iii) deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors unlike in case of banks.

QUES-3. Is it necessary that every NBFC should be registered with RBI?

ANS 3. In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.

However, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or Housing Finance Companies regulated by National Housing Bank.

QUES 4. What are the different types of NBFCs registered with RBI?

ANS 4. Originally, NBFCs registered with RBI were classified as:

(i) equipment leasing company;

(ii) hire-purchase company;

(iii) loan company;

(iv) investment company.

However, with effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as

(i) Asset Finance Company (AFC)

(ii) Investment Company (IC)

(iii) Loan Company (LC)

AFC would be defined as any company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.

The above type of companies may be further classified into those accepting deposits or those not accepting deposits.

MSMEs - Micro, Small and Medium Enterprises

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Q.1. What is the definition of MSME?

A.1. The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is as under:

(a) Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below:

(i) A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh;

(ii) A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore; and

(iii) A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No.S.O.1722(E) dated October 5, 2006 (Annex I).

(b) Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006 are specified below.

A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh;

A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore; and

A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

Q.2.What is the status of lending by banks to this sector?

A.2. Bank’s lending to the Micro and Small Enterprises is reckoned for priority sector advances. Lending to Medium enterprises is not eligible to be included for the purpose of computation of priority sector lending. Detailed guidelines on lending to the Micro, Small and Medium enterprises sector are available in our Master Circular no. RPCD.SME & NFS. BC. No. 09/06.02.31/2011-12 dated July 1, 2011. The Master circulars issued by RBI, to banks, on various matters are available on our website www.rbi.org.in and updated in July each year.

Q.3.What is meant by Priority Sector Lending?

A.3. Priority sector lending include only those sectors as part of the priority sector, that impact large sections of the population, the weaker sections and the sectors which are employment-intensive such as agriculture, and tiny and small enterprises. Detailed guidelines on Priority sector lending are available in our Master Circular on Priority sector lending no. RPCD.CO.Plan.BC 10 /04.09.01/ 2011-12 dated July 1, 2011. The Master circulars issued by RBI, to banks, on various matters are available on our website www.rbi.org.in and updated in July each year.

Q.4. What is the status of loans granted to Khadi and Village Industries Sector (KVI)?

A.4. All advances granted to units in the KVI sector, irrespective of their size of operations, location and amount of original investment in plant and machinery will be treated as loans to the micro enterprises segment within the MSE Sector and covered under priority sector advances.

Q.5. Are there any targets prescribed for lending by banks to MSMEs?

A.5. As per extant policy, certain targets have been prescribed for banks for lending to the Micro and Small enterprise (MSE) sector. The targets for domestic banks and foreign banks are slightly different keeping in mind the limited presence of the foreign banks. The domestic commercial banks are expected to enlarge credit to priority sector and ensure that priority sector advances (which include the micro and small enterprises sector) constitute 40 per cent of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher.

BCSBI and its role in MSEs

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The Banking Codes and Standard Board of India (BCSBI) constituted a Working Group comprising members from select banks, Indian Banks Association, Rural Planning & Credit Department of Reserve Bank of India to formulate a Banking Code for SME Customers. On the basis of discussions with Industry Associations, banks, SIDBI and Government agencies, The Banking Codes and Standard Board of India (BCSBI) has formulated a Code of Bank's Commitment to Micro and Small Enterprises. This is a voluntary Code, which sets minimum standards of banking practices for banks to follow when they are dealing with Micro and Small Enterprises (MSEs) as defined in the Micro Small and Medium Enterprises Development (MSMED) Act, 2006. The Code may be accessed on the website of BCSBI www. bcsbi.org.in

Real reason for Bank Nationalisation in India

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THE nationalisation of major commercial banks in July 1969 was one of the crucial decisions taken by the then Prime Minister, Indira Gandhi. For many years, the Left parties and some radical Congressmen had persistently demanded nationalisation to preven t concentration of wealth in private hands and to mobilise more resources for economic development. The government, however, did not favour outright nationalisation because that would involve payment of large-scale compensation to shareholders of banks, and would create other complications due to the lack of adequate and competent technical personnel. The Government, therefore, decided to introduce social control over them without actually owning these institutions.

Banking industry representatives argued that social control was not necessary because the Reserve Bank of India had been vested with effective and extensive powers over almost every aspect of banking, including management, supervision, regulation of expa nsion and control of credit. The RBI could appoint or dismiss any chairman or director of a bank and lay down the terms and service conditions for the chief executives. It could inspect banks thoroughly, and its approval was necessary for all advances of Rs. 1 crore and above to any borrower. It could regulate the opening of branches and the formation of mergers and direct all aspects of the credit policies of commercial banks.

The record of commercial banks in serving the economy by stimulating savings was claimed to be commendable. They had also provided timely and adequate credit to the small-scale sector. But these arguments did not convince Indira Gandhi's government; it w anted to enfeeble the private industrial sector, which had built up close connections with banks.

The main features of the social control scheme were the establishment of a National Credit Council, with the Finance Minister as the Chairman, and representatives of agriculture, trade, industry, banks and professional groups. The RBI was given additiona l powers, and the boards of directors of banks were reconstituted with a majority of non-industrialists.

The social control came into force from February 1, 1969, with the enactment of the Banking Laws Amendment Bill. But the banks started implementing the scheme even before the Bill became law. By the beginning of July 1969, all the 15 banks with deposits of Rs. 25 crores and above, which were required to reorganise their boards and appoint whole-time chairmen, had done so. These banks represented 77 per cent of the total deposit business in the private sector. The other Indian and foreign banks also init iated the necessary changes to comply with the regulations of the Banking Laws Amendment Act.

The Indian public generally seemed satisfied with the working of the social control over banks. But the Left parties continued to agitate for nationalisation. In fact, at the all-India Congress Committee meeting in Faridabad in April 1969, Indira Gandhi stoutly opposed this proposal. She pleaded for a fair trial to the scheme of social control. She made it clear that she was not opposed to nationalisation but pointed out that there was not enough manpower to run the banks if they were nationalised.

Though Indira Gandhi expressed such views in April, in July she advocated the nationalisation of banks in the note submitted to the All-India Congress Committee meeting held in Bangalore. Her actual words on this subject were: ``There is a great feeling in the country regarding the nationalisation of private commercial banks. We can consider the nationalisation of a few top banks or issue directions that the resources of banks should be reserved to a larger extent for public purposes.''

Indira Gandhi suggested that the banks' investment in government securities be raised on the average for both slack and busy seasons by about 5 per cent. She estimated that this would make available about Rs. 200 crores for the public sector. This amount might be utilised for quick-yielding schemes, such as minor irrigation programmes, rural electrification and fisheries.

Indira Gandhi said that even after the new policy of social control and reconstitution of the boards of directors, the former industrial chairmen of the bank still continued on the boards and influenced the present chairmen who had previously been genera l managers. ``We may examine'', she said, ``whether through legislation or otherwise we can prevent such men from continuing on the board. The chief executives of the banks will not been then feel obliged to the former chairmen and they may be expected t o take an independent line in regard to lending.'' She, therefore, favoured nationalisation. But Morarji Desai, Finance Minister and Deputy Prime Minister, opposed the proposal.

In a note issued on July 10, he said: ``Recent experience does not suggest that the large banks need to be taken over so as to be made to do something which they are not doing. There is no reason why, under social control, they cannot be made to do what the State Bank is doing if that is in the national interest. Nor is it right that the State Bank should be expected to do what banks, as institutions concerned with the safety of their depositors' funds, cannot do. Mere nationalisation will not provide m ore resources.''

Morarji Desai argued that as the banks were custodians of the people's savings, it was only natural that they should exercise considerable care in deploying the funds entrusted to them while, at the same time, making credit available in accordance with n ational priorities. He stressed that no bank, whether in the private or the public sector, could abandon the test of viability of a credit transaction.

He observed: ``The experiment of social control is a continuing one. It aims at socialisation of credit without nationalisation of banking. Our experience in the past year or so has shown that it is an experiment whose results, we have every reason to be lieve, will be rewarding.''

After announcing the decision to nationalise the 14 banks on July 29, 1969, Indira Gandhi herself took over the Finance portfolio, thereby making it difficult for Morarji Desai to remain in the Cabinet. When he expressed his strong resentment at her acti on, she told him he could continue in the Cabinet as Deputy Prime Minister and hold charge of some other portfolio. Morarji Desai described it as ``an amazing proposal and a very clever move'', and he conveyed his inability to continue in the Cabinet.

Morarji Desai wrote to her: ``If you wanted a change in the Finance Ministry, you could have discussed it with me. You know very well that I never discussed any matter with you in an improper manner. Even when I have differed from you on some matters, I have never been guilty of impropriety or discourtesy. But now you have behaved towards me in a manner in which no one would behave even with a clerk''.

Later, Indira Gandhi told a meeting of the Congress Parliamentary Party that she had taken over Finance as she wanted to gain experience of that Ministry. Morarji Desai observed that if that was indeed the real reason, he would have willingly agreed to t he strategy solely to get him removed from the Cabinet. Indira Gandhi felt that so long as Morarji Desai continued to hold the key finance portfolio, she would not be able to have her way in shaping and implementing policies. He had vast political, parli amentary and administrative experience and enjoyed immense prestige in the Congress Party.

Three decades have passed since the banks were nationalised. But the benefits of this measure are yet to be fully realised. Several committees and study teams have examined the working of the banking sector. But the Government has been unable and unwilli ng to implement most of their recommendations.

For instance, the Narasimham Committee pointed out several deficiencies in banking in its report issued in 1991. It said: ``Management weaknesses and trade union pressures have seriously undermined the efficiency of banks and financial institutions''. It referred to the ``lack of sufficient delegation of authority, inadequate internal control in respect of balancing of books and reconciliation of inter-branch and inter-bank entries.''

The Committee asserted that banks had ceased to be competitive and innovative. It recommended that new skills needed to be developed and new areas of expertise identified. An increasingly complex and sophisticated financial system called for new concepts of management, professional decision-making and modernisation.
But in the context of the strained atmosphere between the Government and the unions, the outlook for the banking sector does not seem as bright as it should be, particularly given the challenges in the new millennium.

Banking Reforms in India and Future of Banking Reforms

2012-01-18T00:12:00.000-08:00

Check this link. http://econ-www.mit.edu/files/779

Banking Ombudsman

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1. What does the Banking Ombudsman Scheme, 2006 offer?

The Banking Ombudsman Scheme, 2006 enables resolution of complaints of bank customers relating to certain services rendered by banks.

2. Has the Banking Ombudsman Scheme come into effect?

The Scheme has come into force from January 1, 2006.

3. Who is a Banking Ombudsman?

The Banking Ombudsman is person appointed by the Reserve Bank of India to redress customer complaints against certain deficiency in banking services.

4. Does the Banking Ombudsman have any legal power?

The Banking Ombudsman is a quasi judicial authority. It has power to summon both the parties - bank and its customer, to facilitate resolution of complaint through mediation.

5. How many Banking Ombudsmen have been appointed and where are they located?

As on date, 15 Banking Ombudsmen have been appointed with their offices located mostly in the State Capitals. The addresses of the Banking Ombudsman offices have been provided in the RBI website.

6. Which banks are covered under the Banking Ombudsman Scheme, 2006?

All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are covered under the Scheme.

7. How is the new Banking Ombudsman Scheme, 2006 different from the Old Banking Ombudsman Scheme, 2002?

The extent and scope of the new Scheme is wider than the earlier Scheme of 2002. The new Scheme also provides for online submission of complaints. The new Scheme additionally provides for the institution of an 'appellate authority' for providing scope for appeal against an award passed by the Ombudsman both by the bank as well as the complainant.

B. TYPES OF COMPLAINTS BEFORE BANKING OMBUDSMAN

8. What sort of disputes can the Banking Ombudsman consider?

The Banking Ombudsman can receive and consider any complaint relating to the following deficiency in banking services:

non-payment or inordinate delay in the payment or collection of cheques, drafts, bills, etc.;
non-acceptance, without sufficient cause, of small denomination notes tendered for any purpose, and for charging of commission for this service;
non-acceptance, without sufficient cause, of coins tendered and for charging of commission for this service;
non-payment or delay in payment of inward remittances ;
failure to issue or delay in issue, of drafts, pay orders or bankers’ cheques;
non-adherence to prescribed working hours;
failure to provide or delay in providing a banking facility (other than loans and advances) promised in writing by a bank or its direct selling agents;
delays, non-credit of proceeds to parties' accounts, non-payment of deposit or non-observance of the Reserve Bank directives, if any, applicable to rate of interest on deposits in any savings, current or other account maintained with a bank ;
delays in receipt of export proceeds, handling of export bills, collection of bills etc., for exporters provided the said complaints pertain to the bank's operations in India;
refusal to open deposit accounts without any valid reason for refusal;
levying of charges without adequate prior notice to the customer;
non-adherence by the bank or its subsidiaries to the instructions of Reserve Bank on ATM/debit card operations or credit card operations;
non-disbursement or delay in disbursement of pension to the extent the grievance can be attributed to the action on the part of the bank concerned, (but not with regard to its employees);
refusal to accept or delay in accepting payment towards taxes, as required by Reserve Bank/Government;
refusal to issue or delay in issuing, or failure to service or delay in servicing or redemption of Government securities;
forced closure of deposit accounts without due notice or without sufficient reason;
refusal to close or delay in closing the accounts;
non-adherence to the fair practices code as adopted by the bank; and
any other matter relating to the violation of the directives issued by the Reserve Bank in relation to banking or other services.
deficiency in Internet banking services
non-adherence to the provisions of Fair Practices Code for lenders as adopted by the banks or Code of Banks Commitment to Customers
non-observance of Regulatory guidelines on engagement of recovery agents by the banks

FAQ Extracted from RBI website

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Courtesy: www.rbi.org.in
I. DOMESTIC DEPOSITS

1. Whether banks can accept interest free deposits?

Banks cannot accept interest free deposits other than in current account.

2. Whether banks can pay interest on savings bank accounts quarterly?

Banks can pay interest on savings bank accounts at quarterly or longer rests.

3. Whether banks can pay interest on term deposits monthly?

Interest on term deposits is payable at quarterly or longer rests. In case of monthly deposit schemes, as per banking practice, the interest is calculated for the quarter and may be paid monthly at the discounted value.

4. Whether banks can pay differential rates of interest on term deposits aggregating Rs.15 lakh and above?

Differential rates of interest can be paid on single term deposits of Rs.15 lakh and above and not on the aggregate of individual deposits where the total exceeds Rs.15 lakh.

5. Whether banks can pay commission for mobilising deposits?

Banks are prohibited from employing/engaging any individual, firm, company, association, institution for collection of deposits or selling of deposit linked products on payment of remuneration or fees or commission in any form or manner except commission paid to agents employed to collect door-to-door deposits under a special scheme. Banks have also been permitted to use the services of Non-Governmental Organisations(NGOs)/ Self Help Groups(SHGs)/ Micro Finance Institutions(MFIs and other Civil Society Organisations(CSOs) as intermediaries in providing financial and banking services including collection of deposits through the use of the Business Facilitator and Business Correspondent models and pay reasonable commission/fees.

6. Whether banks can prematurely repay term deposits on their own?

A term deposit is a contract between the bank and the customer for a definite term and it cannot be paid prematurely at the bank’s option. However, a term deposit can be paid prematurely at the request of the customer subject to the terms of the contract, including penalty, if any.

7. Whether banks can refuse premature withdrawal of term deposits?

Banks may not normally refuse premature withdrawal of term deposits of individuals and Hindu Undivided Families (HUF), irrespective of the size of the deposit. However, banks at their discretion, may disallow premature withdrawal of large deposits held by entities other than individuals and Hindu Undivided Families. Banks should notify such depositors of their policy of disallowing premature withdrawals in advance, i.e. at the time of acceptance of deposits.

8. Whether banks can levy penalty for premature withdrawal?

Banks have the freedom to determine their own penal rates of interest for premature withdrawal of term deposits.

9. How and when are banks required to pay interest on the deposits maturing on holiday/ non-business working day/ Sunday?

Banks should pay interest at the originally contracted rate on the deposit amount for the holiday/ Sunday/ non-business working day intervening between the date of expiry of the specified term of the deposit and the date of payment of the proceeds of the deposit on the succeeding working day.

10. Whether banks can pay additional interest admissible to banks' staff on the deposit placed in the name of minor child/ children of the deceased members of staff?

No. Children (including minor) are not eligible for additional interest admissible to banks' staff members/ retired staff members.

11. Whether additional interest admissible to banks' staff can be paid on the compensation awarded by the court to a minor child and deposited in the joint names of minor child and parent?

No. As the money belongs to the minor child and not the banks' staff, additional interest cannot be paid.

12. Whether banks are permitted to offer differential rate of interest on other deposits?

Banks can formulate special fixed deposit schemes specifically for resident Indian senior citizens offering higher and fixed rates of interest as compared to normal deposits of any size.

13. At what rate is interest payable on a deposit standing in the name of a deceased depositor?

a. In the case of a term deposit standing in the name/s of a deceased individual depositor, or two or more joint depositors, where one of the depositors has died, the criterion for payment of interest on matured deposits in the event of death of the depositor in the above cases has been left to the discretion of individual banks subject to their Board laying down a transparent policy in this regard.

b. In the case of balances lying in current account standing in the name of a deceased individual depositor/ sole proprietorship concern, interest should be paid only from May 1, 1983 or from the date of death of the depositor, whichever is later, till the date of repayment to the claimant/s at the rate of interest applicable to savings deposits as on the date of payment. However, in the case of NRE deposits, if the claimants are residents, the deposit on maturity is treated as a domestic rupee deposit and interest is paid for the subsequent period at the rate applicable to domestic deposits of similar maturity.

14. What are the guidelines for renewal of overdue deposits?

All aspects concerning renewal of overdue deposits may be decided by individual banks subject to their Board laying down a transparent policy in this regard and the customers being notified of the terms and conditions of renewal, including interest rate, at the time of acceptance of the deposit. The policy should be non-discretionary and non-discriminatory.
II. DEPOSITS OF NON-RESIDENTS INDIANS (NRIs)

15. Whether concessional rate of interest is applicable when a loan against FCNR(B) deposit is repaid in foreign currency?

Banks have the freedom to fix the rate of interest chargeable on loans and advances against FCNR(B) deposits to the depositors without reference to their Benchmark Prime Lending Rate (BPLR) irrespective of whether repayment is made in Rupees or in Foreign Currency.

16. Whether banks can accept recurring deposits under the FCNR(B) Scheme?

No. Banks cannot accept recurring deposits under the FCNR(B) Scheme.

17. Who can fix the interest rates on NRE and FCNR(B) deposits?

The Boards of Directors of banks have been empowered to authorise the Asset-Liability Management Committee to fix interest rates on deposits within the ceiling prescribed by RBI.

18. Whether banks are permitted to offer differential rate of interest on NRE/ FCNR(B) deposits?

Yes. Banks are permitted to offer differential rates of interest on NRE term deposits as in the case of domestic term deposits of Rs.15 lakh and above within the ceiling prescribed. Regarding FCNR(B) deposits, banks are free to decide the currency-wise minimum quantum on which differential rate of interest may be offered subject to the overall ceiling prescribed.

19. What is meant by Reinvestment Deposit?

Reinvestment deposits are those deposits where interest (as and when due) is reinvested at the same contracted rate till maturity, which is withdrawable with the principal amount on maturity date. It is also applicable to domestic deposits.

20. Whether FCNR(B) deposits can be renewed with retrospective effect (i.e. from the maturity date)? If yes, what is the rate of interest payable?

A bank may, at its discretion, renew an overdue FCNR(B) deposit or a portion thereof provided the overdue period from the date of maturity till the date of renewal (both days inclusive), does not exceed 14 days and the rate of interest payable on the amount of the deposit so renewed shall be the appropriate rate of interest for the period of renewal as prevailing on the date of maturity or on the date when the depositor seeks renewal, whichever is lower. In the case of overdue deposits where the overdue period exceeds 14 days, the deposits can be renewed at the prevailing rate of interest on the date when the renewal is sought. If the depositor places the entire amount of overdue deposit or a portion thereof as a fresh FCNR(B) deposit, banks may fix their own interest for the overdue period on the amount so placed as a fresh term deposit. Banks are free to recover the interest so paid for the overdue period if the deposit is withdrawn after renewal before completion of the minimum stipulated period under the scheme.

21. Whether interest rate stipulations applicable to loans in rupees under FCNR(B) schemes are applicable to loans denominated in foreign currency?

No. Interest rate stipulations applicable to loans in rupees under FCNR(B) schemes are not applicable to loans denominated in foreign currency, which are governed by the instructions issued by the Foreign Exchange Department of RBI.

22. Under what circumstances additional interest over and above the declared rate of interest can be paid in case of FCNR(B) deposits?

In respect of deposits accepted in the name of –
a. member or a retired member of the bank’s staff, either singly or jointly with any other member or members of his/ her family, or
b. the spouse of a deceased member or a deceased retired member of the bank’s staff,
the bank may, at its discretion, allow additional interest at a rate not exceeding one per cent per annum over and above the rate of interest stipulated, Provided that –
i. the depositor or all the depositors of a joint account is/ are non-resident/s of Indian nationality or origin, and
ii. the bank shall obtain a declaration from the depositor concerned that the moneys so deposited or which may, from time to time, be deposited, shall be moneys belonging to the depositor as stated in clause (a) and (b) above.
iii. the rate fixed by the bank for deposits of staff members, existing or retired, should not exceed the ceiling rate prescribed by RBI.
Explanation: The word "family" shall mean and include the spouse of the member/ retired member of the bank’s staff, his/her children, parents, brothers and sisters who are dependent on such a member/ retired member but shall not include a legally separated spouse.

23. In the case of a deceased depositor’s NRE/FCNR(B) deposit, in the event of legal heirs effecting premature withdrawal before completion of the minimum prescribed period, whether any interest is payable?

No. A deposit has to run for a minimum stipulated period, which is at present one year for both FCNR(B) and NRE deposits, to be eligible to earn interest.

24. Whether banks can pay interest on NRE and FCNR(B) deposits for the intervening Saturday, Sunday and holidays between the date of maturity and payment?

Yes. Whenever the due dates fall on Saturday/Sunday/non-business working day/holidays, banks are permitted to pay interest on NRE and FCNR(B) deposits at the originally contracted rate for the intervening period between the due date and date of payment so that no interest loss is suffered by the depositors.

III. ADVANCES

25. What is the meaning of the word ‘Free’ in the lending rate prescription?

Banks are free to fix Benchmark Prime Lending Rate (BPLR) for credit limits over Rs.2 lakh with the approval of their respective Boards. BPLR has to be declared and made uniformly applicable at all the branches. The banks may authorize their Asset-Liability Management Committee (ALCO) to fix interest rates on Deposits and Advances, subject to their reporting to the Board immediately thereafter. The banks should also declare the maximum spread over BPLR with the approval of the ALCO/Board for all advances.

26.(i) What are the ‘intermediary agencies’?
(ii) What are ‘housing finance intermediary agencies’?

An illustrative list of Intermediary Agencies is as under:

1. State Sponsored organizations for on-lending to Weaker Sections@
2. Distributors of agricultural inputs/ implements.
3. State Financial Corporations (SFCs)/ State Industrial Development Corporations (SIDCs) to the extent they provide credit to weaker sections.
4. National Small Industries Corporation (NSIC).
5. Khadi and Village Industries Commission (KVIC)
6. Agencies involved in assisting the decentralized sector.
7. Housing and Urban Development Corporation Ltd. (HUDCO)
8. Housing Finance Companies approved by National Housing Bank (NHB) for refinance.
9. State sponsored organization for SCs/STs (for purchase and supply of inputs to and/or marketing of output of the beneficiaries of these organizations).
10. Micro Finance Institutions/ Non-Government Organizations (NGOs) on lending to SHGs.

@ Weaker sections include –

i. Small and marginal farmers with landholdings of 5 acres and less, and landless labourers, tenant farmers and share-croppers;
ii) Artisans, village and cottage industries where individual credit requirements do not exceed Rs. 50,000/-;
iii) Beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY);
iv) Scheduled Castes and Scheduled Tribes;
v) Beneficiaries of Differential Rate of Interest (DRI) scheme;
vi) Beneficiaries under Swarna Jayanti Shahari Rozgar Yojana (SJSRY);
vii) Beneficiaries under scheme of Liberation and Rehabilitation of Scavengers (SLRS);
viii) Advances to Self-Help Groups (SHGs);
ix) Loans to distressed poor to repay their debt to informal sector, against appropriate collateral or group security.
Loans granted under (i) to (ix) above to persons from minority communities as may be notified by Government of India from time to time.

In states, where one of the minority communities notified is, in fact, in majority, item (ix) will cover only the other notified minorities. These States/Union Territories are Jammu and Kashmir, Punjab, Sikkim, Mizoram, Nagaland and Lakshadweep.

27. Whether banks can charge interest rate without reference to their own BPLR?

Yes. Banks are free to determine the rates of interest without reference to their BPLR and regardless of the size, in respect of following loans:

(i) a. Loans for purchase of consumer durables.

b. Loans to individuals against shares and debentures/ bonds

c. Other non-priority sector personal loans including credit card dues.

d. Advances/ overdrafts against domestic/ NRE/ FCNR(B) deposits with the bank, provided that the deposit/s stands/ stand either in the name(s) of the borrower himself/ borrowers themselves, or in the names of the borrower jointly with another person.

e. Finance granted to intermediary agencies (excluding those of housing) for on-lending to ultimate beneficiaries and agencies providing input support.

f. Finance granted to housing finance intermediary agencies for on-lending to ultimate beneficiaries

g. Discounting of Bills

h. Loans/Advances/Cash Credit/Overdrafts against commodities subject to Selective Credit Control

(ii) Loans covered by participation in interest refinancing schemes of term lending institutions -
Banks are free to charge rates as per stipulations of the refinancing agencies without reference to BPLR.

28. Whether it is in order for banks to have multiple BPLRs?

No. Since all lending rates can be determined with reference to the Benchmark PLR by taking into account term premia and/or risk premia, there is no need for multiple BPLRs. These premia can be factored into the spread over or below the BPLR.

29. Whether banks can grant fixed rate loans for purposes other than project finance?

Banks have the freedom to offer all loans at fixed or floating rates subject to conformity to their Asset Liability Management (ALM) Guidelines. Banks should use only external or market-based rupee benchmark interest rates for pricing of their floating rate loan products.

30. Whether the revised BPLRs will be applicable to the existing advances?

Yes. Banks are required to invariably incorporate the following proviso in loan agreements in the case of all advances, including term loans, enabling banks to charge the applicable interest rate in conformity with the directives issued by RBI, except in case of Fixed Rate Loans -

"Provided that the interest payable by the borrower shall be subject to the changes in interest rates made by the Reserve Bank from time to time".

31. Whether banks may charge interest below BPLR on loans above Rs.2.00 lakh?

Yes. At present, loans up to Rs.2 lakh carry the prescription of not exceeding the Benchmark Prime Lending Rate (BPLR) and on the loans above Rs.2 lakh, banks are free to determine the rate of interest subject to BPLR and spread guidelines. Keeping in view the international practice and to provide operational flexibility to commercial banks in deciding their lending rate, banks may 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 the respective Boards.

32. Whether banks are permitted to charge interest below their declared BPLR under consortium arrangement to offer a rate comparable to that of the leader bank?

No. Banks need not charge a uniform rate of interest even under a consortium arrangement. Each member bank should charge rate of interest on the portion of the credit limits extended by them to the borrowers subject to their BPLR.

33. What should be penal rate of interest?

With effect from October 10, 2000, banks have been given the freedom to formulate a transparent policy for charging penal interest with the approval of their Board of Directors. However, in the case of loans to borrowers under priority sector, no penal interest should be charged for loans up to Rs.25,000. Penal interest may be levied for reasons such as default in repayment, non-submission of financial statements, etc. However, the policy on penal interest should be governed by well-accepted principles of transparency, fairness, incentive to service the debt and genuine difficulties of customers.

34. Consequent on the deregulation of interest rates on advances over Rs.2 lakh with effect from October 18, 1994, whether banks should pay DICGC Guarantee fees in respect of priority sector advances?

As regards DICGC Guarantee fees, banks have been given the discretion to absorb or to pass on the guarantee fees to the borrower in case of advances over Rs.25,000/- excluding advances to weaker sections. Banks should bear DICGC guarantee fees in respect of advances up to Rs.25,000/- and all advances to weaker sections.

35. Whether interest on loans and advances could be charged at varying periods ranging from monthly rests to yearly rests?

With effect from April 1, 2002 banks have been charging interest on loans and advances at monthly rests except in the case of agricultural advances (including short term loans and other allied activities) where the existing practice continues.

36. What rate of interest is chargeable on loans/ advances granted to Staff Members of the banks or Staff Members of Co-operative Credit Societies?

The interest rate directives on advances granted by banks will not be applicable to loans or advances or other financial accommodation made or provided or renewed by a scheduled bank, inter alia, to its own employees. Where the advances are provided by banks to co-operative credit societies formed by the banks' staff members for lending to constituents (i.e. staff of the bank), the interest rate directives of RBI will not apply in case of such advances.

IV. ADVANCES AGAINST SHARES AND DEBENTURES

37. Whether banks can sanction loans against the equity shares of the banking company to its directors?

No.

38. Whether any ceiling has been fixed on the bank’s exposure to the capital market?
With effect from April 1, 2007 a bank's total exposure, including both fund based and non-fund based exposure, to the capital market in all forms covering its direct investment in equity shares, convertible bonds and debentures and units of equity oriented mutual funds; advances against shares to individuals for investment in equity shares (including IPOs), bonds and debentures, units of equity-oriented mutual funds and secured and unsecured advances to stockbrokers and guarantees issued on behalf of stockbrokers and market makers; all exposures to Venture Capital Funds (both registered and unregistered) should not exceed 40 per cent of its net worth, as on March 31 of the previous year. Within this overall ceiling, the bank’s direct investment in shares, convertible bonds / debentures, units of equity-oriented mutual funds and all exposures to Venture Capital Funds (VCFs) [both registered and unregistered] should not exceed 20 per cent of its net worth. For computing the ceiling on exposure to capital market, the bank’s direct investment in shares will be calculated at cost price of the shares.

The aggregate exposure of a consolidated bank to capital markets (both fund based and non-fund based) should not exceed 40 per cent of its consolidated net worth as on March 31 of the previous year. Within this overall ceiling, the aggregate direct exposure by way of the consolidated bank’s investment in shares, convertible bonds / debentures, units of equity-oriented mutual funds and all exposures to Venture Capital Funds (VCFs) [both registered and unregistered] should not exceed 20 per cent of its consolidated net worth.

39. What is the definition of net worth of a bank?

Net worth would comprise of Paid-up capital plus Free Reserves including Share Premium but excluding Revaluation Reserves, plus Investment Fluctuation Reserve and credit balance in Profit & Loss account, less debit balance in Profit and Loss account, Accumulated Losses and Intangible Assets. No general or specific provisions should be included in computation of net worth. Infusion of capital through equity shares, either through domestic issues or overseas floats after the published balance sheet date, may also be taken into account for determining the ceiling on exposure to capital market.

40. Whether banks can make short sales of shares?
No. Banks are prohibited from making any short sales of shares.

41. Whether banks can invest in fixed deposits of non-financial companies?There is no prohibition on banks’ placing of funds with non-banking non-financial companies under their Public Deposit Schemes. However, investment in the Public Deposit Scheme of such companies should be classified by banks as loans/ advances in their balance sheet and returns submitted under the Banking Regulation Act, 1949 and the Reserve Bank of India Act 1934.

42. What should be the method of valuation for advances against shares/ debentures/ bonds?

Shares/ debentures/ bonds accepted by banks as security for loans/ advances should be valued at the prevailing market prices.

43. Whether banks can sanction bridge loans to companies?
Yes. Banks can sanction bridge loans to companies for a period not exceeding one year against the expected equity flows/ issues as also the expected proceeds of non-convertible Debentures, External Commercial Borrowings, Global Depository Receipts and/ or funds in the nature of Foreign Direct Investments, provided the bank is satisfied that the borrowing company has made firm arrangements for raising the aforesaid resources/ funds. Bridge loans extended by a bank will be included within the ceiling of 40% of net worth prescribed for banks’ aggregate exposure to the capital market.

44. What is the ceiling on the quantum of loans which can be sanctioned by banks to individuals against security of shares, debentures and PSU bonds, if held in physical form and in dematerialized form?

Loans/ advances granted to individuals against the security of shares, debentures and PSU bonds should not exceed Rs.10 lakh and Rs.20 lakh, if the securities are held in physical form and dematerialized form respectively. The maximum amount of finance that can be granted to an individual for subscribing to IPOs is Rs.10 lakh. However, the bank should not provide finance to companies for their investment in IPOs of other companies. Banks can grant advances to employees for purchasing shares of their own companies under Employees Stock Option Plan (ESOP) to the extent of 90% of purchase price of shares or Rs.20 lakh whichever is lower. NBFCs should not be provided finance for on-lending to individuals for subscribing to IPOs. Loans/ advances granted by a bank for subscribing to IPOs should be reckoned as an exposure to capital market.

45. What is the margin stipulated for advances against shares held in physical form and dematerialised form?

A uniform margin of 50% has been stipulated for all advances against shares/ /financing of IPOs/issue of guarantees for capital market operations. Within this 50 percent margin, a minimum cash margin of 25 percent should be maintained in respect of guarantees issued by banks for capital market operations.

46. Is any margin stipulated for banks' exposure to commodity markets?

The minimum margin of 50% and minimum cash margin of 25% (within the margin of 50%), as stipulated in the case of banks' exposure to capital markets, will also apply to guarantees issued by banks on behalf of commodity brokers in favour of the national level commodity exchanges, viz, National Commodity & Derivatives Exchange (NCDEX), Multi Commodity Exchange of India Limited (MCX) and National Multi-Commodity Exchange of India Limited (NMCEIL) in lieu of margin requirements.

V. DONATIONS

47. Whether banks can make donations?

Yes. The profit making banks may make donations during a financial year, aggregating up to one percent of the published profit of the bank for the previous year. However, the contributions/ subscriptions made by banks to Prime Minister’s Relief Fund and to professional bodies/ institutions like Indian Banks’ Association, National Institute of Bank Management, Indian Institute of Bankers, Institute of Banking Personnel Selection, Foreign Exchange Dealers Association of India, during a year will be exempted from the above ceiling. Unutilised amount of the permissible limit of a year should not be carried forward to the next year for the purpose of making donations.

48. Whether loss-making banks can make donations?

Yes, loss making banks can make donations up to Rs.5 lakh only in a financial year.

49. Whether overseas branches of the banks can make donations abroad?

Yes, the overseas branches of the banks can make donations abroad, provided the banks do not exceed the prescribed ceiling of one per cent of their published profit of the previous year.

VI. LOANS FOR PREMISES
50. What are the norms and procedure laid down by RBI for acquisition of accommodation on lease/ rental basis by commercial banks for their use, i.e. for office and residence of the staff?

i. The Board of Directors of the banks should lay down the policy and formulate operational guidelines separately in respect of metropolitan, urban, semi-urban and rural areas covering all areas in respect of acquiring premises on lease/ rental basis for the banks’ use. These guidelines should include also delegation of powers at various levels. The decision in regard to surrendering or shifting of premises other than at rural centers should be taken at the central office level by a committee of senior executives.

ii. The Board of Directors of the bank should lay down separate policy for granting of loans to landlords who provide them premises on lease/ rental basis. The rate of interest to be charged on such loans should be fixed as per the lending rate directives issued by RBI with BPLR as the minimum lending rate for the loans above Rs.2 lakh. The rate of interest may be simple or compound, in accordance with the usual practice of the bank, as applicable to other term loans.

iii. Banks should provide a suitable mechanism for redressing the genuine grievances of the landlord expeditiously.

iv. The details of negotiated contracts in respect of advances to landlords and rental (including taxes etc. and deposits of Rs.25 lakh and above) on premises taken on lease/ rental by the public sector banks, should be reported to the Central Bureau of Investigation (CBI) as per the extant Government instructions. This requirement will not be applicable to banks in the private sector.
VII. SERVICE CHARGES

51. Is there any ceiling on service charges to be levied by the banks?

Indian Banks’ Association (IBA) has dispensed with the practice of prescribing service charges to be levied by banks for various services rendered by them. With effect from September, 1999, the Reserve Bank has granted freedom to banks to prescribe service charges with the approval of the respective Board of Directors.

As announced in the Annual Policy Statement for the year 2006-2007, in order to ensure fair practices in banking services, Reserve Bank of India (RBI) constituted a Working Group to formulate a scheme for ensuring reasonableness of bank charges, and to incorporate it in the Fair Practices Code, the compliance of which would be monitored by the Banking Codes and Standards Board of India (BCSBI). The Working Group, which examined various issues, such as basic banking/financial services to be rendered to individual customers, the methodology adopted by banks for fixing the charges and the reasonableness of such charges, has identified twenty-seven services related to deposit/loan accounts, remittance facilities and cheque collections, as an indicative list of basic banking services to be offered by banks. The recommendations of the Working Group have been accepted by RBI with certain modifications. Based on the recommendations of the Working Group, RBI has issued a circular DBOD. No. Dir. BC. 56/13.03.00/2006-07 dated February 2, 2007 to all scheduled commercial banks.
52. What are the parameters to be adopted for identifying basic banking services?
Banks have been advised to identify basic banking services on the basis of two parameters indicated by the Working Group, namely, (i) banking services that are ordinarily availed by individuals in the middle and lower segments and (ii) the value of transactions, namely, cheque collections and remittances up to Rs. 10,000 for each transaction and up to $500 for forex transactions. The indicative list of banking services includes services relating to Deposit Accounts (cheque book facility, issue of pass book / statement, ATM Card, Debit Card, stop payment, balance enquiry, account closure, cheque return - inward, signature verification); Loan Accounts (no dues certificate); Remittance facilities (Demand Draft – issue/ cancellation/ revalidation, Payment Order - issue/ cancellation/ revalidation/ duplicate, Telegraphic Transfer - issue/ cancellation/ duplicate, Electronic Clearing Service (ECS), National Electronic Fund Transfer (NEFT) / Electronic Fund Transfer (EFT); Collection Facilities (collection of local /outstation cheques, cheque return- outward). Banks are required to implement the recommendations of the Working Group on making available the basic banking services at reasonable prices/ charges and   towards this, delivering the basic services outside the scope of the bundled products.
53. What are the principles to be followed by banks in order to ensure reasonableness in fixing and communicating service charges?
Banks are required to follow the following principles for ensuring reasonableness in fixing and communicating the service charges -

(a) For basic services to individuals, banks should levy charges at rates that are lower than the rates applied when the same services are given to non-individuals.

(b) For basic services rendered to special category of individuals (such as individuals in rural areas, pensioners and senior citizens), banks should levy charges on more liberal terms than the terms on which the charges are levied to other individuals.

(c) For basic services rendered to individuals, banks should levy charges only if the charges are just and supported by reason.

(d) For basic services to individuals, banks should levy services charges ad-valorem only to cover any incremental cost and subject to a cap.

(e) Banks should provide to the individual customers upfront and in a timely manner, complete information on the charges applicable to all basic services.

(f) Banks should provide advance information to the individual customers about the proposed changes in the service charges.

(g) Banks should collect for services given to individuals only such charges which have been notified to the customer.

(h) Banks should inform the customers in an appropriate manner recovery of service charges from the account or the transaction.
54. What are the other steps to be taken by banks?

Banks are required to take steps to ensure that customers are made aware of the service charges upfront and changes in the service charges are implemented only with prior notice to the customers. Banks are also required to have a robust grievance redressal structure and processes, to ensure prompt in-house redressal of all their customer complaints. Further, full-fledged   information on bank products and their implications should be disclosed to the customers, so that the customers can make an informed judgment about their choice of products.

1. For what purposes can I seek a first time home loan?

You can generally seek a first time home loan for buying a house or a flat, renovation, extension and repairs to your existing house. Most banks have a separate policy for those who are going for a second house. Please remember to seek specific clarifications on the above-mentioned issues from your commercial bank.

2. How will your bank decide your home loan eligibility?

Your bank will assess your repayment capacity while deciding the home loan eligibility. Repayment capacity is based on your monthly disposable / surplus income, (which in turn is based on factors such as total monthly income / surplus less monthly expenses) and other factors like spouse's income, assets, liabilities, stability of income etc. The main concern of the bank is to make sure that you comfortably repay the loan on time and ensure end use. The higher the monthly disposable income, higher will be the amount you will be eligible for loan. Typically a bank assumes that about 55-60 % of your monthly disposable / surplus income is available for repayment of loan. However, some banks calculate the income available for EMI payments based on an individual’s gross income and not on his disposable income.

The amount of the loan depends on the tenure of the loan and the rate of interest also as these variables determine your monthly outgo / outflow which in turn depends on your disposable income. Banks generally fix an upper age limit for home loan applicants.

3. What is an EMI?

You repay the loan in Equated Monthly Installments (EMIs) comprising both principal and interest. Repayment by way of EMI starts from the month following the month in which you take full disbursement. (For understanding how EMI is calculated, please see annex).

4. What documents are generally sought for a loan approval?

In addition to all legal documents relating to the house being bought, banks will also ask you to submit Identity and Residence Proof, latest salary slip ( authenticated by the employer and self attested for employees ) and Form 16 ( for business persons/ self-employed ) and last 6 months bank statements / Balance Sheet, as applicable . You also need to submit the completed application form along with your photograph. Loan applications form would give a checklist of documents to be attached with the application.

Do not be in a hurry to seal the deal quickly.

Please do discuss and seek more information on any waivers in terms and conditions provided by the commercial bank in this regard. For example some banks insist on submission of Life Insurance Policies of the borrower / guarantor equal to the loan amount assigned in favour of the commercial bank. There are usually amount ceilings for this condition which can also be waived by appropriate authority. Please read the fine print of the bank’s scheme carefully and seek clarifications.

5. What are the different interest rate options offered by banks?

Banks generally offer either of the following loan options: Floating Rate Home Loans and Fixed Rate Home Loans. For a Fixed Rate Loan, the rate of interest is fixed either for the entire tenure of the loan or a certain part of the tenure of the loan. In case of a pure fixed loan, the EMI due to the bank remains constant. If a bank offers a Loan which is fixed only for a certain period of the tenure of the loan, please try to elicit information from the bank whether the rates may be raised after the period (reset clause). You may try to negotiate a lock-in that should include the rate that you have agreed upon initially and the period the lock-in lasts.

Hence, the EMI of a fixed rate loan is known in advance. This is the cash outflow that can be planned for at the outset of the loan. If the inflation and the interest rate in the economy move up over the years, a fixed EMI is attractively stagnant and is easier to plan for. However, if you have fixed EMI, any reduction in interest rates in the market, will not benefit you.

Determinants of floating rate:

The EMI of a floating rate loan changes with changes in market interest rates. If market rates increase, your repayment increases. When rates fall, your dues also fall. The floating interest rate is made up of two parts: the index and the spread. The index is a measure of interest rates generally (based on say, government securities prices), and the spread is an extra amount that the banker adds to cover credit risk, profit mark-up etc. The amount of the spread may differ from one lender to another, but it is usually constant over the life of the loan. If the index rate moves up, so does your interest rate in most circumstances and you will have to pay a higher EMI. Conversely, if the interest rate moves down, your EMI amount should be lower.

Also, sometimes banks make some adjustments so that your EMI remains constant. In such cases, when a lender increases the floating interest rate, the tenure of the loan is increased (and EMI kept constant).

Some lenders also base their floating rates on their Benchmark Prime Lending Rates (BPLR). You should ask what index will be used for setting the floating rate, how it has generally fluctuated in the past, and where it is published/disclosed. However, the past fluctuation of any index is not a guarantee for its future behavior.

Flexibility in EMI:

Some banks also offer their customers flexible repayment options. Here the EMIs are unequal. In step-up loans, the EMI is low initially and increases as years roll by (balloon repayment). In step-down loans, EMI is high initially and decreases as years roll by.

Step-up option is convenient for borrowers who are in the beginning of their careers. Step-down loan option is useful for borrowers who are close to their retirement years and currently make good money.

6. What is monthly reducing balances method?

Borrowers benefit more from a loan that's calculated on a monthly reducing basis than on an annual basis. In case of monthly resets, interest is calculated on the outstanding principal balance for that month. The principal paid is deducted from the opening principal outstanding balance to arrive at the opening principal for the next month and interest is computed on the new, reduced principal outstanding. In case of annual resets, principal paid is adjusted only at the end of the year. Hence, you continue to pay interest on a portion of the principal that has been paid back to the lender.

7. How does tenure affect cost of loan?

The longer the tenure of the loan, the lesser will be your monthly EMI outflow. Shorter tenures mean greater EMI burden, but your loan is repaid faster. If you have a short-term cash flow mismatch, your bank may increase the tenure of the loan, and your EMI burden comes down. But longer tenures mean payment of larger interest towards the loan and make it more expensive.

8. What is an amortization schedule?

This is a table that gives details of the periodic principal and interest payments on a loan and the amount outstanding at any point of time. It also shows the gradual decrease of the loan balance until it reaches zero. (See annex)

9. What is pre-EMI interest?

Sometimes loan is disbursed in installments, depending on the stages of completion of the housing project. Pending final disbursement, you may be required to pay interest only on the portion of the loan disbursed. This interest called pre-EMI interest. Pre-EMI interest is payable every month from the date of each disbursement up to the date of commencement of EMI.

However, many banks offer a special facility whereby customers can choose the installments they wish to pay for under construction properties till the time the property is ready for possession. Anything paid over and above the interest by the customer goes towards Principal repayment. The customer benefits by starting EMI payment earlier and hence repays the loan faster. Please check with your banker whether this facility is available before availing of the loan.

10. What security will you have to provide?

The security for a housing loan is typically a first mortgage of the property, normally by way of deposit of title deeds. Banks also sometimes ask for other collateral security as may be necessary. Some banks insist on margin / down payment (borrowers contribution to the creation of an asset) to be maintained / made also.

Collateral security assigned to your bank could be life insurance policies, the surrender value of which is set at a certain percentage to the loan amount, guarantees from solvent guarantors, pledge of shares/ securities and investments like KVP/ NSC etc. that are acceptable to your banker. Banks would also require you to ensure that the title to the property is free from any encumbrance. (i.e., there should not be any existing mortgage, loan or litigation, which is likely to affect the title to the property adversely).

11. What precautions do you need to take if you are purchasing a property that is not a newly built one?

Ensure that the documents being provided to you are not colour photocopies. Check the internet for other modus operandi to fraud and ensure clear title to the asset. Seek advice only from authentic sources such as your bank.

Get the no encumbrance certificate to find the true title holder and if it is mortgaged to any financier. Obtain all tax papers to ensure that all documents are up to date.

12. What should be your strategy in dealing with the banks?

Give yourself comfortable time. Do not hurry your purchase or loan in any case. Shopping around for a home loan will help you to get the best financing deal. Shopping, comparing, seeking clarification and negotiating with banks may save you thousands of rupees.

a) Obtain information from several banks

Home loans are available from mainly two types of lenders--commercial banks and housing finance companies. Different lenders may quote you different rates of interest and other terms and conditions, so you should contact several lenders to make sure you’re getting the best value for money.

Find out how much of a down payment you are required to pay, and find out all the costs involved in the loan (including processing fees, administrative charges and prepayment charges levied by banks). Knowing just the amount of the EMI or the interest rate is not good enough. Similarly, ask for information on loan amount, loan term, and type of loan (fixed or floating) so that you can compare the information and take an informed decision.

The following is some important information that you will require.

i) Rates

Ask your lender about its current home loan interest rates and whether the rate is fixed or floating. Remember that when interest rates in the economy go up so does the floating rates and hence the monthly re-payment.

If the rate quoted is a floating rate, ask how your rate and loan payment will vary, including the extent to which your loan payment will be reduced when rates go down by a certain percentage. Ask your lender to what index your floating home loan is referenced / linked and the periodicity of updation of that index. Also ask your bank whether the index is internal or external and how and where it is published.

Ask about the loan’s annual percentage rates (APR). The APR takes into account not only the interest rate but also fees and certain other charges that you may be required to pay, expressed as a yearly rate. Banks are obliged to reveal the APR if requested for by the customer.

ii) Reset Clause

Check the reset clause, especially in the case of fixed interest rate loan as the rates will not be fixed throughout the tenure of the loan.

iii) Spread/Mark up

Check if the margin in the case of the floating rate is fixed or variable. The rate of interest you have to pay will vary accordingly.

iv) Fees

A home loan often requires payment of various fees, such as loan origination or processing charges, administrative charges, documentation, late payment, changing the loan tenure, switching to different loan package during the loan tenure, restructuring of loan, changing from fixed to floating interest rate loan and vice versa, legal fee, technical inspection fee, recurring annual service fee, document retrieval charges and pre-payment charges, if you want to prepay the loan. Every lender should be able to give you an estimate of its fees. Many of these fees are negotiable / can be waived also.

Ask what each fee includes. Sometimes several components are lumped into one fee. Ask for an explanation of any fee you do not understand. Also, remember that most of these fees are perhaps negotiable! Do negotiate with your bank before agreeing to a particular fee. See how the all inclusive rate compares with the all inclusive rates offered by other banks. While planning your finances, don't forget to include the costs of stamp duty and registration.

v) Down Payments / Margin

Some lenders require 20/30 percent of the home’s purchase price as a down payment from you. However, many lenders also offer loans that require less than 20/30 percent down payment, sometimes as little as 5 percent .Ask about the lender’s requirements for a down payment and also negotiate with him to reduce the down payments.

b) Obtain the best deal

Once you know what each bank has to offer in terms of rates, fees and down payments, negotiate for the best deal. Ask the lender to write down all the costs associated with the loan. Then ask if the bank will waive or reduce one or more of its fees or agree to a lower rate. Do make sure that the bank is not agreeing to lower one fee while raising another or to lower the rate while raising the fees. Ask for clarification in case you do not understand any particular term. All banks are obliged to explain the most important terms and conditions of the home loan in detail.

Once you are satisfied with the terms you have negotiated, please do obtain a written offer letter from the lender and keep a copy with you. Read the offer letter carefully before signing.

13. Can you repay your loan ahead of schedule? Is pre-payment of loan allowed?

Yes, most banks allow you to repay the loan ahead of schedule by making lump sum payments. However, many banks charge early repayment penalties up to 2-3% of the principal amount outstanding. Prepayment penalty may vary according to the reasons and source of funds - if you obtain a loan from another bank for pre-payment the charges are usually higher than when you pay from your own sources. However, you may credit more than your EMI amount into your loan account on a periodic basis and bring down your interest burden as and when funds are available with you. Most banks do not charge a pre-payment penalty if you deposit more than your EMI payable on a periodic basis. Please check such stipulations while availing the loan.

14. What are Switch over charges/ balances transfer charges?

When other banks reduce the interest rate, you may prefer to close your account with the bank with whom you are banking, to avail of the loan from the bank offering reduced rates of interest. You have to pay pre-payment charges for doing so. In order to ensure that their customers do not approach other banks for availing reduced interest rates, banks allow customers to switch over from a higher interest loan to a lower interest loan by paying a switch over fees which is lesser than the pre-payment charges. Generally switchover fee is taken as percentage of the outstanding loan amount.

Keep up-dating yourself on various changes in the home loan market. Visit the branch, discuss with the officials to get the best out of any changes in the home loan scenario.

15. Do you get a tax benefit on the loan?

Yes. Resident Indians are eligible for certain tax benefits on both principal and interest components of a loan under the Income Tax Act, 1961. Under the current laws, you are entitled to an income tax rebate for interest repayment up to Rs. 1,50,000 /- per annum. Moreover, you can get added tax benefits under Section 80 C on repayment of principal amount up to Rs. 1,00,000 /- per annum.

16. What are the minimum standards that banks are required to follow when they sell you a home loan?

At the time of sourcing the loan, banks are required to provide information about the interest rate applicable, the fees / charges and any other matter which affects your interest and the same are usually furnished in the product brochure of the banks. Complete transparency is mandatory.
The banks will supply you authenticated copies of all the loan documents executed by you at their cost along with a copy each of all enclosures quoted in the loan document on request.

A bank cannot reject your loan application without furnishing valid reason(s) for the same.

17. What do you do if you have a grievance?

If you have a complaint against only scheduled bank on any of the above grounds, you can lodge a complaint with the bank concerned in writing in a specific complaint register provided at the branches as per the recommendation of the Goiporia Committee or on a sheet of paper. Ask for a receipt of your complaint. The details of the official receiving your complaint may be specifically sought. If the bank fails to respond within 30 days, you can lodge a complaint with the Banking Ombudsman. (Please note that complaints pending in any other judicial forum will not be entertained by the Banking Ombudsman). No fee is levied by the office of the Banking Ombudsman for resolving the customer’s complaint. A unique complaint identification number will be given to you for tracking purpose. (A list of the Banking Ombudsmen along with their contact details is provided on the RBI website).

Complaints are to be addressed to the Banking Ombudsman within whose jurisdiction the branch or office of the bank complained against is located. Complaints can be lodged simply by writing on a plain paper or online at www.bankingombudsman.rbi.org.in or by sending an email to the Banking Ombudsman. Complaint forms are available at all bank branches also.

Complaint can also be lodged by your authorised representative (other than a lawyer) or by a consumer association / forum acting on your behalf.

If you are not happy with the decision of the Banking Ombudsman, you can appeal to the Appellate Authority in the Reserve Bank of India.

REVERSE MORTGAGE LOAN

18. What is reverse mortgage loan? What is my eligibility and how I will get back the title deeds?

The scheme of reverse mortgage has been introduced recently for the benefit of senior citizens owning a house but having inadequate income to meet their needs. Some important features of reverse mortgage are:

A homeowner who is above 60 years of age is eligible for reverse mortgage loan. It allows him to turn the equity in his home into one lump sum or periodic payments mutually agreed by the borrower and the banker.
The property should be clear from encumbrances and should have clear title of the borrower.
NO REPAYMENT is required as long as the borrower lives, Borrower should pay all taxes relating to the house and maintain the property as his primary residence.
The amount of loan is based on several factors: borrower’s age, value of the property, current interest rates and the specific plan chosen. Generally speaking, the higher the age, higher the value of the home, the more money is available.
The valuation of the residential property is done at periodic intervals and it shall be clearly specified to the borrowers upfront. The banks shall have the option to revise the periodic / lump sum amount at such frequency or intervals based on revaluation of property.
Married couples will be eligible as joint borrowers for financial assistance. In such a case, the age criteria for the couple would be at the discretion of the lending institution, subject to at least one of them being above 60 years of age.
The loan shall become due and payable only when the last surviving borrower dies or would like to sell the home, or permanently moves out.
On death of the home owner, the legal heirs have the choice of keeping or selling the house. If they decide to sell the house, the proceeds of the sale would be used to repay the mortgage, with the remainder going to the heirs.
As per the scheme formulated by National Housing Bank (NHB), the maximum period of the loan period is 15 years. The residual life of the property should be at least 20 years. Where the borrower lives longer than 15 years, periodic payments will not be made by lender. However, the borrower can continue to occupy.
From FY 2008-09, the lump sum amount or periodic payments received on reverse mortgage loan will not attract income tax or capital gains tax.

Note- Reverse mortgage is a fixed interest discounted product in reverse. It does not take into account the changes in interest rates as yet.

Important – This part is fine printed to help you practice reading the fine print. The loan agreement documentation runs into nearly 50 pages and its language is complex. If you thought everyone signs the same agreements with the bank, where is the need to read? You are not taking an informed decision. If you thought somebody would have pointed this to me if there was any problem, then maybe they did but you could not read or listen to it. Think again! Borrowers' and lenders' rights may not be expressed clearly in a transparent manner in all the loan agreements. The home loan agreement may not be provided to you in advance so that this could be read and understood before you sign the agreement. Every method may be used to delay handing over a copy to the borrower in sufficient time. Some areas you may focus are a) check the “reset clause” incorporated by some banks in their home loan agreements that allows them to change the interest rate in the future, even on fixed rate loans. Banks may set their reset clauses for 3 or 2 year intervals. They say a lender cannot have an agreement that a fixed rate is set for the entire tenure of 15 to 20 years as this will cause an asset-liability mismatch. Talk to your bank. b) Please seek clarifications on the term “exceptional circumstances” (if stated in the loan agreement) under which loan rates can be unilaterally changed by your bank. c) A common person thinks that default ideally means non-payment of one or more loan installments. In some loan documentation it can include divorce and death (in individual case) and even involvement in civil litigation or criminal offence. d) Does the loan agreement say that disbursement of the loan may be made directly to the builder or developer and in the case of a ready-built property to the vendor thereof and/or in such other manner as may be decided solely by bank? It is the borrower whose original property papers are retained with the bank, so why disburse to the builder. Possession of property has been delayed in some cases when the cheque was issued in the name of the builder and the builder refused to pay delay penalty to the borrower e) Does the agreement enable assignment of your loan to a third party? You take into account reputation and credibility of the bank before entering into a loan agreement with it. Are you comfortable with third party takes over or should you also be allowed to move your home loan from one bank to another in that case? Look for ambiguous clauses and discuss with the banker. Some agreements say changes in employment etc. have to be informed well in advance without quantifying the term “well in advance”. f) In one case the loan documentation says “issuance of pre-approval letter should not be construed as a commitment by the bank to grant the housing loan and processing fees is not re-fundable even if the home loan is not processed”. This is never ending it seems. The above are only indicative instances of what has been observed / reported/ indicated by various sources. However, our main objective was to get you into the habit of reading the fine print. If you have read this, you would have understood the importance of reading fine print in any document and we have achieved our objective. I only wish I could have made the print smaller as in the real cases.

Loan amount x rpm x (1+pm)
(1+pm)

rpm= interest per month (rate of interest per year/12)
n= number of installments

NB: If you have a fixed budget towards EMI you can arrive at loan amount by changing the other variables such as by reducing the rate of interest or by increasing the tenure of loan. This can also be arrived at through EMI calculator by a trial-and-error approach.

Over Draft

2012-01-17T07:15:00.001-08:00

An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.

Bank Loans

2012-01-17T07:13:00.001-08:00

A loan is a type of debt. In a loan, the borrower (customer) initially receives or borrows an amount of money, called the principal, from the lender (bank), and is obligated to pay back or repay an equal amount of money to the lender (bank) at a later time. Typically, the money is paid back in regular installments (Eg.Monthly), or partial repayments; in an annuity, each installment is the same amount.

The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender (bank) to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants

We can broadly classify loans into two major categories.

Secured Loan

A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) called as collateral security. A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. Similar concept is applicable for auto loan, gold loan etc.

Unsecured Loan:

Unsecured loans are monetary loans that are not secured against the borrower's (customers )assets. This means no collateral security provided by the customer. These may be available from financial institutions (banks) under many different guises or marketing packages:

credit card debt

personal loans (This also can be secured loan eg: against property, gold etc)

bank overdrafts

credit facilities or lines of credit

corporate bonds (may be secured or unsecured)

The interest rates applicable to these different forms may vary depending on the lender and the borrower.

Interest rates on unsecured loans are nearly always higher than for secured loans, because an unsecured lender's options for recourse against the borrower in the event of default (Not paying back) are severely limited. An unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in the event of insolvency, the debt may be uncollectible.

You can further classify the loans as Home loans, educational loans, Car Loan, Two Wheeler loan, Personal Loans, Agricultural Loans, Business Loans and so on.

Phishing Attack

2012-01-16T11:14:00.001-08:00

Phishing is a way of attempting to acquire information such as usernames, passwords, and credit card details by masquerading as a trustworthy entity in an electronic communication. Communications purporting to be from popular social web sites, auction sites, online payment processors or IT administrators are commonly used to lure the unsuspecting public. Phishing is typically carried out by e-mail spoofing or instant messaging, and it often directs users to enter details at a fake website whose look and feel are almost identical to the legitimate one. Phishing is an example of social engineering techniques used to deceive users, and exploits the poor usability of current web security technologies. Attempts to deal with the growing number of reported phishing incidents include legislation, user training, public awareness, and technical security measures.

A phishing technique was described in detail in 1987, and the first recorded use of the term "phishing" was made in 1996. The term is a variant of fishing,[4] probably influenced by phreaking, and alludes to "baits" used in hopes that the potential victim will "bite" by clicking a malicious link or opening a malicious attachment, in which case their financial information and passwords may then be stolen.

ECGC & EXIM

2012-01-16T11:09:00.000-08:00

What is ECGC?

Export Credit Guarantee Corporation of India Limited, was established in the year 1957 by the Government of India to strengthen the export promotion drive by covering the risk of exporting on credit.

Being essentially an export promotion organization, it functions under the administrative control of the Ministry of Commerce & Industry, Department of Commerce, Government of India. It is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance and exporting community.

ECGC is the fifth largest credit insurer of the world in terms of coverage of national exports. The present paid-up capital of the company is Rs.800 crores and authorized capital Rs.1000 crores.

What does ECGC do?

· Provides a range of credit risk insurance covers to exporters against loss in export of goods and services

· Offers guarantees to banks and financial institutions to enable exporters to obtain better facilities from them

· Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan

How does ECGC help exporters?

· ECGC

· Offers insurance protection to exporters against payment risks

· Provides guidance in export-related activities

· Makes available information on different countries with its own credit ratings

· Makes it easy to obtain export finance from banks/financial institutions

· Assists exporters in recovering bad debts

· Provides information on credit-worthiness of overseas buyers

Need for export credit insurance

Payments for exports are open to risks even at the best of times. The risks have assumed large proportions today due to the far-reaching political and economic changes that are sweeping the world. An outbreak of war or civil war may block or delay payment for goods exported. A coup or an insurrection may also bring about the same result. Economic difficulties or balance of payment problems may lead a country to impose restrictions on either import of certain goods or on transfer of payments for goods imported. In addition, the exporters have to face commercial risks of insolvency or protracted default of buyers. The commercial risks of a foreign buyer going bankrupt or losing his capacity to pay are aggravated due to the political and economic uncertainties. Export credit insurance is designed to protect exporters from the consequences of the payment risks, both political and commercial, and to enable them to expand their overseas business without fear of loss.

EXIM - Export-Import Bank of India is the premier export finance institution of the country, established in 1982 under the Export-Import Bank of India Act 1981. Government of India launched the institution with a mandate, not just to enhance exports from India, but to integrate the country’s foreign trade and investment with the overall economic growth. Since its inception, Exim Bank of India has been both a catalyst and a key player in the promotion of cross border trade and investment. Commencing operations as a purveyor of export credit, like other Export Credit Agencies in the world, Exim Bank of India has, over the period, evolved into an institution that plays a major role in partnering Indian industries, particularly the Small and Medium Enterprises, in their globalisation efforts, through a wide range of products and services offered at all stages of the business cycle, starting from import of technology and export product development to export production, export marketing, pre-shipment and post-shipment and overseas investment.

what is Core Banking

2012-01-12T10:43:00.000-08:00

This is term used to describe group of branches connected each other well and the customer can do transaction any of the branch. Core banking solution is provided by most of the banks in India. For example if you have an account with ICICI, You can go to any branch of ICICI to withdraw your money. Basically the information is stored in a central database and the transaction is updated in the central location. Many IT companies in India are providing the core banking solution to the banks. TCS, Oracle, Infosys have their own solution for core banking.

CIBIL and CRISIL

2012-01-12T10:33:00.001-08:00

CRISIL is a Credit rating Company for Commercial entities. Credit Rating and Information Services of India Ltd. Is a global analytical company providing ratings, research, and risk and policy advisory services. Major shares of the CRSIL is owned by a company called Standard and Poor's, which is again a part of The McGraw-Hill Companies. McGraw-Hill Companies is worlds leading credit rating agency. CRISIL Research is India's largest independent research house which helps the client to make business and investment decisions. CRISIL Equities , Mutual Fund Research and Indices - IISL India Index Services and Products Ltd (IISL), a joint venture between NSE and CRISIL Ltd., was set up in May 1998 to provide a variety of indices and index related services and products for the Indian capital markets. CRISIL Infrastructure Advisory provides practical and innovative solutions to governments, donor funded agencies and leading organizations in over 20 emerging economies across the world to help improve infrastructure service delivery

CIBIL is a credit information company for both consumers and Commercial entities. . CIBIL provides this information to its members in the form of credit information reports (CIRs).CIBIL’s members include all leading banks, financial institutions, non-banking financial companies, housing finance companies, state financial corporations and credit card companies.

Balance Sheet

2012-01-09T11:16:00.001-08:00

In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year. A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

The balance sheet must follow the following formula:

Assets = Liabilities + Shareholders' Equity

Golden Rules of Accounting. Modern Classication of accounts and Traditional Classification of Accounts

2012-01-09T11:13:00.000-08:00

Three golden Rules of accounting are Real, Nominal and Personal accounts

1 Personal Accounting : Debit the Receiver, Credit the Giver

2 Nominal Accounting : Debit all Expenses and Losses, Credit all Incomes and Gains.

3 Real Accounting : Debit What comes in, Credit what goes out.

According to Modern approach Accounts are classified into five groups:

Asset

Expense

Revenue

Liability

Capital

According to Traditional approach Accounts are classified into three groups:

Real – all the assets except Debtors

Nominal – all the expenses, incomes, losses, gains.

Personal – all the accounts of persons, company or firms. these are further classified into three types

Understand below for your knowledge:

Debit and credit are the two aspects of every financial transaction. Their use and implication is the fundamental concept in the double-entry bookkeeping system, in which every debit transaction must have a corresponding credit transaction(s) and vice versa. Debits and credits are a system of notation used in bookkeeping to determine how to record any financial transaction. In financial accounting or bookkeeping, "Dr" (Debit) means left side of a ledger account and "Cr" (Credit) is the right side of a ledger account.

To determine whether one must debit or credit a specific account we use the modern accounting equation approach which consists of five accounting elements or rules. An alternative to this approach is to make use of the traditional three rules of accounting for: Real accounts, Personal accounts, and Nominal accounts to determine whether to debit or credit an account.

Debit what comes in and credit what goes out.

Debit is the receiver, Credit is the giver

All gains and income are credit, All losses and expenses are Debit

Lokayukta

2012-01-09T06:44:00.001-08:00

The Lokayukta (also Lok Ayukta) is an anti-corruption ombudsman organization in the Indian states.The Administrative Reforms Commission (ARC) headed by Morarji Desai submitted a special interim report on "Problems of Redressal of Citizen's Grievances' in 1966. In this report, the ARC recommended the setting up of two special authorities designated as 'Lokpal' and 'Lokayukta' for the redressal of citizens' grievances.

The LokAyukta helps people bring corruption to the fore mainly amongst the politicians and officers in the government service. It is to be noted that the LokAyukta conducts raids. But surprisingly, it does not have binding powers to punish anyone. Owing to this, many acts of the LokAyukta have not resulted in criminal or other consequences for those charged.

The Lokayukta is an anti-corruption authority constituted at the state level. It investigates allegations of corruption and mal-administration against public servants and is tasked with speedy redressal of public grievances. The origin of the Lokayukta can be traced to the Ombudsmen in Scandinavian countries. The Administrative Reforms Commission, (1966-70), had recommended the creation of the Lokpal at the Centre and Lokayukta in the states. The Centre is yet to get a Lokpal.

The Lokayukta is created as a statutory authority with a fixed tenure to enable it to discharge its functions independently and impartially. The person appointed is usually a former High Court Chief Justice or former Supreme Court judge. Members of the public can directly approach the Lokayukta with complaints of corruption, nepotism or any other form of mal-administration against any government official.

The range of powers vary. In, say, Delhi, the Lokayukta inquires into allegations of corruption, misuse of authority and wrong doings of public functionaries including Chief Minister, Ministers and MLAs. And civil servants/bureaucrats, judiciary, police and the Delhi Development Authority are excluded from its ambit.

In Karnataka, which in the 1980s was the first state to move to get a Lokayukta and where there has been much controversy over the teeth that the office has, the new powers promised to the Lokayukta keep the Chief Minister, ministers, MPS and MLAs out of the purview.

Jan Lokpal Bill and Anna Hazare Movement

2012-01-09T06:40:00.001-08:00

The Jan Lokpal Bill, also referred to as the citizens' ombudsman bill,[citation needed] is a proposed independent anti-corruption law in India. Anti-corruption social activists proposed it as a more effective improvement to the original Lokpal bill, which is currently being proposed by the Government of India.[1]

The Jan Lokpal Bill aims to effectively deter corruption, redress grievances of citizens, and protect whistle-blowers. If made into law, the bill would create an independent ombudsman body called the Lokpal (Sanskrit: protector of the people). It would be empowered to register and investigate complaints of corruption against politicians and bureaucrats without prior government approval.[2][3][4]

In April 2011, civil activist Anna Hazare started a Satyagraha movement by commencing an indefinite fast in New Delhi to demand the passing of the bill. The movement attracted attention in the media, and hundreds of thousands of supporters, in part due to the organizational skills of Arvind Kejriwal.[5] Following Hazare's four day hunger strike, Indian Prime Minister Manmohan Singh stated that the bill would be re-introduced in the 2011 monsoon session of the Parliament.[6] Accordingly, a committee of five Cabinet Ministers and five social activists attempted to draft a compromise bill merging the two versions but failed. The Indian government went on to propose its own version in the parliament, which the activists rejected on the grounds of not being sufficiently effective, and called it a "toothless bill".

Issue	The Jan Lokpal Bill[10]	Government's Lokpal Bill[1]
Prime Minister	PM can be investigated with permission of seven member Lokpal bench.	PM can be investigated by Lokpal after she/he vacates office.
Judiciary	Can be investigated, though high level members may be investigated only with permission of a seven member Lokpal bench.	Judiciary is exempt and will be covered by a separate "judicial accountability bill".
Conduct of MPs	Can be investigated with permission of seven member Lokpal bench.	Can be investigated, but their conduct within Parliament, such as voting, cannot be investigated.
Lower bureaucracy	All public servants would be included.	Only senior officers (Group A) will be covered.
Anti-corruption wing of the Central Bureau of Investigation (CBI)	The Anti-corruption wing of the CBI will be merged into the Lokpal.	The Anti-corruption wing of the CBI cannot be merged into the Lokpal.
Removal of Lokpal members and Chair	Any person can bring a complaint to the Supreme Court, who can then recommend removal of any member to the President.	Any "aggrieved party" can raise a complaint to the President, who will refer the matter to the CJI.
Removal of Lokpal staff and officers	Complaints against Lokpal staff will be handled by independent boards set-up in each state, composed of retired bureaucrats, judges, and civil society members.	Lokpal will conduct inquiries into its own behaviour.
Lokayukta	Lokayukta and other local/state anti-corruption agency would remain in place.	All state anti-corruption agencies would be closed and responsibilities taken over by centralised Lokpal.
Whistleblower protection	Whistleblowers are protected by Lokpal.	No protection granted to whistleblowers by Lokpal Mahima.
Punishment for corruption	Lokpal can either directly impose penalties, or refer the matter to the courts. Penalties can include removal from office, imprisonment, and recovery of assets from those who benefited from the corruption.	Lokpal can only refer matters to the courts, not take any direct punitive actions. Penalties remain equivalent to those in current laws.
Investigatory powers	Lokpal can obtain wiretaps ( to make a connection to a telegraph or telephone wire in order to obtain information secretly), issue rogatory letters, and recruit investigating officers. Cannot issue contempt orders.^[17]	Lokpal can issue contempt orders, and has the ability to punish those in contempt. No authority to obtain wiretaps, issue rogatory letters, or recruit investigating officers.[17]
False, frivolous and vexatious complaints	Lokpal can issue fines for frivolous complaints (including frivolous complaints against Lokpal itself), with a maximum penalty of Rs 100,000.	Court system will handle matters of frivolous complaints. Courts can give 2–5 years imprisonment and fines of Rs 25,000 to 200,000.
NGOs	NGOs not within the scope due to their role in exposing corruption.	NGOs are within the scope and can be investigated.

The Jan Lokpal Bill (Citizen's ombudsman Bill) is a draft anti-corruption bill drawn up by prominent civil society activists seeking the appointment of a Jan Lokpal, an independent body that would investigate corruption cases, complete the investigation within a year and envisages trial in the case getting over in the next one year.

Drafted by Justice Santosh Hegde (former Supreme Court Judge and former Lokayukta of Karnataka), Prashant Bhushan (Supreme Court Lawyer) and Arvind Kejriwal (RTI activist), the draft Bill envisages a system where a corrupt person found guilty would go to jail within two years of the complaint being made and his ill-gotten wealth being confiscated. It also seeks power to the Jan Lokpal to prosecute politicians and bureaucrats without government permission.

Retired IPS officer Kiran Bedi and other known people like Swami Agnivesh, Sri Sri Ravi Shankar, Anna Hazare and Mallika Sarabhai are also part of the movement, called India Against Corruption. Its website describes the movement as "an expression of collective anger of people of India against corruption. We have all come together to force/request/persuade/pressurize the Government to enact the Jan Lokpal Bill. We feel that if this Bill were enacted it would create an effective deterrence against corruption."

Anna Hazare, anti-corruption crusader, went on a fast-unto-death in April, demanding that this Bill, drafted by the civil society, be adopted. Four days into his fast, the government agreed to set up a joint committee with an equal number of members from the government and civil society side to draft the Lokpal Bill together. The two sides met several times but could not agree on fundamental elements like including the PM under the purview of the Lokpal. Eventually, both sides drafted their own version of the Bill.

The government has introduced its version in Parliament in this session. Team Anna is up in arms and calls the government version the "Joke Pal Bill." Anna Hazare declared that he would begin another fast in Delhi on August 16. Hours before he was to begin his hunger strike, the Delhi Police detained and later arrested him. There are widespread protests all over the country against his arrest.

The website of the India Against Corruption movement calls the Lokpal Bill of the government an "eyewash" and has on it a critique of that government Bill.

A look at the salient features of Jan Lokpal Bill:

1. An institution called LOKPAL at the centre and LOKAYUKTA in each state will be set up

2. Like Supreme Court and Election Commission, they will be completely independent of the governments. No minister or bureaucrat will be able to influence their investigations.

3. Cases against corrupt people will not linger on for years anymore: Investigations in any case will have to be completed in one year. Trial should be completed in next one year so that the corrupt politician, officer or judge is sent to jail within two years.

4. The loss that a corrupt person caused to the government will be recovered at the time of conviction.

5. How will it help a common citizen: If any work of any citizen is not done in prescribed time in any government office, Lokpal will impose financial penalty on guilty officers, which will be given as compensation to the complainant.

6. So, you could approach Lokpal if your ration card or passport or voter card is not being made or if police is not registering your case or any other work is not being done in prescribed time. Lokpal will have to get it done in a month's time. You could also report any case of corruption to Lokpal like ration being siphoned off, poor quality roads been constructed or panchayat funds being siphoned off. Lokpal will have to complete its investigations in a year, trial will be over in next one year and the guilty will go to jail within two years.

7. But won't the government appoint corrupt and weak people as Lokpal members? That won't be possible because its members will be selected by judges, citizens and constitutional authorities and not by politicians, through a completely transparent and participatory process.

8. What if some officer in Lokpal becomes corrupt? The entire functioning of Lokpal/ Lokayukta will be completely transparent. Any complaint against any officer of Lokpal shall be investigated and the officer dismissed within two months.

9. What will happen to existing anti-corruption agencies? CVC, departmental vigilance and anti-corruption branch of CBI will be merged into Lokpal. Lokpal will have complete powers and machinery to independently investigate and prosecute any officer, judge or politician.

10. It will be the duty of the Lokpal to provide protection to those who are being victimized for raising their voice against corruption.

RTI Act, 2005 in India

2012-01-09T06:39:00.001-08:00

The Right to Information Act, 2005

Territorial extent Whole of India except the State of Jammu and Kashmir

Enacted by Parliament of India

Date enacted 15-06-2005

Date assented to 15-06-2005

Date commenced 15-06-2005

The Right to Information Act 2005 (RTI) is an Act of the Parliament of India "to provide for setting out the practical regime of right to information for citizens." The Act applies to all States and Union Territories of India except the State of Jammu and Kashmir. Jammu and Kashmir has its own act called Jammu & Kashmir Right to Information Act, 2009. Under the provisions of the Act, any citizen may request information from a "public authority" (a body of Government or "instrumentality of State") which is required to reply expeditiously or within thirty days. Every citizen has a right to know how the Government is functioning. Right to Information empowers every citizen to seek any information from the Government, inspect any Government documents and seek certified photocopies thereof. Some laws on Right to Information also empower citizens to official inspect any Government work or to take sample of material used in any work.

Right to Information includes the right to:

1.Inspect works, documents, records.

2.Take notes, extracts or certified copies of documents or records.

3.Take certified samples of material.

4.Obtain information in form of printouts, diskettes, floppies, tapes, video , cassettes or in any other electronic mode or through printouts.

"information" means any material in any form, including records, documents, memos, e-mails, opinions, advices, press releases, circulars, orders, logbooks, contracts, reports, papers, samples, models, data material held in any electronic form and information relating to any private body which can be accessed by a public authority under any other law for the time being in force.

"record" includes:

a) Any document, manuscript and file

b) Any microfilm, microfiche, and facsimile copy of a document

c) Any reproduction of image or images embodied in such microfilm (whether enlarged or not); and

d) Any other material produced by a computer or any other device;

An applicant cannot ask for opinions/advice/views under the RTI Act, unless the opinion/advice/view is already on "record".

However, under Section 4(1)(d), an applicant can ask for "reasons" behind a administrative or quasi judicial decision of a public authority, especially if he is a "affected person".

BASEL Norms

2012-01-09T04:12:00.001-08:00

Basel II is the second of the Basel Accords, (now extended and effectively superseded by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. BASEL III is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members of the Basel Committee on Banking Supervision in 2010-11. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. The business of a bank is to lend deposits to its customers. The interest earn from the loans is then used to foot for the deposits. While your deposits and interest are safe, the edge faces the risk of losing money on the loans they hold given. Succinctly put, while a bank's assets (loans and investments) are risky and prone to losses, its liabilities (deposits) are convinced. Bank failures are mostly caused by losses on its assets within the form of default by borrowers (credit risk), losses on investments within different securities (market risk) and frauds, systems and process failures (operational risks).

Mutual Fund and ULIP

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ULIP and Mutual funds

By product structure, ULIP and Mutual fund are almost the same. ULIP include insurance or risk coverage but mutual fund doesn’t. The performance of the fund is based on Market Performance, needless to say that if Market is going down your fund value also goes down. Based on the investor’s selected stock performance, his returns will reflect exactly that in both cases. Fund manager in those companies will be responsible for running the scheme.

Differences

Mutual Funds are regulated by the SEBI, while ULIPs are regulated by the IRDA as the scheme is insurance. From an industrial point of view, while Mutual Funds focus on low costs and better performance as the USP, ULIP looks more at distribution reach as the USP.

Generally, agents who ‘distribute the numerous AMC products’ are the ones that sell Mutual Funds, whereas the agents who are attached to a single insurance company are the ones that sell Insurance (excluding insurance brokers who are much fewer than attached agents). This is a very important consideration, as there’s a tendency for tied agents to be well acquainted, and champion only the products that his principal insurance company sells, whereas a Mutual Fund agent, who is mostly unattached, will be more performance driven when selecting a fund, given his fees are wholly dependent on investor satisfaction.

Mutual Funds have very stringent transparency requirements compared to ULIPs, but this also ensures that the investor is availed as much information as necessary, unlike with ULIPs. Things like Portfolio disclosure and Daily NAV are better followed with Mutual Funds.

In terms of flexibility, a ULIP will allow you to increase your life cover while keeping your premium the same. This is achieved by reducing your investment allocation. However, if you have a term policy purchased on top of a Mutual Fund, you cannot increase your life cover. You would only have the option of purchasing a new policy, thus incurring new administration costs again.

In terms of costs of insurance, typically investing in a Mutual Fund will cost you less than it will cost for a general ULIP scheme. But in a nutshell, ULIP products are better suited for long term investment bundled with insurance cover, whereas Mutual Funds are better suited for those that solely focus on investment and medium-term returns.

Summary:

Mutual Funds are regulated by the SEBI, while ULIPs are regulated by the IRDA.

Mutual Funds are sold by un-tied agents, while ULIPs are sold by tied agents attached to one particular insurer.

Mutual funds have stricter transparency requirements than ULIPs.

ULIPs are more flexible than MFs, as they allow you to increase your life cover while the premium remains the same; unlike ULIPs, where you have to buy a new policy altogether.

MICR, IFSC Code, Swift code, IBAN Number

2012-01-09T02:45:00.003-08:00

Indian Financial System Code (IFSC) is an alpha numeric code designed to uniquely identify the bank-branches in India. This is 11 digit code with first 4 characters representing the banks code, the next character reserved as control character (Presently 0 appears in the fifth position) and remaining 6 characters to identify the branch. The MICR (Magnetic Ink Character Recognition) code has 9 digits and are also used to identify the bank-branch for cheque clearing and online transaction processes. IFSC is being identified by the RBI as the code to be used for various payment system projects within the country, and it would, in due course, cover all networked branches in the country. In due course, when all bank branches participate in electronic payment systems, they would need to have a single identifiable unique code and IFSC would serve the purpose effectively.

In the Structured Financial Messaging System (SFMS), the Indian Financial System Code (IFSC) is being used as the addressing code in user-to-user message transmission. The Payment System Applications such as RTGS, CFMS and NEFT developed by the Reserve Bank of India (RBI) use these codes. The code consists of 11 characters - first 4 characters represent the entity; fifth position has been defaulted with a '0' (Zero) for future use; and the last 6 characters (6!X) denote the branch identity.

SWIFT Code is a unique identification code for a particular bank and it is a standard format of Bank Identifier Codes (BIC). SWIFT Codes are used for transferring money and messages between banks. SWIFT Code is 8 or 11 characters for a bank. If SWIFT Code is 8 character code then it points to the primary branch/office

•First 4 characters represents bank code.

•Next 2 characters represents ISO 3166-1 alpha-2 country code.

•Next 2 characters represents location code. (letters and digits) (passive participant will have "1" in the second character)

•Last 3 characters represents branch code. These characters are optional. ('XXX' for primary office)

There are a great many SWIFT codes which correspond to various types of message. A SWIFT code is normally made up of the letters 'MT', and then a three digit number. The 'MT' simply stands for 'message type', and the numbers correspond to a certain type of SWIFT message. For obvious reasons these numbers are standardized globally and do not change between countries

IFSC Code vs Swift Code

Swift code and IFSC code are identification codes for the purpose of electronic money transfer between financial institutions, mainly banks. One has to mention these codes when transferring money from one bank to another. While Swift code is used for international money transfer, IFSC codes are required when one wishes to transfer money from one bank to another within India. Let us know a bit more about these codes to enlighten the readers.

Swift Code

Swift codes have been developed by International Organization of Standards (ISO) to facilitate easy transfer of money (and in some cases, messages) between banks located in different parts of the world. SWIFT stands for Society for worldwide inter bank financial telecommunication. A Swift code is made up of either 8 or 1 alphanumeric digits that provide the identity and location of the bank. In this code 5th and 6th characters are reserved for the country. For example if the Swift code is DEUTUS33XXX, it stands for Deutsch bank in Ney York, USA. When requesting for transfer of money from a foreign bank to a local bank, the banks normally charge a fees in USD which may range from $25 to $35 per transaction.

IFSC Code

If you are in India and wish to transfer money from one bank to another within the country, you can easily do it once you know the IFSC codes of both the banks. IFSC stands for Indian Financial System Code and is required whether you are using RTGS, NEFT or CEMS, which are different payment systems developed by RBI. IFSC is a 11 digit code The first four characters of this alphanumeric code disclose the name of the bank. The fifth character has been kept zero to accommodate expansion of branches. Last 6 characters in the code tell the exact location of the bank. The IFSC code is even printed on the cheque books issued by all banks and one can know the IFSC code by looking at the cheque slip. Here are some examples of IFSC codes. IOBA0000684, SBIN0006435, ICIC0007235

The International Bank Account Number (IBAN) is an international standard for identifying bank accounts across national borders with a minimal risk of propagating transcription errors. It was originally adopted by the European Committee for Banking Standards (ECBS), and was later adopted as an international standard under ISO 13616:1997 and now as ISO 13616-1:2007. The official IBAN registrar under ISO 13616-2:2007 is SWIFT.

The IBAN was originally developed to facilitate payments within the European Union but the format is flexible enough to be applied globally and has now been adopted by many Middle Eastern countries as well as most European countries. It consists of a four character header comprising an ISO 3166-1 alpha-2 country code, followed by two check digits that are calculated using a mod-97 technique and a country-specific Basic Bank Account Number (BBAN) of up to thirty alphanumeric characters

Demand Draft and Pay Order

2012-01-09T02:45:00.001-08:00

Demand Draft is one of the methods for individual, business to transfer fund from one bank to another bank account. It also can be defined as a written document instructing to pay the money to the beneficiary. Unlike Cheques, DD doesn’t require signature to be cached. This was earlier used commonly by telemarketers to withdraw money from customer. The individual who wrote the draft is Drawer and the bank who expected to pay the money is Drawee or Payer. The person/ firm expected to receive the payment is Payee. The money will be credited to the account of the payee, it cannot be encashed by the payee at the counter. In the case of DD, it will not be dishonored as the money is pre paid by the depositor and the bank itself becomes the drawee. In the case of cheque it may get dishonored if there is no sufficient fund in depositors account.

A banker’s cheque (Pay Order) is another payment method which is used by the banks to settle payment obligations on behalf of their customers. This instrument is guaranteed by the bank for its full value and is similar to a demand draft. In practice, these instruments are payable at the branch of issue and are used for payment within the local clearing jurisdiction.