Overview of BankingLiability Products

Overview of BankingLiability Products

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

Which source will a bank choose?

It depends mainly on the following: --cost --maturity --availability of funds (market environment) --regulatory requirements --investment opportunities --required NIM ( net interest margin)

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

Overview of BankingLiability Products

What is the regulatory position regarding acceptance of deposits and paying interest?
There is no restriction on banks for accepting deposits. Payment of interest is deregulated except for current account balances.

Interest on term deposits can be decided by individual banks. Periodicity of payment of interest is flexible depending upon the nature of the product and depositors requirement.
Interest on Savings Bank has to be paid on half yearly basis. Banks do not pay interest on current account balances. Acceptance of deposits under Certificate of Deposits is fully regulated by RBI. Under CD also, payment of interest is left to the individual Banks.

Overview of BankingLiability Products

Deposits are accepted as --demand deposits and --time deposits Demand deposits can be accepted only by Banks. Non-banking companies, authorised to accept deposits, can accept only time deposits. Demand deposits are accepted as savings deposit and current account deposits. (CASA) Every Bank is striving for increasing the share of CASA to its total deposits. What is the upside potential and down side risk in CASA?

What are the operational features of deposit accounts?

Overview of BankingLiability Products

What are the operational features of deposit accounts?
--Opening of accounts is a contract between banks and customers under the Indian Contract Act. --Therefore accounts will be opened only for those who can legally enter in to a contract. --Before opening accounts Banks will complete KYC formalities as per RBI regulation. --Accounts can be opened for any type of customers as individuals, firms, companies, Trusts, Societies, Clubs,JHFs etc.

--Accounts can also be opened for NRIs (non resident individuals) also Opening of such accounts are governed by FEMA. Such accounts can not be opened for non resident firms without RBI prior approval. --Banks will prescribe separate account opening formalities and documents for different class of customers.

Overview of BankingLiability Products

Mode of operation
Individuals Can be opened in single or joint names In case of joint accounts, can be operated as --both or all or survivor --either or survivor --former or survivor --latter or survivor Nomination facility is available for all individual accounts. In fact, wide publicity is given by banks about this facility, as it helps in hassle free passing on the funds to legal heirs, in case of death of the depositor. Savings Bank account and term deposit can be opened in the name of minor if the minor is of 10 years and above. For minors below that age, it will be opened in the name of the natural or court appointed guardian, as the case may be.

Overview of BankingLiability Products

Mode of operation
In the case of NRI individuals, the mode of operation is governed by FEMA which we shall discuss later separately.

For accounts other than individuals

Partnership accounts As agreed between the partners and evidenced in the partnership deed. Limited companies As authorised by the Board of Directors, evidenced by the Board resolution JHF (Joint Hindu Family) The eldest male member (Kartha) of the family and evidenced by the Joint Hindu Family Letter Trusts As provided for in the Trust Deed Clubs, Societies As per the by-laws There are certain other features for demand deposits and term deposits separately

Overview of BankingLiability Products

Other features of demand deposits and term deposits Demand deposits
--opened as savings bank, current account --payable on demand --savings bank may be cheque operated or not cheque operated --each bank can stipulate minimum balance requirement --overdrafts can be allowed in current account, but not in savings account --the balance in savings bank can never go to zero, but in current account it can occasionally go to zero. --In savings bank, number of withdrawals is restricted , but no such restriction in current accounts --savings bank account is generally opened only for individuals --for customers other than individuals and business establishments, current account is opened --current account can be opened for individuals also depending upon their requirement --interest is payable on daily product basis.

Overview of BankingLiability Products

Other features of demand deposits and term deposits Demand deposits
--if there are no withdrawals for certain minimum period in SB and current accounts, they are treated as dormant accounts for closer scrutiny. --if there are no operations in the account (debit or credit) for a minimum period, they are treated as inoperative accounts.

Time Deposits
--accepted for periods from 7 days and above. --though no restriction on maximum period, banks generally restrict term deposits to not more than ten years

What is the rationale for 7 days and 10 years?

--rate of interest payable on time deposits can be fixed by banks individually --mode of payment of interest as monthly, quarterly etc is flexible depending upon the features of the product and depositors intention. --a term deposit receipt issued by the bank is not transferable. It is payable only to the depositor

Overview of BankingLiability Products

Other features of demand deposits and term deposits Time Deposits
--Time deposit holders can ask for payment before maturity. Called as embedded option for depositors Levying penalty for such pre payments is at the discretion of banks But in such cases interest will be paid only up to the period for which the deposit has run. --A overdraft or demand loan can be availed against the security of time deposit. --Time deposit can be opened as ordinary term deposit where periodical interest is paid and the principal is paid on maturity --It can be opened as special term deposit, where interest is compounded at quarterly intervals and the principal and accumulated interest paid on maturity --On the due date, if the depositor does not communicate anything, the deposit will be automatically renewed for a further period of same maturity at the ongoing rate of interest.

Overview of BankingLiability Products

Other features of demand deposits and term deposits
Time Deposits --time deposits can also be opened as Recurring Deposits. --in such accounts, the depositor credits an agreed fixed amount monthly for a certain number of months and gets the maturity amount, (principal and interest) on maturity date. --rate of interest is the same as term deposits. --normally available for periods from 6 months to 120 months. --ideally suitable for salaried class and regular wage earners, who wish to save a fixed amount for a particular purpose or time. --this can also be closed before maturity at the request of the depositor

What is certificate of deposit?

Overview of BankingLiability Products

Certificate of deposit
Fully regulated by RBI A short term instrument available for banks to raise resources and for investors to park temporary surplus.
-- a debt instrument, tradable in financial market. -- issued at discount to face value -- only Banks and some select All India Financial Institutions permitted by RBI can issue certificates of deposit. -- while a normal deposit is not transferable, CD is negotiable. -- interest rate is slightly more than the normal deposit rate. -- maturity period7 days to one year. -- FIs can issue for minimum period of I year and maximum 3 years -- minimum amount of deposit Rs1.00 lac and multiples of 1 lac. -- investors can be individuals, companies ,firms etc -- NRIs also can invest in CDs, but only on non-repatriable basis. -- No loan against CDs or buy back of CDs permitted -- can be issued in physical or demat form

Overview of BankingLiability Products

Though all banks are making available the same traditional products as term deposit , savings bank and current accounts now also, they are packaging the different products in one and offer to customers. For example, Multi Option Deposit Scheme, in which the savings account balance beyond fixed amount is automatically swept to term deposit to enable the depositor get the benefit of higher interest. At the same time to provide liquidity to the depositor, it will be swept back to savings account in case of need.

Various banks are giving different names for such a facility.

Multi city cheques is another value addition provided to customers.

Overview of BankingLiability Products

Deposit Insurance
Deposit Insurance and Credit Guarantee Corporation (DICGC) is a wholly owned subsidiary of RBI. Established under the DICGC Act 1961 to protect the interest of depositors especially small depositors, against bank failures.

Originally it had two purposes:

1. To guarantee the loans provided by banks to SSIs and Small Business enterprises 2. To provide insurance cover to depositors of Banks Now, DICGC provides only insurance cover to depositors as under: 1. Maximum cover Rs100,000 per depositor with a bank 2. Cover is provided against default in case of failure of a bank. 3. The maximum includes both principal and interest 4. All deposits held with various branches of the same bank will be treated as deposits with one bank for deciding the maximum cover.

Overview of BankingLiability Products

No-frills' account
With a view to achieving the objective of greater financial inclusion, banks have been advised by RBI to make available a basic banking 'no-frills' account either with 'nil' or very low minimum balances as well as charges that would make such accounts accessible to vast sections of population.

The nature and number of transactions in such accounts could be restricted, but made known to the customer in advance in a transparent manner.
All banks should give wide publicity to the facility of such 'no-frills' account including in the local media indicating the facilities and charges in a transparent manner. A few banks have already initiated certain pilot projects in different remote parts of the country utilizing smart cards / mobile technology to extend banking services similar to those dispensed from branches. Rural kiosks, engagement of business correspondents are two such initiatives

Overview of Banking
Non Fund Based Loan Products
What do we understand by the term non fund based loan? A loan product by which, the Bank enables the customer to acquire an asset, or a service contract by extending an undertaking to the seller of the asset or the provider of the service contract. Bank steps in to pay only in case of need. Why do we call such undertakings as loan products? Since the Bank provides a promise to pay, it is treated as a loan extended to the customer. Since funds are not extended immediately, such advances are called as non fund based advances.

Overview of Banking
Non Fund Based Loan Products
Let us answer certain questions
These advances are treated as contingent liability by the banks. Why? Whether the banks have to provide capital to cover such advances also? If so, why? What are the broad categories of non fund based advances and how they are accounted for by the banks?

What are the benefits for customers from out of non fund based loans?
What are the risk and benefits for the banks from out of such advances?

Overview of Banking
Non Fund Based Loan Products
What are the various types of non fund based advances?

Guarantees
Financial guarantees Performance guarantees Deferred Payment Guarantees Guarantees can be inland guarantees as well as guarantees in foreign currency. What are the various purposes for which guarantees are given? How they are assessed and issued? What are the various features of guarantees? How they are regulated?

Overview of Banking
Non Fund Based Loan Products
Before we discuss letter of credit, let us understand the term settlement What is settlement? Settlement means exchange of values traded. In trade transactions where buyer and seller are in different locations, goods move from one centre through some mode of transport as road, rail, sea, or air and payment has to be received from the buyer. When seller has parted with the goods, one leg of the transaction is completed. What is the other leg? Receipt of payment from the buyer. Only after completion of the second leg, we say that the transaction is settled.

What are the various methods by which trade transactions are normally settled?

Overview of Banking
Non Fund Based Loan Products
What are the various methods by which trade transactions are normally settled? Open Account Advance Payment Collection through a Bank Letters of Credit What are the features, of each of the above methods?

Overview of Banking
Non Fund Based Loan Products
Open Account The seller has full trust in the buyer They are related entities The buyer is operating in a buyers market. Advance Payment The buyer has full trust in the seller They are related entities The seller is operating in sellers market.

Overview of Banking
Non Fund Based Loan Products
Collection through a Bank (Documentary Collection) Documents sent to buyers Bank through sellers Bank. Can be either DP or DA basis. Contains all documents. Advantages Seller has reasonable assurance of getting payment. Buyer has evidence of shipment before payment. The system can handle sale on credit also. Shortfalls In case of refusal of payment of a sight bill by the buyer, or if the buyer goes insolvent or his credit quality weakens after acceptance of a usance bill, seller will be at distress.

Overview of Banking
Non Fund Based Loan Products Letters of Credit (LC)
How do we define a letter of credit? A letter of credit is an arrangement by whatever name called a) under which one Bank b) acting at the request of its customer c) promises to pay to a third party d) against submission of stipulated documents. Banks issue both inland and foreign LCs. In an LC, presentation of documents as called for in the LC is the most important. The LC opening Banks undertaking is only subject to this. What are the advantages of LC? To whom it is advantageous? buyer or seller?

Overview of Banking
Non Fund Based Loan Products Letters of Credit (LC)
Advantages for the seller No worry about the credit worthiness of the buyer. Enables him to sell anywhere in the world, provided credit is available Enables him to avail finance from his banker Advantages for the buyer He is assured of the right quality and quantity of goods He can pay after shipment is made He can get favorable credit terms How many parties are there for a letter of credit?

Overview of Banking
Non Fund Based Loan Products
Letters of Credit (LC) How many parties are there for a letter of credit? Applicant Opening Bank Beneficiary Advising Bank Negotiating Bank Confirming Bank Reimbursing Bank Transferring Bank Second beneficiary

What are the different types of letters of credit?

Overview of Banking
Non Fund Based Loan Products Letters of Credit (LC)
What are the different types of letters of credit?

All LCs are irrevocable

Confirmed Transferable Clean Red Clause Green Clause Revolving Stand by
How the transactions under documentary credit are regulated through out the globe?

Overview of Banking
Non Fund Based Loan Products Letters of Credit (LC) How the transactions under documentary credit are regulated through out the globe? ICC, International Chamber of Commerce has its headquarters in Paris.

To ensure that all parties to an LC have common understanding of the various aspects of LC transactions, ICC has developed a set of codified rules to be observed by all parties throughout out the Globe.
This codified rules is called as Uniform Customs and Practice for Documentary Credits (UCPDC). It was first published in year 1933. It underwent various revisions in tune in with the changes taking place in international trade and industry. The current version is UCP 600 effective from 1.7.2007. What are the contents of UCPDC?

Overview of Banking
Non Fund Based Loan Products Letters of Credit (LC) What are the contents of UCPDC?
It contains 39 Articles. Defines various terms used in documentary credits. Provides uniform interpretation for various terms used in credit. Defines roles and responsibilities of various parties. Gives uniform guidelines for examining various documents. Provides uniform rules to be followed in various situations. Any person dealing with LC, should also understand Incoterms.

Overview of Banking
Non Fund Based Loan Products Letters of Credit (LC) International Commercial Terms (Incoterms) Introduced by ICC in 1936 Revised six times since then The last revision in 2000 The current version is 2010, to come in to force from 1.1.2011. An incoterm, when incorporated in the contract, clearly specifies --who has the obligation to arrange for carriage or insurance --which cost each party is responsible for --when the seller delivers the goods to the buyer --who bears the risk for the goods at a particular point It does not say anything about --the price to be paid by the buyer --transfer of ownership on the goods

Overview of Banking
Non Fund Based Loan Products Letters of Credit (LC) International Commercial Terms (Incoterms)
Rules for any mode or modes of transport EXW Ex works FCA Free carrier CPT carriage paid to CIP carriage and insurance paid to DAT DAP DDP Rules FAS FOB delivered at terminal delivered at place delivered duty paid for sea and inland waterway transport free along side ship free on board

CFR cost and fright CIF cost insurance and freight