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REPORT ON NON-
FUND BASED
FACILITIES IN
INDIAN BANKING
SECTOR AND
COMPARATIVE
STUDY ON THE
PERFORMANCE OF
PSBs AND
s PvSBs
SUBMITTED BY –
Banking system plays an important role in growth of economy. The banking sector is the
lifeline of any modern economy. It is one of the important pillars of financial system,
which plays a vital role in the success or failure of an economy. It is a well-known fact
that banks are one of the oldest financial intermediaries in the financial system. They
play a crucial role in the mobilization of deposits from the disbursement of credit to
various sectors of the economy. The banking system reflects the economic health of the
country. The strength of the economy of any country basically hinges on the strength
and efficiency of its financial system, which in turn depends on a sound and solvent
banking system. A Banking Sector performs three primary function in economy, the
operation of the payment system, the mobilization of savings and the allocation of
Banking in India forms the base for the economic development of the country. Major
changes in the banking system and management have been seen over the years with
SECTOR:
The credit facilities given by the banks where actual bank funds are not involved are
termed as 'non-fund-based facilities. The bank does not give physical money but gives
Letters of credit
Guarantees
widely used to finance purchase of machinery and raw material etc. It contains a written
undertaking given by the bank on behalf of the purchaser to the seller to make payment
In other words, Letter of credit is a written undertaking by a bank (issuing bank) given to
the seller (beneficiary) at the request and in accordance with the instructions of buyer
(applicant) to effect payment of a stated amount within a prescribed time limit and
against stipulated documents provided all the terms and conditions of the credit are
complied with".
All letters of credit in India relating to the foreign trade i.e., export and import letters of
credit are subject to provisions of 'Uniform Customs & Practice for Documentary Credits'
(UCPDC). The latest revision of these provisions effective from 1st January, 1994 has
been issued by International Chamber of Commerce as its publication No. 500 of 1994.
These provisions neither have the status of law or automatic application but parties to a
These provisions have almost universal application and help to arrive at unambiguous
interpretation of various terms used in letters of credit and also set the obligations,
therefore, important that customers should be fully aware of these provisions and shall
also understand complete L/C mechanism as these transactions will find increasing use
Letters of credit thus offers both parties to a trade transaction a degree of security. The
seller can look forward to the issuing bank for payment instead of relying on the ability
and willingness of the buyer to pay. He is further assured of payment being received on
due date enabling him to have proper financial planning. The only condition being
attached is submission of stipulated documents and compliance with the terms and
conditions of credit. The buyer on the other hand will be obliged to pay only after receipt
which states that: "Credits, by their nature, are separate transactions from the sales or
other contract(s) on which they may be based and banks are in no way concerned with
Many disputes have arisen due to the reference of sale contract in the letter of credit.
The letter of credit is issued in accordance with the instructions of the applicant who
should provide complete and precise instructions to the bank to avoid any dispute later.
The undertaking of a bank to pay, accept and pay drafts or negotiate and/or to fulfil any
other obligations under the credit is not subject to claims or defences by the Applicant
resulting from his relationship with the issuing Bank or the Beneficiary.
Another very important provision which is very vital to letter of credit operations is
regarding disputes emanating from the quality/quantity of goods covered under a letter
of credit. Article 4 of UCPDC states: “In credit operations all parties concerned deal with
documents, and not with cods, services and/or other performances to which the
An important point which emerges from the above article is that any dispute regarding
the quality/quantity of the goods may have to be settled outside the terms of letter of
credit. Letter of credit thus provides no protection on this account and the applicant
as considered necessary to satisfy himself regarding the goods on the basis of these
documents alone.
3.1 PARTIES TO A LETTER OF CREDIT:
Applicant/Opener:
It is generally the buyer of the goods who gets the letter of credit issued by
his banker in favour of the seller. The person on whose behalf and under
the credit.
Beneficiary:
Advising Bank.
beneficiary by the opening bank. It is, however, customary to advise the letter of
credit through sane other bank operating at the place/country of seller. The bank
Confirming Bank.
the issuing bank. It may sometimes happen especially in import trade that the
issuing bank itself is not widely known in the exporter's country and exporter is
not prepared to rely on the L/C opened by that bank. In such cases the opening
bank may request other bank usually in the country of exporter to add its
bank to the beneficiary. The bank adding its confirmation is known as confirming
bank. The confirming bank has the same liabilities towards the beneficiary as that
of opening bank.
Negotiating Bank:
The bank who negotiates the documents drawn under letter of credit and
The complete mechanism of a letter of credit may be divided in three parts as under:
Issuing of Credit.
A. Issuing of Credit.
Letter of credit is always issued by the buyer's bank (issuing bank) at the request and
on behalf and in accordance with the instructions of the applicant. The letter of credit
may either be advised directly or through some other bank. The advising bank is
responsible for transmission of credit and verifying the authenticity of signature of
The advising bank may also be required to add confirmation and in that case will
assume all the liabilities of issuing bank in relation to the beneficiary as stated already.
On receipt of letter of credit, the beneficiary shall arrange to supply the goods as per the
terms of L/C and draw necessary documents as required under L/C. The documents will
then be presented to the negotiating bank for payment/acceptance as the case may be.
The negotiating bank will make the payment to the beneficiary and obtain
The last step involved in letter of credit mechanism is retirement of documents received
On receipt of documents drawn under L/C, the opening bank is required to closely
examine the documents to ensure compliance of the terms and conditions of credit and
present the same to the opener for his scrutiny. The opener should then make payment
to the opening bank and take delivery of documents so that delivery of goods can be
obtained by him
3.3 NEED OF LETTER OF CREDIT
International trade covers very large distance between two countries and exporter &
importers are not known to each other. Letter of credit can resolve the complications
iii. Currencies;
Seller is paid only after shipment and delivery of documents within the LC validity
Seller need not bother about the import regulation of buyer country
beneficiary. Such letter of credit will not offer any protection and should not be accepted
as beneficiary of credit.
thereto. This type of letter of credit is mainly in use and offers complete protection to the
A letter of credit, that ensures payment after a certain period of time. The date of
payment is accepted by both buyer and seller. The bank may review the
documents early but the payment to the beneficiary is made after the agreed-to
Transferable LC:
It is an LC, where the beneficiary is entitled to transfer the LC, in whole or in part,
cannot transfer it further, but can transfer the unused portion, back to the original
A pair of LCs in which one is to the benefit of a seller who is not able to provide
the corresponding goods for unspecified reasons. In that event, a second credit
is opened for another seller to provide the desired goods. Back-to- back be
houses are sometimes required to open LCs for a supplier and receive Export
issuing bank's responsibility. These advances are adjusted from proceeds of the
bills negotiated.
Standby Credits:
It is similar to performance bond or guarantee, but issued in the form of LC. The
Letter of credit transactions are not risks free. The risks inherent in these types of
transactions include:
Fraud Risks:
funded.
Legal Risks:
relating directly to the parties and their rights and obligations under the documentary
credit.
Force majeure risk:
The event in which completion of the transaction is prevented by an external force, such
4. SWIFT CODE
Telecommunication". In simple terms swift has two main roles in international financial
institutions can communicate each other reliably & fast and secondly SWIFT establishes
Today banks use SWIFT platform to communicate each other when sending a wire
transfer, issuing a letter of credit, advising a discrepancy message etc. each of these
message formats have a different code, which is called swift message types.
For example a bank must use MT700 Issue of a Documentary Credit when issuing a
letter of credit and MT 734 advice of a refusal when giving its refusal message. (MT
According to the current letters of credit rules, UCP 600, a letter of credit will be deemed
such as SWIFT.
5. GUARANTEE
Principal debtor
The person who has to perform or discharge the liability and for whose default
the guarantee is given.
Principal creditor
beneficiary.
Guarantor or Surety
various purpose. The guarantees may broadly be divided in two categories as under -
Deferred guarantee
Inland Guarantee
Guarantee which issued with in India in favor of beneficiary located in India for
Foreign Guarantee:
FINANCIAL GUARANTEE
Issued in respect of Excise / Custom duties and Octroi under dispute etc.
Issued in respect liabilities towards tax, excise duties, custom duties etc. to
PERFORMANCE GUARANTEE
whereby the bank assure a third party, that the customer will perform the contract
These are issued on behalf of customer, who enters into contracts to do certain
DEFERRED PAYMENT
It required when goods or machinery are purchase on long term credit and
by buyer.
1. The conditions relating to obliging being a customer of the bank enjoying credit
isolation.
2. Financial guarantees will be issued by the banks only if they are satisfied that the
invoked and the bank is required to make the payment in terms of guarantee.
customers with whom the bank has sufficient experience and is satisfied that the
customer has the necessary experience and means to perform the obligations
STUDY-
A Public sector bank is one where the government owns a majority stake (i.e. more than
50%). In common parlance, they are also known as government banks. Due to its
ownership, the aims set for these banks revolve around social welfare and fulfillment of
In these banks, most of the equity is owned by private bodies, corporations, institutions
or individuals rather than government. These banks are managed and controlled by
private promoters.
Of the total banking industry in India, Public sector banks constitute 72.9% share while
1. CUSTOMER BASE-
Longer periods of existence in the Indian markets have allowed public banks to develop
a larger customer base in comparison to the private banks. This has motivated the
public banks to penetrate deeper into rural areas gaining a greater customer base.
Private Banks, on the other hand, enter only areas where they see a potential to earn a
profit. This is the reason private banks mainly function in urban areas and not rural.
2. MARKET SHARE
As of 2018 public sector banks account for 62% of the total banking assets and 58% of
the total income, the rest occupied by private banks. Although public banks have a
One would expect private banks to have a high number of NPA’s considering that in
order to gain an edge over public banks the private banks may be more approachable
when it comes to loans, leading to higher NPA’s. But this has not been the case as the
NPA’s of private sector banks have been lower in comparison to private banks.
To survive in this modern market every bank implements so many new innovative ideas,
strategies, and advanced technologies. The study emphases on the Non-fund Based
6. CONCLUSION -
It is evident that although the public sector still holds a greater market share they have
not been able to compete with the growth rate of private banks. In order to achieve this,
Private Banks have capitalized on the weaknesses of Public Banks. Coupling superior
customer service with the inclusion of technological changes has worked out in favour
of the private banks. It is good to see that these measures adopted by private banks are
But if the public banks keep playing catch up with the private banks they will soon be
seen falling behind even in terms of market share. This has called for multiple structural
reforms to ensure that does not happen because at the end of the day it is the public
banks that look after and perform in the interest of the economy.
“A COMPARATIVE STUDY OF NON-FUND BASED INCOME
Banks are among the main participants of the financial system in India. Banks also
perform certain activities which are ancillary to this business of accepting deposits or
lending. There are major two types of income for the banks like, Fund based income
Non-fund based income is such income which are deriving from non-fund facilities
Commission
Exchanges
Brokerage
Rental Income
Other recourses
To study of non-fund based income of the selected banks. Through this research study
society will able to know the real situation of Non-fund based income of the banks.
year 2004 to 2008. Non-fund Based income was highest Rs 9398.43 Crore in Year
2008, and it was lowest Rs 7119.90 crore in the year 2005. After year 2005, non-fund
The Average Non fund based income is Rs 7793.29 Crore. Only 2008 income was
ICICI BANK-
The above table shows the Non-fund Based Income of ICICI Bank from the year 2004
to 2008. Non-fund Based income was highest Rs 8878.85 Crore in Year 2008, and it
was lowest Rs 3064.92 crore in the year 2004. Non-fund based income represents
continues increasing trends year to year. The Average Non-Fund based income is Rs
2007 and 2008 was higher than average Non fund based income.
State Bank of India is the largest bank in India, with 7793.2900 crore average non-fund
based income. In case of public sector banks the Non-Fund Based Income in some of
them are increasing and some of them having a mix trend for year by year.
ICICI Bank is the largest Private Sector Banks in India, with 5471.9140 crore average
As compared to the developed world, the Indian banking sector, apart from the relying
on traditional sources of revenue like loan making are also focusing on the activities that
generate fee income, service charges, trading revenue, and other types of noninterest
income. While noninterest income plays an important role in banking revenues in the
developed world, its contribution to the total income of the Indian banking was 25% as
1. The banks in India need to focus at ensuring greater financial stability to tackle
2. Bank must create strategic alliance with the rural regional banks to open up rural
branches and increased use of technology for improved products and services.
3. For the financial repression construct Indian banking industry have to focusing
and concerning the challenges intensity of the change in three polices likely,
4. Banking sector in India need to move towards a more market based system for to
create the sound and condition for well functioning of a market based banking
system.
short time of period. Both of banks need to expand branches in rural area.
6. Banking sector in India need to start moving into areas that yield Non-Fund
Based Income activities that earn more income rather than interest income.
CONCLUSION -
All these developments in Indian banking are says that, the Indian banks are moving
towards modern banking changing a face of traditional banking of Indian economy .It is
grate change of banking industry. They having a installing an information technology for
banking business and they trying to provide technology based banking products and
For a long term success of banking institution to require effective management of credit
risk and diversified into fee based activities. Non-traditional activities of banks are more
sophisticated and
It is tempting to conclude that interest based, intermediation activities have become less
central to financial health and business strategy of the typical commercial banks and
that fee based non-intermediation financial services have become more important
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