BANKING FOR ALL

M.RAMKUMAR

BANKING FOR ALL

(UNIQUE GUIDE FOR BANK PO / CLERK INTERVIEW) by M.RAMKUMAR

BANKING FOR ALL

M.RAMKUMAR

CONTENTS 1. BANKING 2. FINANCIAL INCLUSION 3. NPA 4. RBI 5. MISCELLANEOUS

BANKING FOR ALL

M.RAMKUMAR

1. BANKING
What is Banking?
Acceptance of deposits of money from the public for the purpose of lending or investment. > The main business of banks is Acceptance of deposits and lending, the banks have now spread their wings far and wide into many allied and even unrelated activities like issuing letter of credit and bank guarantee purchasing and selling of bonds, scrips etc., providing safe deposit vaults Underwriting and dealing in stock, funds, shares, debentures, debenture stocks, bonds, securities and investment of all kinds Buying, selling and dealing in bullion (Gold market) Mutual fund activities Insurances businesses

Functions of banks
Deposits Loans Insurance Mutual fund Depository services

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Functions of bank

Primary functions

Secondary functions

Accepting deposits Granting advances Savings deposit Fixed Deposits Current deposits Recurring Deposit Overdraft Cash credit Loans

Agency functions Transfer of funds Periodic payments Collection of cheques

Utility Functions Drafts Lockers underwriting Project reports

Social welfare programs

Discounting of Bills Portfolio Management Periodic collections Other agency functions

Other Utility functions

Source of Income for Bank

Interest income and non-interest income Interest Income o Interest raised by lending (Loan Interest) Exchange or commissions Profit on sale of Investments Profit on revaluation of investments Recovery in written off accounts Others Non-interest income o o o o o

BANKING FOR ALL Associated Terms: Net interest income

M.RAMKUMAR

The excess revenue that is generated from the spread between interest paid out on deposits and interest earned on assets. Net Interest Income = Interest earned-Interest paid out

Investment returns Interest exposure Net Interest margin = --------------------------------Average interest earning assets

Fee based income

Any income generated out of a transaction which does not actually involve the funds of the banks can be considered as fee based income. Fee based income by offering services such as Trade finance (Export & Import business) Debt syndication (Debt arrangement for corporate projects) Treasury (foreign exchange requirements of clients) Cash management services (electronic mode of payment cash web channel) Advisory services Merchant appraisal of projects Acquisition / Sale of assets Business valuation Pre bid advisory for PPP projects

Source of income for Mutual fund

Dividends Interest from banks Bands interest payments Profits from selling units

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Cross selling
Mutual funds Banc assurance (Life insurance) Depository services

Need of Nationalization of Banks

In order to spread banking to all the citizens and to take the power from the hands of few businessmen.

CBS-Core Banking Solutions

Bank customers may access their funds and other simple transactions from any member branch offices In other words- Group of networked bank branches

CORE-Centralized online real time exchange

CASA ratio Current and Savings account ratio

CASA ratio is the ratio in current and savings account to its total deposits. If high CASA ratio, banks get more money at low cost since current account dont have interest rate and savings account have less rate of interest. Deposits of CASA -------------Total Deposits = CASA Ratio

Provision coverage ratio

PCR is the ratio of provisions held to Gross NPA

Operating profit
Earnings before interest & tax

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CD (Credit Deposit) Ratio

The proportion of loans / assets created by banks from the deposits received

Universal bank
Participates in many kind of banking activities and in both commercial bank and an investment bank (Assists in raising capital through underwriting)

NEFT - National electronic fund transfer

Bank club transactions together and only the net amount is transferred 6 times / day on weekdays 3-times / day on Saturdays

RTGS-Real time Gross settlement

The beneficiary bank has to credit the beneficiary Account within 2 hours of receiving the fund transfer message Above Rs. 2 lacs

Alternate delivery channels

NEFT RTGS ECS Net banking Mobile banking

Requirements to get loan from bank

Regular source of income (To get regular repayment) Third party security, if required Collaterals like Land, building, gold, NSC, LIC policies Loans can be give against term deposits

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Economic viability
Possibility of sustainable growth and income ( In order to decide whether the borrower can repay the amount or not)

Technical feasibility study

Assess the details of how you will deliver a product or service

Market feasibility
Identifying market competition Potential markets Present Anticipated future potential sales projections

Financial feasibility
Startup capital required Sources of capital Returns on investment

Movable property
Household goods like furniture & appliances Jewelry Intellectual property Bank notes Bills of exchange

Immovable property
Land and building Other property bound to its location

Cash credit
The cash credit is given against the security of Stocks and book debts.

Overdraft
A certain amount is sanctioned as overdraft which can be withdrawn within a certain period of time say three months or so. 8

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2. FINANCIAL INCLUSION
Financial inclusion (FI)
FI means include the people, hitherto excluded from the financial system. To be done at both ends. (Deposits and advances). To implement and to give banking for all citizens, banks have the model of business correspondents (BC) and Business institutions (BI). BC can open no frills account, building Ultra small branches in remote villages to provide banking services to the villages are the bank initiatives to achieve the goal of banking for all. By means of No frill / basic savings account General purpose credit cards Overdraft facilities for SB accounts Smart cards (Biometric Smart cards)

Swabiman campaign Financial literacy initiatives Swavalanban New pension scheme No frill accounts / Basic banking account: Nil or very low minimum balance Low charges to such account Limited services to such account

Micro credit
Micro credit is defined as provision of thrift, credit and other financial service and products of very small amount to the poor in rural, semi urban and urban areas for enabling them to raise their income levels and improve living standards. e.g. SHG and bank linkage

Lead bank
Any one public sector Bank is designated as lead bank in every individual district. It coordinates the activities of all banks in those districts to avoid duplication of bank works, to ensure same person not getting loan from different banks and to ensure benefits of banking to every section of people

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Service area approach

Operated under lead bank Scheme Each semi urban and rural branch allotted a specific area (Cluster of village) to implement banking Scheme

Differential rate of interest scheme

PSBs were directed to grant at least 1 % of their total deposits of previous year to weaker sections of the society at a concessional rate of 4% 40% of loans to SC/ST is compulsory under this scheme

Social banking
Persons trained from government programs were provided loans Self employment

Priority sector lending (PSL)

Priority sectors are those sectors which substantially contribute to national income but get less credit from banking sector 40% of adjusted net bank credit or credit equivalent amount of off- Balance sheet exposure OBE, whichever is higher Sub targets o 18% for agriculture o 13.5%- Direct lending 4.5% Indirect lending

10% for weaker sections

For RRBs PSL is 60% - Shortfalls will be deposited in NABARD rural infrastructure development fund For foreign banks-PSL is 32% Other priority sector targets MSE upto Rs. 1 Cr. Housing loan upto Rs. 25 lacs in Area where population is more than 10 Lacs Rs. 15 lacs in Area where population is more than 10 Lacs - 10% MSE - 12% Export sectors

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BANKING FOR ALL Education loan Rs 10 lacs Inland Rs. 20 Lacs Abroad OD upto Rs. 50000 for no frill accounts State sponsored organization for SC / ST Solar Weaker sections

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Local Area banks

To operate within maximum of three geographically contiguous districts with HO/ Regd. Office located at a centre within the area of operation of the bank. Subject to prudential norms (CAR) To promote rural savings and provide credit for viable economic activities in the local areas.

Regional rural bank

Central govt. 50 : : State govt. : 15 : PSB 35

Working in all states except Goa and Sikkim Provides credit and other facilities to agriculture and non agricultural productive activities in rural areas

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3. NPA
NPA Nonperforming assets
NPA is an advance where interest and /or installment of principal remain overdue for a period of more than 90 days. In case of agriculture Short term crops 2 Harvest season Long term crops 1 Harvest season

Ordinary advances Agriculture advances

Overdue for more than 90 Days Short term crops 2 Harvest season Long term crops 1 Harvest season

Asset classification Standard Asset Sub standard Asset Doubtful Asset

Criteria Not an NPA As NPA, not exceeding 12 months As NPA, more than 12 months NPA which dont have security. Amount has not

Loss Asset

been written off, wholly or partly

Gross NPA
Gross NPA is advance which is considered irrevocable, for which bank has made provisions and which is still held in banks book of accounts

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Net NPA
Net NPA = Gross NPA (Balance in interest suspense account + claims received and held pending adjustment + Part payment received and kept in suspense + Total provisions held)

Subordinate debts
A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings. (If the borrower borrows money from more the one Bank / institution then he needs to subordinate the security given to other bank/institution)

Deferred payment agreement

DPA is an agreement that allows you to pay off your past due balance by dividing the amount owned into equal monthly payments. You may be allowed upto one year to pay off your past due amount.

Credit information Bureau (India Ltd. (CIBIL)

Setup in Jan 2001 For curbing growth of NPSs For exchange of information between banks and FIs

SARFAESI Act
Securitization and reconstruction of financial assets & enforcement of security Interest Act-2002 (To recover NPA SARFAESI act is used)

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4.RBI
Functions of RBI
1. Monetary policy regulations 2. Banker to banks 3. Issuer of currency 4. Banker to government 5. Foreign exchange reserves management 6. Market operations 7. Foreign exchange management 8. Financial regulation & supervision 9. Payment & settlement systems

Bank rate
The bank rate or the discount rate is the rate fixed by the central bank (RBI) at which it rediscounts first class bills of exchange and government securities held by commercial banks. (Short term loan to adjust reserves of the bank)

Open market operations

The sale and purchase of securities, bills and bonds of government as well as private financial institutions by the RBI (To increase / control the money supply)

Cash reserve ratio - CRR

Banks need to keep certain percentage of their net time and demand deposits with RBI. To have effect in credit limit. (More CRR less money with banks)

Statutory Liquidity ratio -SLR

Banks are required to keep certain percentage of net time and demand deposits in their vault itself. It need not be deposited with RBI. (The reserve can be cash, gold, bonds)

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Liquidity adjustment facility - LAF

Short term credit control measure To absorb the excess liquidity (money supply)

Repo rate
Rate at which banks borrow from RBI (By mortgaging their securities)

Reverse repo rate

Rate at which RBI borrows from the commercial banks. Credit creating capacity of banks will come down, if the rate is increased by RBI.

Base rate
Base rate is the minimum interest rate of a bank below which it cannot lend. Each bank will have its own base rate. Except DRI (Differential rate of interest) advances, loans to banks own employees and loan to bank depositors against their own deposits (e.g.- Loan against fixed deposits)

BPLR- Benchmark prime lending rate

BPLR is the interest rate that commercial banks normally charge their most credit worthy customers. Banks may lend money below BPLR to their prime borrowers. As per RBI, BPLR can be scrapped and can be replaced with base rate which is much more transparent and below which bank cannot lend.

Marginal standing facility rate

Banks can borrow funds up to 2% of their net demand and time liabilities and this can be within the SLR. 100 basis point above repo rate

Market stabilization Scheme

Not a pure monetary instrument RBI issues government securities to absorb excess liquidity Ministry of finance pays the interest 15

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Capital Adequacy ratio (CAR) or Capital to risk weighted assets ratio (CRAR)
CRAR or CAR is a ratio of banks capital to risk weighted assets

Tier1 capital +Tier2 Capital CAR= ----------------------Risk weighted assets Tier 1 Capital- Core capital, permanent and readily available for meeting losses + Paid up capital + Statutory reserves + Disclosed free reserves + Capital representing surplus arising out of sale of proceeds of assets - Losses, Intangible assets, Equity investments in subsidiaries Tier 2 Capital Less permanent and less readily available + Undisclosed reserves + General provision and loss reserves (upto 1.25% of risk weighted assets) + Cumulative perpetual preference shares (fully paidup) + Revaluation reserves (reckoned at a discount of 55%) - Hybrid debt capital instrument - Subordinate debts (Unsecured redeemed bonds)

Monetary policy
Regulated by RBI Regulation of money supply and interest rates To control inflation and stabilize currency

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5.MISCELLANEOUS
Narrow banking
Implies that the weak banks place their funds only in the short term in risk free assets.

Gilt edged market

Market for government and semi government securities backed by RBI

Equity shares
That has claim over capital, profit & loss.

Preference shares
That has entitlement to a fixed amount of dividend or dividend at a fixed rate like that of interest on bonds.

Debentures
Also like bond but secured Surety may be plant, machinery or building

Bonds
Have no surety Regardless of profit/ Loss holder is entitled to receive interest amount

Underwriter
Underwriter means a financial intermediary who agrees to purchase unsubscribed portion of issued capital.

Venture capital fund

Venture capital companies provide capital to companies that produce new products based on innovations and to new industries. 17

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Merchant banking
Merchant banks manage and underwrite new issues, provide consultancy and corporate advisory services for corporate clients on raising funds and other financial aspects Business of issue management

Mutual funds
Mutual funds mobilize the savings of the people and invest in stock market securities.

Certificate of deposits
Certificate of deposits are issued by commercial banks & Financial institutions to raise additional fund. Multiples of 25 Lacs Min Rs. 25 Cr. Banks maturity period -3 months to 1 year Financial institution maturity period 1 to 3 years

Commercial papers
CPs are issued by corporate, primary dealers and all India financial institution funds. 5 lac or multiples Min 1 Cr. Maturity period 3 months to 6 months

Factoring
Factoring is a financial transaction whereby a business sells its accounts receivable to a third party (Called a factor) at a discount.

Assets management companies

AMC is an investment management firm that invests the pooled funds of retail investors in securities in line with the stated investment objectives.

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Net Asset value (NAV)

Assets of the fund Liabilities and outstanding expenses NAV = -----------------------------------------------Number of fund units

Inflation
Consistent increase in the price of goods and services Caused by Increased money supply Effects Depreciation of rupee value

Fiscal policy
Regulated by government To achieve Goals of full employment, price stability and economic growth Through taxation and government spending

Balance of payment (BOP)

BOP = Money into country Money going out of the country BOP crisis = When a country has a large budget deficit, it has difficulty in maintaining fixed exchange rate, ultimately facing BOP crisis & unable to pay for the debts outside the country In India we faced BOP crisis during 1991 during which we depreciated the value of rupee and implemented LPG policy (Liberalization, Privatization and Globalization)

Recession
Decline in GDP for 2 or more consecutive quarters Accompanied by Drop in stock market Increased unemployment Decline in housing market

Causes- Investors fear to invest

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ASBA
ASBA is an application containing an authorization to block the application money in the bank account, for subscribing an issue. If an investor is applying through ASBA, his application money shall be debited from the bank account only if his application is selected for allotment after the basis of allotment is finalized or the issue is withdrawn / failed.

Business continuity management

In order to ensure continuity of business operations during business disruptions / disasters on account of process disruptions, technology breakdown, power failure, natural calamities, fire riots etc.,

Types of government securities

1. Dated government securities Dated govt. securities are long term securities and carry a fixed or floating coupon (Interest rate) Which is paid on the face value payable at fixed time periods (usually half yearly) 2. 3. 4. 5. 6. Zero coupon bonds Zero coupon bonds are bonds issued at discount face value and redeemed at par. Partly paid stock Payment of principal amount is made in installments over a given time frame It meets the needs of investors with regular flow of funds and the need of govt. when it does not need funds immediately. Floating rate bonds Dont have fixed coupon rate Coupon is reset at pre announced intervals Bonds with Call / put option Issuer can have option to buy back (call option) Or Investor can have option to sell the bond (put option) to the issuer during the currency of the bond Capital indexed bonds Interest rate is fixed percentage over the wholesale price index Effective hedge against inflation

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----------------------------------------------------------------------------------------------------------------------------------------------------------------IFSC - Indian Financial system code (Used to send or receive funds within India) MICR Magnetic ink character recognition (9 digits) SWIFT Society for worldwide Interbank financial telecommunication (Used to send or receive funds worldwide) ASBA Application supported by blocked amount (For IPO issues) BCSBI Banking Codes and standards board of India ECB External commercial borrowings HNI High net worth individuals (Few branches will have separate branches for HNI) NEFT national electronic fund transfer RTGS Real time gross settlement

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FREQUENTLY ASKED QUESTIONS 1. Tell about yourself 2. What is banking? 3. Why do you prefer banking as career? 4. What are your hobbies? 5. Which news paper do you read daily? 6. What is in news today? 7. Recent News about banking and economy 8. About your graduation 9. About your previous work experience, if any 10. About your hometown 11. Family background 12. Your achievements 13. Your strength and weakness 14. What will be your commitment towards bank 15. Financial inclusion 16. Merger of banks-your opinion 17. Private vs public sector banks 18. Role of public sector banks in Indian economy 19. GDP of India (Get details of contribution from Primary, Secondary and tertiary sector) 20. Strength and weakness of India 21. You are the manager of the branch. One person is approaching you for loan. What are the aspects you will see first?

For your valuable feedback: Mail to : ramkumar_at_18@yahoo.com Mobile : 9944339812

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