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MATSMANAGEMENT OF BANKS
SICK UNITS.
Any unit ( business)is not functioning normally and is facing lot
problems due to internal or external factors which increases the risk for
the lender and quality of assets deteriorate can be treated as a sick unit.
THE ACCUMALATED LOSSES EQUAL OR EXCEEDS ITS NET
WORTH. OF THE COMPANY.
These units normally gives out warning signals indicating the problems
they are facing. Banks or Institutions during their follow up should
identify and find a solution in the form of Rephasement, rehabilitation
or recall.
CAUSES OF SICKNESS
1INTERNAL CAUSES.
TECHNICAL FEASIBILITY
Outdated production/technology
Location disadvantages.
ECONOMIC FEASIBILITY
High costs of inputs
Very high Break even.
Under estimation of financial requirements.
Large investment on fixed assets.
PRODUCTION MANAGEMENT
Poor quality control.
High cost of production.
Poor inventory management
Single product.
LABOUR MANAGEMENT.
Industrial relations.
More labour power.
High wage structure.
MARKETING MANAGEMENT
Single buyer
Poor sales realization.
Pricing policy
Weak marketing strategy
Lack market info and research.
FINANCIAL MANAGEMENT
Bad costing
Financial indiscipline.
Lack of control over expenditure.
Wrong borrowings.
High cost borrowings.
MANAGEMENT
Promoters ..lack of coordination.
No second line management.
Diversion of funds.
No proper control.
No Proper decision.
2. EXTERNAL FACTORS..
INFRASTRUCUTRE BOTTLENECKS.
GOVERNMENT POLICIES.
NATURAL CALAMITIES.
CHANGE IN MARKET DEMAND.
The companies which become sick as defined in Sec 3(1) (o) of SICA act
1985 should be referred to B I F R
LOSS ASSETS.
The assets which are identified as one from which the Dues to the
bank are not collectable.Not a bankable assets.
R B I in its policy defines the NPA norms and it will not be the same.
R B I defines the NPA norms according to the market segment
depending upon the meeting the interest and the principle commitment
by the borrowers.
Recently the NPA norms has been changed WEF..31.3.2004.
Timely identification and proactive decision by the Banks will certainly
improve the quality of lending ..and brings down the NPA position..
PROVISIONING NORMS..
Banks has to provide from the profits the probable loss from NPA..
Finalised on the basis of the category of NPA.
Normally Loss assets are written off from the bank Books or provided
100%this ensures a proper picture of the performance of the bank..
Banks will provide for all the exposures of lending and investment .a
regular review should be done.
RBI in its policy defines the norms both on lending exposure and
investment exposures of the Bank.
WRITE OFF.
When bank cannot recover the loan outstanding from the borrower
after using all the available recourse can wrtite off the loan from the
profits for which provision was made earlier.
However Supreme Court has given a judgement .
Writing off of Non performing assets by Bank is only an internal
accounting procedure to clean up the Balance sheet and it does not
affect the right of bank to proceed against borrowers to realize the
dues.
RISK MANAGEMENT
Banks business is exposed to various risks .They should have a risk
management system.
MANAGING OF THE RISK INVOLVES..
RISK IDENTIFICATION .
RISK MEASUREMENT( assessing magnitude)
RISK MANAGEMENT.
RISK POLICIES .
BANKS ARE EXPOSED TO FOLLOWING RISKS.
Credit risk.
Lending activity..possibility of lossdue to credit qualitydefault
.concentration of loan portfolios.exposure to one group.
WHAT IS TO DONE.
Policy should be there to measure, monitor, and control the risk.
Delegation of powers.
Credit approving systems.
Bench mark financial ratios
Prudential exposure norms.
Risk rating system
Parameters.
Operational /Financial performance of the unit.
Bank accounts , securities available.
Business and industry outlook.
Promoters / management
Evaluation of loan port folio on an ongoing basis.
.Interest risk..
Deregulation interest ratescompetitoninterest income.
On a regular basis Bank has to consider both lending and mobilization
of funds and their cost.
Price risk.in investmentsa part of market risk..
Banks should evolve a definite time frame for moving over to VaR and
duration approach for measurement of interest rate risk. Change of
portfolio on a continuous basis.
Liquidity risk
Mismatch of maturity in assets and liabilities.deposits have a shorter
contractual maturity than loans. Banks have a risk of raising high cost
funds to meet liquidity.more liquidity means idle funds
Limit on inter bank borrowings, call funds, purchased funds, core
deposits to core assets .contingent plans to meet the adverse liquidity
conditions.
FOREIGN EXCHANGE
fluctuations of currency.
RISKrisk
caused
by
exchange
environment
ASSET-LIABILITY MANAGEMENT
A L M System was formally introduced in Banks from 1.4.1999.
AL management is defined as the process of adjusting Bank liabilities to
meet
Loan demands
Liquidity needs.
Safety requirements.
A L ..Philosophy
Assets growth by adjusting liabilities.
Long term operating viability and profitability
Earnings growthrisk to be all time low.
Appropriate strategies. To be evolved.depending upon the
resources.
A L M PROCESS.
A L COMMITTEE TO BE FORMED IN BANKS.
TOP LEVEL DECISION MAKING GROUP.
FLOW OF INFORMATION
IDENTIFY THE RISK OF THE ASSETS AND ITS SENSITIVITY.
DURATION GAP ANALYSIS, VALUE AT RISKFOR INTEREST
RISK MANAGEMENT
CAMEL.
CAPITAL ADEQUACY
ASSETS QUALITY
MANAGEMENT
EARNINGS
LIQUIDITY
8.
SARFAESI ACT
to hanldle new
Consolidation happens
NBFC`S..
A NON BANKING FINANCIAL COMPANY IS A COMPANY
REGISTERED UNDER THE Companies act 1956 and is engaged in the
business of loans and advances , acquisitions of shares / stocks/securities
issued by Government or local authority are other marketable securities ,
activities like leasing, hire purchase insurance business, chit business and
BANKING
BANK EXPANSION..
SUB PRIME .
When Bank lends money to people they broadly classify them into Prime
and sub prime debtors.
Prime debtors are credit worthy and latter less than first.
Banks primary duty is not to lend to Non credit worthy borrowers. But they
do at a higher rate of interest
Crisis starts when Low income borrowers has to meet higher repayment and
default happens.
These asset backed securities are taken by investors and good times they
make money and bad times it fails .
Lesson from Sub prime crisis is that bank`s should check credentials
before lending and the rating agencies doing the rating also should follow
correct process.
BASEL.II
Extract From an article ..
Some of the benefits that can be expected from a well implemented basel
programme are competitive advantage through better pricing , access to
DICGC
CGC came into being in 1971 and later on it was known as DICGC.
Policy is to encourage flow of credit to small borrowers on a significant
scale .
Becaue of scattered nature and non availability of tangible security the
risk was high for small loans.
IT was decided to cover the risk under a common and centralized
scheme.
WEF 1989 the cover is all priority sector advance s.The guarantee
covers lending of commercial banks , Co op banks, central, state,
primary ,RRB`s and SFc`s . DICGC have structured credit guarantee
schemes.
Banks have to pay premium to cover the loans . Guarantee cover is for
75% of the amount of default.
The guarantee fee for banks have to paid annually.
MISCELLANEOUS ..
A recent concept has come to banking system called FINANCIAL
INCLUSIONThis is to ensure banks operating in their area of
operations must ensure all those who come under the area operation
should have a bank account and enjoy the services provided by the
banks.
Banking has to reach vast segment of population in rural areas towards
achieving financial literacy , financial inclusion and social banking are
important tools.
INDIAN INSTITUTE OF BANKING AND FINANCE DEFINES
Financial inclusion is delivery of banking services at an affordable
cost to the vast section of disadvantaged and low income group.
**
to
the
term
REHABILITATION.
A unit after identified as SICK where in the review reveals that it can be
brought back on the track a suitable package has to be worked to
bring it back to normalcy.
This will be fresh funding.rephasement.interest concession.
This process will ensure the sick unit to revive and comes back to
normal.
Again the possibility is most important.
RECALL.
Bank gets a feeling that being a sick unit risk of exposure increase if
not get back the money lent.When either rephasement or
rehabilitation is not possible.. the route will be legal one by filing a suit
in the court of law for recovery.
Either through Civil courtor DRTSARFAESI ACT ..
SOME CASES O. T. S OR EXTENSION OF CONCESSIONARY
RATE OF INTEREST IS POSSIBLE.
K Y C .KNOW YOUR CUSTOMER
RBI has issued guidelines relating to identification of depositors,
put in place systems and procedures to help and control financial
frauds, money laundering and other suspicious activities.
Opening of accounts and monitoring the cash transactions .
Maintenance of proper records.
BANKING RATIOS
ACCOUNTING RATIOS ..NORMALLLY BANKS LOOKS INTO
FROM THE FINANCIAL STATEMENT FRESHRENEWAL
PROPOSALS.
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X
TO MEASURE
NO OF DAYS
BANKS PERFORMANCE
CREDIT/DEPOSIT RATIO
AVERAGE WORKING FUNDS
INTEREST SPREAD/AWF
NET PROFIT/AWF
OPERATING EXPENSES/AWF
COST OF DEPOSITS
COST OF BORROWINGS
BUSINESS PER BRANCH
GROSS PROFIT PER BRANCH.
BUSINESS PER EMPLOYEE.
BANKING TERMINOLOGIES.
MARKET SEGMENT.
DEPOSITS.
DEMAND .TIME LIABILITY.
N D T L.
INVESTMENT.
ASSETS.
LENDING
CURRENT ASSETS
FIXED ASSETS.
FUND BASED FACILITY
NON FUND BASED FACILITY
LETTER OF CREDIT
BANK GUARANTEE
ANCILLARY SERVICES.
PROJECT APPRAISAL
CREDIT APPRAISAL
TERM LOAN
DPG
WORKING CAPITAL
CASH CREDIT
PRESHIPMENT FINANCE
E.P.C.
INVENTORY NORMS
BILLS DISCOUNTING
POST SHIPMENT FINANCE.
REFINANCE
SANCTION
FOLLOW UP AND INSPECTION
REPAYMENT
EMI
LIMIT
DRAWING POWER
IRREGULARITY
PRIMARY SECURITY
COLLATERAL SECURITY
RENEWAL
REVIEW
ENHANCEMENT
SICK UNIT
REPHASEMENT
REHABILITATION
RECALL
MONTHLY /QUARTERLY RESTS
CONSORTIUM
MULTIPLE BANKING
PROVISIONING
WRITE OFF
ACKNOWLEDGEMENT OF DEBT
REVIVAL LETTERS
PRIORITY SECTOR
BANKING RATIOS.
N.P.A.
CRR
SLR
PLR
PLEDGE
HYPOTHECATION
LIEN
MORTAGAGE
BREAK EVEN
SENSITIVITY ANALYSIS.
D. E RATIO
D.S.C.R.
********************************
CORPORATE DEBT RESTRUCTURING.
Based on the experience in other countries like U K , and others need
was felt to put in place Institutional Mechanism for restructuring of
Corporate debt .
Introduced by RBI in 2001.
Finance Minister announced in budget speech of 2002-2003.
Two categories of debt restructuring .
Standard.. Sub standardclassified by the lender as Category I
Classified under Doubtful will be under Category..II.
OBJECTIVE..
C D R is to ensure timely and transparent mechanism for
restructuring the Corporate debts of viable entities facing problems
( Internal ..external )outside the purview of BIFR. DRT, and other legal
proceedings for the benefit of all concerned.
STRUCTURE.
CDR standing forum.
Comprises of FI`s and CB`s representatives. Lays down policies
guidelinesmonitor the progress.
CDR empowered group.
CDR cell.
Look into the proposed rehabilitation plan submitted by Lenders and
borrowers.
OMBUDSMAN.
CASH AND
BALANCES
WITH R B I
BALANCES WITH
BANKS AND CALL
AND SHORT NOTICE
BORROWINGS
OTHER LIABILITIES
AND PROVISIONS
ADVANCES
FIXED ASSETS
OTHER ASSETS
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