Cash Reserve Ratio

Cash Reserve Ratio

The Cash Reserve Ratio is the amount of funds that the banks are bound to keep with Reserve bank of IndiaThe Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934 with ....., with reference to the demand and time liabilitiesAny claim for money against the assets of a company, such as bills of creditors, income tax payable, debenture redemption, interest on secured and unsecured ..... (NDTL) to ensure the liquidity and solvency of the Banks. Please note that earlier RBI was empowered to fix RBI between 3-20% by notification. However, from 2006 onwards the RBI is empowered to fix the CRR on its discretion without any ceiling. The CRR is maintained fortnightly average basisIn a futures market, basis is defined as the cash price (or spot price) of whatever is being traded minus its futures price for the ......

What is impact of reducing CRR?

• When CRR is reduced, more funds are available to banks for deploying in other business as they have to keep fewer amounts with RBI. This means that the banks would have more money to play and this leads to reduction of interest ratesWhen a person borrows some money from another person, this money comes at an interest which can also be called the "Opportunity Cost" of the ..... on Loans
  provided by the Banks.

What is impact of Hiking CRR?

RBI uses the method of CRR hike to drain out the excess liquidity from the banks. This is because; the banks will now have to keep more money with the Reserve Bank of India In 1926, the Royal Commission on Indian Currency and Finance which is also known as the Hilton-Young Commission recommended the creation of a central bank. ...... On this money banks don`t earn any / much interest. Since they don't earn any interest, the banks are left with an option to increase the interest rates. If RBI hikes this rate substantially, banks will have to increase the loan interest rates. The home loans, car loans and EMI of floating Rate loans increase.

The following Graphic shows the history of CRR since 2000.

The above graphic shows that RBI has used this tool to contain the money supply and credit creation more frequently. Highest CRR was 9% when the Global Financial Slowdown had started taking definite shape. During the slowdown years the CRR was reduced gradually so that Banks have more money with them. Once, the signs of recovery are shown clearly, RBI made it again a little higher.

Three Pillars of Basel III

Three Pillars of Basel III

The Basel IIIThe role of banks in global and national economies is very important. The banking industry holds reliance of the entire economy and it is important ..... Guidelines are based upon 3 very important aspects which are called 3 pillars of the Basel II. These 3 pillars are as follows:

Risks Associated with the Banking Business

Risks Associated with the Banking Business

Let's have a view on the risks associated with the banking business.

There are three kinds of Risks associated with the Banking:

1. Credit RiskThe risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter. Credit risk includes pre-settlement .....
2. Market Risk
3. Operational RiskThe risk that deficiencies in information systems or internal controls could result in unexpected losses.

International Financial Reporting Standards (IFRS)

International Financial Reporting Standards (IFRS)

IFRS is principles based set of accounting standards developed by the International Accounting Standards Board (IASB), an independent group of 15 experts. IFRS is steadily becoming the global standard for the preparation of financial statements of public companies.
The IFRS establishes broad rules and dictate specific treatments in Financial reporting.
International Accounting Standards Board

International Accounting Standards Board (ISAB) is based at London and was founded in 2001 as a successor to the International Accounting Standards Committee (IASC). The IASB has continued to develop standards calling the new standards IFRS.

Some Questions on IFRS

Some Questions on IFRS

What is the relevancy of IFRS?

The IFRS is relevant to the extent that the financial statements as per the international standards would make the comparisons of the Indian companies and their international competitors / stakeholders/ partners easier. So, the basic idea is to increase the trust and reliance placed by the investors, stakeholders and analysts in the companies. For the companies, which are subsidiary to the foreign companies, it would be mandatory if their parent company uses IFRS. To a great extent, the IFRS documents would help the domestic companies to raise the capital abroad.

What is Basel Committee on Banking Supervision?

What is Basel Committee on Banking Supervision?

Basel Committee on Banking Supervision is an institution of Governors of the Central Banks of "G-10" nations and was formed in 1974. It has 27 members viz. Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

• Out of them 12 are permanent members and its headquarters are located at Basel Switzerland.

This Basel Committee on Banking Supervision works on strengthening the soundness and stability of the banking system, internationally.

What is CRAR System?

What is CRAR System?

CRAR is the acronym for capital to risk weighted assets ratio, a standard metric to measure balance sheetAn accounting statement of a company’s assets and liabilities, provided for the benefit of shareholders and regulators. It gives a snapshot, at a specific point ..... strength of banks.

Understanding Capital Adequacy

Understanding Capital Adequacy

We all know that Capital refers to the assets which are capable of generating income and which have themselves been produced. This is one of the four factors of production and consists of Machine, Plant and Building, Land and Labour.

But in Banking Industry, Capital refers to the stock of Financial Assets which is capable of generating income.

First Narasimham Committee

First Narasimham Committee

The most important committee was Narasimham Committee on banking Sector Reforms. It was set up in 1991.

Please note that there were two Narasimham Committees.

• Narasimham Committee –I was formed in 1991 and Narasimham Committee –II was formed in 1998 and both were related to Banking Sector Reforms.
  

Brief History of Banking in India-1

Brief History of Banking in India-1

From the ancient times in India, an indigenous banking system has prevailed. The businessmen called Shroffs, Seths, Sahukars, Mahajans, Chettis etc. had been carrying on the business of banking since ancient times. These indigenous bankers included very small money lenders to shroffs with huge businesses, who carried on the large and specialized business even greater than the business of banks.

Brief History of Banking in India: 2

Brief History of Banking in India: 2

Central Bank of India was dreams come true of Sir Sorabji Pochkhanawala, founder of the Bank. Sir Pherozeshah  Mehta was the first Chairman of this Bank. Many more Indian banks were established between 1906-1911. This was the era of the Swadeshi Movement in India. Some of the banks are Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

Brief History of Banking in India -3

Brief History of Banking in India -3

The first major step was Nationalization of the Imperial Bank of India in 1955 via State Bank of India Act.

• State Bank of India was made to act as the principal agent of RBI and handle banking transactions of the Union and State Governments.

In a major process of nationalization, 7 subsidiaries of the State Bank of India were nationalized by the Indira Gandhi regime. In 1969, 14 major private commercial banks were nationalized. These 14 banks Nationalized in 1969 are as follows:

1. Central Bank of India
2. Bank of Maharastra
3. Dena Bank
   

General Knowledge of Basel III

General Knowledge of Basel III

Contents [hide]

• General Principles of Banking Regulation
  • Minimum requirements
• Supervisory review
  • Market discipline
  • Basel Committee on Banking Supervision
  • Basel Accords
  • Capital Adequacy
  • Capital to Risk (Weighted) Assets Ratio
    

SARFAESI Act 2002

SARFAESI Act 2002

Contents

• How it works?
• Background of the act
• Rights of Borrowers
• Pre-conditions
• Methods of Recovery
• Powers of Debt Recovery Tribunal
• Role of Chief Metropolitan Magistrate or District Magistrate
• Role of High Court:
• Proposed amendments to the Act

The full form of SARFAESI Act as we know is Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Banks utilize this act as an effective tool for bad loans (NPA) recovery. It is possible where non-performing assets are backed by securities charged to the Bank by way of hypothecationPledging assets against a loan. The ownership of the asset or the income from the asset is not transferred, except that in default of repayment ..... or mortgage or assignment.

• Upon loan default, banks can seize the securities (except agricultural land) without intervention of the court.
  
• SARFAESI is effective only for secured loans where bank can enforce the underlyingThe designated financial instrument which must be delivered in completion of an option or futures contract. security eg hypothecation, pledge and mortgages. In such cases, court intervention is not necessary, unless the security is invalid or fraudulent. However, if the asset in question is an unsecured asset, the bank would have to move the court to file civil case against the defaulters.

How it works?

The SARFAESI Act, 2002 gives powers of "seize and desist" to banks. Banks can give a notice in writing to the defaulting borrower requiring it to discharge its liabilitiesAny claim for money against the assets of a company, such as bills of creditors, income tax payable, debenture redemption, interest on secured and unsecured ..... within 60 days. If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures:

• Take possession of the security for the loan
• Sale or lease or assign the right over the security
• Manage the same or appoint any person to manage the same

The SARFAESI Act also provides for the establishment of Asset Reconstruction Companies (ARCs) regulated by RBI to acquire assets from banks and financial institutions. The Act provides for sale of financial assets by banks and financial institutions to asset reconstruction companies (ARCs). RBI has issued guidelines to banks on the process to be followed for sales of financial assets to ARCs.

Background of the act

The previous legislation enacted for recovery of the default loans was Recovery of Debts due to Banks and Financial institutions Act ,1993. This act was passed after the recommendations of the Narsimham Committee - I were submitted to the government. This act had created the forums such as Debt Recovery TribunalsGovernment of India has constituted 33 Debt Recovery Tribunals and 5 Debt Recovery Appellate Tribunal across the country. The idea was to keep in line ..... and Debt Recovery Appellate Tribunals for expeditious adjudication of disputes with regard to ever increasing non-recovered dues. However, there were several loopholes in the act and these loopholes were mis-used by the borrowers as well as the lawyers. This led to the government introspect the act and this another committee under Mr. Andhyarujina was appointed to examine banking sector reforms and consideration to changes in the legal system .

• This committee recommended to enact a new legislation for the establishment of securitisation and reconstruction companies and to empower the banks and financial institutions to take possession of the Non performing assets.

Thus, via the Sarfaesi act, for the first time, the secured creditors were empowered to recover their dues without the intervention of the court.

• However, as soon as the act was passed, its implementation was challenged in the court and this delayed its coming into force for 2 years. In the Mardia Chemicals v. Union of India, the Supreme Court upheld the validity of the SARFAESI act was upheld.

Rights of Borrowers

The above observations make it clear that the SAFAESI act was able to provide the effective measures to the secured creditors to recover their long standing dues from the Non performing assets, yet the rights of the borrowers could not be ignored, and have been duly incorporated in the law.

• The borrowers can at any time before the sale is concluded, remit the dues and avoid loosing the security.
• In case any unhealthy/illegal act is done by the Authorised Officer, he will be liable for penal consequences.
• The borrowers will be entitled to get compensation for such acts.
• For redressing the grievances, the borrowers can approach firstly the DRT and thereafter the DRAT in appeal. The limitation period is 45 days and 30 days respectively

Pre-conditions

The Act stipulates four conditions for enforcing the rights by a creditor.

• The debt is secured
• The debt has been classified as an NPA by the banks
• The outstanding dues are one lakh and above and more than 20% of the principal loan amount and interest there on.
• The security to be enforced is not an Agricultural land.

Methods of Recovery

According to this act, the registration and regulation of securitizationThe process of homogenizing and packaging financial instruments into a new fungible one. Acquisition, classification, collateralization, composition, pooling and distribution are functions within this process. ..... companies or reconstruction companies is done by RBI. These companies are authorized to raise funds by issuing security receipts to qualified institutional buyers (QIBs), empowering banks and Fls to take possession of securities given for financial assistance and sell or lease the same to take over management in the event of default.

This act makes provisions for two main methods of recovery of the NPAs as follows:

• Securitisation: Securitisation is the process of issuing marketable securities backed by a pool of existing assets such as auto or home loans. After an asset is converted into a marketable security, it is sold. A securitization company or reconstruction company may raise funds from only the QIB (Qualified Institutional Buyers) by forming schemes for acquiring financial assets.
• Asset Reconstruction: Enacting SARFAESI Act has given birth to the Asset Reconstruction Companies in India. It can be done by either proper management of the business of the borrower, or by taking over it or by selling a part or whole of the business or by rescheduling of payment of debts payable by the borrower enforcement of security interest in accordance with the provisions of this Act.

Further, the act provides Exemption from the registration of security receipt. This means that when the securitization company or reconstruction company issues receipts, the holder of the receipts is entitled to undivided interests in the financial assets and there is not need of registration unless and otherwise it is compulsory under the Registration Act 1908.

However, the registration of the security receipt is required in the following cases:

• There is a transfer of receipt
• The security receipt is creating, declaring, assigning, limiting, extinguishing any right title or interest in a immovable property.

Is Mortgaged House exempted?
The Sarfaesi act covers any asset, movable or immovable, given as security whether by way of mortgage, hypothecation or creation of a security interest. There are some exceptions in the act such as personal belongings. However, only that property given as security can be proceeded under the provisions of SARFAESI Act. If the property of the borrower is his own mortgaged residential house, it is also NOT exempted from the Sarfaesi act.

Powers of Debt Recovery Tribunal

The debt Recovery Tribunals have been empowered to entertain appeals against the misuse of powers given to banks. Any person aggrieved, by any order made by the Debts Recovery Tribunal may go to the Appellate Tribunal within thirty days from the date of receipt of the order of Debts Recovery Tribunal.

Role of Chief Metropolitan Magistrate or District Magistrate

The Chief Metropolitan Magistrate or District Magistrate has been mandated to assist secured creditor in taking possession of secured asset. These officers will make sure that once the creditor has given him in writing that all other formalities of the act have been done, the CMM or DM will take possession of such asset and documents relating thereto; and forward such assets and documents to the secured creditor. Now, here, you have to note that such an act of the CMM or DM can not be called in question in any court or before any authority.

Role of High Court:

The act allows taking the matter to high courts only in some matters related to the implementation of the act in Jammu & Kashmir. However, High Courts have been entertaining writ petitions under article 226 (Power to issue writs) of the constitution of India.

Proposed amendments to the Act

The government had approved bill to amend the act. The Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, amends two Acts — Sarfaesi Act 2002, and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act). Via these amendments:

• Banks and asset reconstruction companies (ARCs) will be allowed to convert any part of the debt of the defaulting company into equityThe ownership interest in a company of holders of its common and preferred stock. . Such a conversion would imply that lenders or ARCs would tend to become an equity holder rather than being a creditor of the company.
• The amendments also allows banks to bidAn offer of a price to buy as in an auction. Business on the Stock Exchange is done through bids. Bid also refers to the ..... for any immovable property they have put out for auctionWhen a seller is not in a position to deliver the securities he has sold, the buyer sends in his applications for buying-in, so that ..... themselves, if they do not receive any bids during the auction. In such a scenario, banks will be able to adjust the debt with the amount paid for this property. This enables the bank to secure the asset in part fulfillment of the defaulted loan.
• Banks can then sell this property to a new bidder at a later date to clear off the debt completely.

However lenders will be able to carry this property on their books only for seven years, as per the Banking Regulation Act, 1949.

SARFAESI Act 2002

Deficit Financing

Deficit Financing

Deficit refers to the difference between expenditure and receipts. In public finance, it means the government is spending more than what it is earning. Government expenditure and revenue can be splitSub-division of a share of large denomination into shares of smaller denominations. Also means sub¬division of holdings. into capital and revenue. Capital expenditure generally includes those expenses which result in creation of assets. Revenue expenditure is primarily that which does not result in asset creation —for example interest payments, salaries, subsidies, etc. Similarly, on the receipts side, whatever the government receives as taxes is revenue receipt. Receipts not of a recurring nature are generally capital receipts. These include domestic and external borrowings, proceeds of disinvestment, recovery of loans given by the Union government, etc.

Deficit financing is a necessary evil in a welfare state as as the states often fail to generate tax revenue which is sufficient enough to take care of the expenses of the state. Deficit financing allows the state to undertake activities which, otherwise, would be beyond its financial capacity. The concept was popularised by noted British economist JM Keynes with the aim of pumping a depressed economyeconomy.

The basic intention behind deficit financing is to provide the necessary impetus to economic growth by artificial means. However, deficit financing helps to a certain extent only and beyond that it may cause havoc. Here are some of the problems of deficit financing.

1. Leads to inflation :- Deficit financing may lead to inflation. Due to deficit financing money supply increases & the purchasing power of the people also increase which increases the aggregate demand and the prices also increases.

2. Adverse effect on saving:- Deficit financing leads to inflation and inflation affects the habit of voluntary saving adversely. Infect it is not possible for the people to maintain the previous rate of saving in the state of rising prices.

3. Adverse effect on Investment ;- deficit financing effects investment adversely when there is inflation in the economy trade unions make demand for higher wages for that they go for strikes and lock outs which decreases the efficiency of Labour and creates uncertainty in the business which a decreases the level of investment of the country.

4. Inequality :- in case of deficit financing income distributionReturn to investors of the accumulated income of a trust or mutual fund and distribution of capital gains. becomes unequal. During deficit financing deflationary pressure can be seen on the economy which make the rich richer and the poor, poorer. The fix wage earners are badly effected and their standard of living deteriorates thus no gap b/w rich & poor increases.

5. Problem of balance of payment :- Deficit financing leads to inflation. A high price level as compared to other countries will make the exports more expensive and thus they start declining. On the other hand rise in domestic income and price may encourage people to import more commodities from abroad. This will create a deficit in balance of payment and the balance of payment will become unfavourable.

6. Increase in the cost of production: - When deficit financing leads to the rise in the price level the cost of development projects also rises this means a larger dose of deficit financing is required on the port of government for completion of these projects.

7. Change in the pattern of investment:- Deficit financing leads to inflation. During inflation prices rise and reach to a very high level in that case people instead of indulging into productive activities they start doing speculative activities.

India and Deficit Financing:

India resorted to deficit financing, then largely financed through Reserve Bank's books either by printing more money or use of its foreign exchangeRegulated market place where capital market products are bought and sold through intermediaries. reserves, right from the early years of planned economic development. However, our planners did not factor in the impact of deficit financing on inflation. But with large foreign exchange reserves, they were confident of the government's ability to manage the supply-side of the economy.

For much of the 1950s, the Bank was part of this consensus. Although the impact of deficit financing on prices had aroused concern already in 1951-52 , price stability did not return as a major cause of worry at the Bank until the mid-50 s. Besides, the Bank recognised the need for any plan to go beyond what available resources dictated, even if some part of the additional investment had to be financed through additions to money supply.

Is deficit financing inevitable?

Deficit financing is neither good nor bad. it depends upon the circumstances in which it is resorted to and the economic policy which is followed to neutralize its adverse consequences. A certain measure of deficit financing is inevitable in India under the planned economic development as one of the objectives of the planning is to step up the tempo of the economic progress beyond what it would have been in absence of planning. As far as deficit financing does not lead to inflation , there is no objection to its use. However , unfortunately, extent to which India has been practicing deficit financing has gone way beyond what could possibly have been contemplated by Lord Keynes.

Relation of Deficit Financing and Inflation:

Deficit financing may not necessarily be inflationary there are certain conditions under which deficit financing may not lead to inflation. With increase in money supply due to deficit financing prices do rise but rise in price will only be temporary for about a period. As flow of goods and services increase prices will began to fall. deficit financing is an important device for financing development plans for underdeveloped countries and accelerate their rate of economic development. But If deficit financing is not kept with in limits It may give rise to prices, distorted investment and unequal and unjust distribution of income. therefore it is essential that deficit financing is kept within limits and its impact on prices and costs are softened through various controls.

Know Your Customer

Know Your Customer

What is Know your Customer?

Know your customer (KYC) is a bank regulation that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them.

What are Objectives of KYC?

• Money launderingProcess of converting the proceeds of
  

Know Your Customer

Demat Account

Demat Account

Demat refers to a dematerialised account. Just as we open a bank account to hold money and make payments, we need to open a Demat account now to buy and sell securities (listed stocks), ETFs as well as debenturesBonds

Demat Account