Final Project on Banking Sector

7/30/2019 Final Project on Banking Sector

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Chapter 1

Abbreviation

1) RBIReserve Bank of India2) SEBISecurities Exchange Board of India3) IRDAInsurance Regulatory and Development Authority4) LICLife Insurance Corporation5) LPGLiberalization, Privatization and Globalization6) CCDContract Committee on Disinvestment7) CRRCash Reserve Ratio8) SLRStatutory Liquidity Ratio9) CROChief Risk Offices10)L/CLetter of Credit11)UCPDCUniform Customs and Practice for Documentary Credits12)IDBIIndustrial Development Banks of India13)SIDBISmall Industrial Development Banks of India14)NBFCNon Bank Finance Companies15)LMELicentiate in Mechanical Engineering16)NICNational Insurance Company17)ECGCExport Credit Guarantee Corporation of India18)PLRPrime lending Rate19)HPHire Purchase20)VCVenture Capital21)IPOInitial Public Offer22)BPLRBench mark Prime Lending Rate


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Chapter 2

2.1 Introduction to Indian Financial System

Financial system consists of two words i.e. Finance & system. Finance meansstudy of money, its nature, its creation, behaviour, regulations and administration

and system means set of instructions, markets, practices, transaction, claims &liabilities in the economy. Hence financial system refers to area in which all those

activities, bodies and instruments dealing in finance are organized in to a system.

Indian Financial System includes many institutions and mechanism that effect thegeneration of savings and distribution of savings amongst all those who demand

these funds for investment purpose. Thus financial system is a broader term which

brings under its fold financial markets and financial institutions which support the

system and major assets/instruments traded in the system. An efficientfunctioning of financial system facilitates free flow of funds to more productive

activities and promotes faster economic growth. Hence financial system plays acrucial role in converting savings into investment and making surplus money

available to core sectors of economy i.e. agriculture, industry, infrastructuredevelopment and thereby helps in overall development of economy.


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2.2 Features of Financial Services

i) Customer-Specific:-Financial services are usually customer focused. Thefirms providing these services, study the needs of their customers in detail before

deciding their financial strategy, giving due regard to costs, liquidity and maturity

considerations. Financial services firms continuously remain in touch with theircustomers, so that they can design products which can cater to the specific needs

of their customers. The providers of financial services constantly carry out market

surveys, so they can offer new products much ahead of need and impending

legislation. Newer technologies are being used to introduce innovative, customerfriendly products and services which clearly indicate that the concentration of the

providers of financial services is on generating firm/customer specific services.

ii) Intangibility:-In a highly competitive global environment brand image isvery crucial. Unless the financial institutions providing financial products andservices have good image, enjoying the confidence of their clients, they may not

be successful. Thus institutions have to focus on the quality and innovativeness of

their services to build up their credibility.

iii) Concomitant:- Production of financial services and supply of theseservices have to be concomitant. Both these functions i.e. production of new andinnovative financial services and supplying of these services are to be performed

simultaneously.

iv) Tendency to Perish:- Unlike any other service, financial services do tendto perish and hence cannot be stored. They have to be supplied as required by thecustomers. Hence financial institutions have to ensure a proper synchronization of

demand and supply.

v) People based services:-Marketing of financial services has to be peopleintensive and hence its subjected to variability of performance or quality of

service. The personnel in financial services organization need to be selected onthe basis of their suitability and trained properly, so that they can perform their

activities efficiently and effectively.

vi) Market Dynamics:-The market dynamics depends to a great extent, onsocioeconomic changes such as disposable income, standard of living and

educational changes related to the various classes of customers. Thereforefinancial services have to be constantly redefined and refined taking into

consideration the market dynamics. The institutions providing financial services,


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while evolving new services could be proactive in visualising in advance what the

market wants, or being reactive to the needs and wants of their customers.

Thus, Indian Financial consists of following :-

1. Financial markets

2. Financial institutions/intermediaries

3. Financial assets/instruments

Financial markets can be further divided into :-

1. Organized sector2. Unorganized sector

Organized sector markets can be further divided into:-

1. Money Market

2. Capital Market (Primary Market & Secondary Market)

Regulatory BodiesKey regulatory bodies are :-

RBI Securities & Exchange Board of India (SEBI) Insurance Regulatory & Development Authority (IRDA) Govt. of India (Dept. of Banking & Insurance, Ministry of Finance)

IntermediariesWhich may be :-

1. Money Market Intermediaries.

2. Capital market intermediaries


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2.3 Reforms Taken Place In Financial Sector

From the year 1991-92 and onwards lot of reforms have taken place in financial

sector in India. Some important reform measures are listed below:-

1. The Reserve Bank of India has introduced the system ofderegulation of

interest rates and as a result banks are free to decide their interest rates on

deposits and loans and advances

2. Introduction of Liberalization, Privatization and globalization (LPG) in

economy has also effected financial sector. There is a greater increase in

participation of private sector in banking, mutual fund and public sector

undertakings.

3. Disinvestment from public sector undertakings is another key step taken by

Govt. of India towards privatization. For this purpose, a statutory body in thename of Disinvestment Commission was established in 1996 and even a

Contract Committee on Disinvestment (CCD) was constituted to decide matters

pertaining to disinvestment in public sector undertakings.

4. Free pricing of issues was introduced by SEBI and issuing companies were

brought out of controller of capital issues in this regard. This has resulted in lot of

new issues coming in the market and capital market has been activated a lot .

SEBI has also liberalized other stringent conditions to boost up capital market.

5. Liberalized tax structure has started giving lot of relief in direct and indirecttaxes to entrepreneurs particularly in remote and hard areas.

6. Recognized credit rating agencies have started working in financial sector for

looking after the interest of investors as well as making the task of issuingcompanies easy.

7. There is a lot of emphasis on financial inclusionby Govt. and as a result

banking sector is making serious efforts to bring more people in banking network.

Even the policy of zero balance has been introduced by banks to make financialinclusion policy a success.

8. Due to these reforms and need of investors, new and innovative financial

instruments are coming in market.


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2.4 Challenges Before Financial Services Sector

Some of the important challenges faced by financial services sector are as

follows:-

1. Lack of qualified personnel:There is a dearth of qualified and trainedpersonnel & it is a important impediment in the growth of financial service

sector. A proper and comprehensive training need to be given to various

financial intermediaries.

2. Lack of investors awareness: Many innovative financial products/instruments are coming in market but the investors are not aware about their

advantages. Hence, financial intermediaries need to educate investors aboutvarious products.

3. Lack of specialization: Each financial intermediary is dealing indifferent financial service lines without specializing in one or two areas as is thecondition in foreign countries. Hence financial intermediaries have to go for such

specialization.

4. Lack of recent data:Most of the intermediaries do not spend more timeon research and lack adequate data base required for financial creativity.

5. Lack of efficient risk Management system:With the opening up ofeconomy to Multinationals and exposure of Indian companies to international

competition, much importance is given to foreign portfolio flows involving multicurrency transactions exposing the client to exchange rate risk, interest rate risk,

economic and political risk. Hence it is essential that they should introduce

futures, options , swaps and other derivative products which are necessary for aneffective risk management system.


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2.5 Risk under financial services

Types of risks are faced by financial institutions while providing financial

activities:-

1. Credit Risk:The risk of default by the borrowing firm. There can be asystematic credit risk which is associated with general economy-wide

macroeconomic conditions effecting all borrowers e.g. economic recession,

downfall of capital market due to some internal reason in the country.

2. Liquidity risk:It arises when all liability claim holders seek to withdrawfunds which can lead to solvency problem for a financial institution.

3. Interest rate risk: This risk arises when a financial institutionmismatches its assets and liabilities.

4. Market risk:This risk arises due to sudden changes in interest rates,exchange rates in the market.

5. Off-balance risks:Risk relating to contingent assets and liabilities e.g.risk in case of letter of credit issued but due to some problems, financing

institutions is required to make payment.

6. Foreign exchange risk:Which arises due to changes in exchange rates.

7. Country or sovereign risk:Which arises by a sudden interference fromforeign governments.

8. Insolvency risk:Due to continuation of one or more of above risk, suchrisk may arise in a financial institution. All these risks are inter related and to

minimize such risks, financial institutions have started recruiting Chief RiskOfficers (CROs) who can keep track on these risks.


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Chapter 3

3.1 Financial Intermediaries:-

Financial intermediaries in capital market and money market. The term financial

intermediary includes all kinds of organizations which Intermediate and facilitate

transactions of both individual and corporate customers as well as transactions ofboth banking and non banking nature. Thus intermediaries refers to all kinds of

financial institutions as well investing institutions which facilitate financial

transactions in financial markets. These intermediaries & transactions may be in

the organized sector or unorganized sector. These intermediaries may also beclassified into two:-

1. Capital Market Intermediaries2. Money Market Intermediaries

1. Capital Market Intermediaries:are those which mainly provide longterm funds to individuals and corporate customers. They consist of term lending

institutions, Development banks, financial corporations and investment

institutions like LIC.

2. Money Market Intermediaries: are those which supply only shortterm funds to individuals and corporate customers. They consist of commercial

banks and cooperative. Charts showing details of following types of institutions

working as intermediaries in above both types are enclosed in annexures.

Types of financial intermediaries:-

- Commercial banks

- Cooperative banks

- Development banks


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3.2 Key Activities Performed By Banks

The Banking Regulation act 1949 defines banking as accepting for the purposeof lending or investment of deposits of money from public, repayable on demand

or otherwise and with drawable by cheque , draft, order or otherwise. The key

activities which a bank performs can easily be derived from this definition whichare as follows:-

- Accepting deposits from public

- Advancing loans/investment of deposit money.- Deposits are repayable only on demand.

- Allowing withdrawal of deposits through various modes.

Different type of depositsaccepted by bank are mainly of following types.- Saving deposit

- Current deposit- Fixed deposit

- Recurring deposit

- Deposits under various deposit schemes like deposits from retiring Govt.

employees, public sector employees etc.

Another key area of activity is lending money to public which may be against

security or unsecured loans. The secured loans may be against:-

- Commodities- Financial instruments

- Real Estate- Document of title

- Consumer durable goods, automobiles

Other type of loans given by banks are ;

- Cash credit account

- Overdraft- Bill discounting

- Term loans

- Education loans

Another key activity is investment of money. Here it would be pertinent to

mention that as per BR Act, banks are required to maintain statutory liquid ratio

(SLR) under which banks are required to invest 25% of its total time and demand

liabilities in Govt. or Govt. approved securities. Further, as per RBI Act, banksare required to keep 5% in the form of cash Reserve Ratio (CRR) with R.B.I

(raised to 5.75% w.e.f. Feb 2010).. Besides these two statutory investments, banks


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are investing money in other avenues which are known as non-SLR investments.

Besides above three key activities i.e. accepting deposits, lending to public and

investment of deposits, banks are undertaking various other activities such as:-

- Transfer money from one place to other (remittance facility)

- Acting as Trustees- Keeping valuables in safe custody- Collection business

- Working as an agent of customers

- Govt. business

In addition to above, banks are providing various services to customers e.g. debit

card, credit card etc


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3.3 Changing perception of intermediaries regarding financial

services

Financial intermediaries are coming out with innovative financial instrument in

the market which are more investor friendly and these products are offering

multiple benefits to the investor. These innovative products are more :-

Safe Economical Less risky Providing good return Package of return is attractive as it provides multiple benefits. Highly liquid i.e. easily convertible into cash. Less time consuming on maturity Procedure of converting them into cash is less cumbersome.

Hence growing need for innovations has assumed great importance in recenttimes. This process of innovation is also called financial engineering. The term

financial engineering is the design, development and the implementation of

innovative financial instruments and processes and formulation of creative

solutions to problems in finance.

To quote some examples, many financial institutions have come out with savingplans where money can be taken back after 3 years lock in period with guarantee

bonus, benefits under income tax, coupled with insurance benefit, healthinsurance and accident insurance benefit.

The Financial instruments are not only attractive but also the procedure is beingconstantly simplified with quick/fast services through rise of modern technology.

This change in perception of financial intermediaries like banks, insurance

companies, particularly in private sector is visible. The degree of competition andprivatization has forced even public sector financial intermediaries to change their

perception and come out with innovative products.


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Chapter 4

4.1 Non-Fund based activities

Non-Fund based activities/services are those where funds are not involved

and financial institution gets income in the form of fee such as:-

- Commission on demand draft.

- Guarantee/Letter of credit

- Managing capital issue (pre-issue & post issue management services)

- Advisory/Consultancy services

- Project preparation/appraisal/arranging finance through projects from

financial institutions

- Assisting in the process of getting clearances from Govt/Govt bodies.

Modern activities/services provided by financial institutions are like advisory role

in corporate restructuring, acting as trustees for debentures, rehabilitation and

restructuring sick units, portfolio management of large corporate risk.

The credit facilities given by the banks where actual bank funds are not involvedare termed as 'non-fund based facilities'. These facilities are divided in three broadcategories as under:

Co acceptance of bills/deferred payment guarantees.

Units for the above facilities are also simultaneously sanctioned by banks while

sanctioning other fund based credit limits.

Facilities for co acceptance of bills/deferred payment guarantees are generallyrequired for acquiring plant and machinery and may, technically be taken as a

substitute for term loan which would require detailed appraisal of the borrower's

needs and financial position in the same manner as in case of any other term loanproposal. The co-acceptance limits may also sanctioned under IDBI's BillRediscounting Scheme.


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4.2 PURPOSE FOR NON-FUND BASED FACILITIES

These are called non-fund based financing (or quasi-credit facilities) because, atthe time of opening of the letter of credit or bank guarantee, no amount, as such,

becomes immediately payable. But, these facilities do involve some financial

commitment on the part of the bank in as much as the bank is required to pay theamount of the bill (drawn under the L/C, and in meticulous compliance of all the

terms and conditions stipulated therein), in the event of the applicant (borrower)

refusing or being unable to honor the bill on presentation, at the material time.

The borrowers need such facilities not only for purchases of current assets or

financing there of or take benefit of certain services with the help of non-

fund based facilities. They also need the facilities for acquisition of fixed

assets including their financing. The relevant aspects of two kinds ofn o n - f u n d b a s e d f a c i l i t i e s i . e . l e t t e r o f c r e d i t , b a n k

g u a r a n t e e s


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4.3 Guarantees

A contract of guarantee can be defined as a contract to perform the promise, ordischarge the liability of a third person in case of his default.

The RBI guidelines for sanctioning guarantee facilities have already beendiscussed earlier in this chapter. Reserve Bank lays a great emphasis on banks to

make prompt payment to the beneficiaries in terms of guarantees issued by them

as and when such guarantees are invoked. Other important points/ precautions in

respect of availing of these facilities from banks are discussed here under:

1. The conditions relating to obligant being a customer of the bank enjoying credit

facilities as in case of letters of credit are equally applicable for guarantees also.

In fact, guarantee facilities also cannot be sanctioned in isolation.

2. Financial guarantees will be issued by the banks only if they are satisfied thatthe customer will be in a position to reimburse the bank in case the guarantee is

invoked and the bank is required to make the payment in terms of guarantee.

3. Performance guarantee will be issued by the banks only on behalf of thosecustomers with whom the bank has sufficient experience and is satisfied that the

customer has the necessary experience and means to perform the obligations

under the contract and is not likely to commit any default.

4. As a rule, banks will guarantee shorter maturities and leave longer maturities tobe guaranteed by other institutions. Accordingly, no bank guarantee will normally

have a maturity of more than 10 years.

5. banks should not normally issue guarantees onbehalf of those customer's who

enjoy facilities with other banks.


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4.4 Types of guarantee

a) Bid bond guarantee /tender bond guarantee:-This guarantee assures the importer only those contractor with reasonable

means and capacity to execute the work in the tender. So that, the contractorwould seriously take up the work when it is allot to him. The bid bond is normally

issued for short period of 3 to 6 months and it is terminated on the contractor

taking up the contract on the expiry of the said period.

b)Advanced payment guarantee:-The importer may require a bank guarantee that a amount of advance would be

repay to the importer. If the contract could not be fulfilled by exporter. The

difference between and advances between a performance guarantee and advancedguarantee is that in the former case is that the banks undertake to pay up to certain

percentage of the contract amount on the failure of the export. In case of advancepayment guarantee, the exporter have received some advances and this amount

would be paid by the bank to the importer in case of exporter failure to account

for the same. This is also known as repayment guarantee.

c) Performance guarantee:-If the contractor is awarded the contract he would be require to furnish this were

by his execution of the contract as per terms and condition and specification

agreed upon is guarantee usually the guarantee is given for up to 10% of the

contract amount. This way the importer is assured that the exporter could executethe contract as per the contracted standards.

d)Retain money guarantee:-Many of the turn key projects and concernation contract provide that a part of

the contract amount the retain by the importer which shall be paid after a

stipulated period during which time the proper functioning of the work executedcould be verified by him.


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Chapter 5

5.1 Letters of Credit

Letter of credit is, a method of settlement of payment of a trade transaction and is

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 of a stated amount on presentation of stipulated documents and

fulfilment of all the terms and conditions incorporated therein. All letters of credit

in India relating to the foreign trade i.e., export and import letters of credit aresubject 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 letter of credit bind themselves to these provisions by specifically

agreeing to do so. 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, responsibilities and rights of various parties to a letter of

credit.

Inland letters of credit may also be issued subject to the provisions of UCPDCand it is, 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 in the coming days. Complete text of

UCPDC is not being reproduced. However, important articles have been given as

extracts wherever necessary. An attempt has been made to explain the L/C

mechanism in full as there are some inherent risks and wrong notions while

dealing with these transactions.


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5.2 Parties included in letter of credit

1. Applicant/Opener:- It is generally the buyer of the goods who gets theletter of credit issued by his banker in favour of the seller. The person on whose

behalf and under whose instructions the letter of credit is issued is known as

applicant/ opener of the credit.

2. Opening bank/issuing bank:- The bank issuing the letter of credit.

3. Beneficiary:- The seller of goods in whose favour the letter of credit isissued.

4. Advising Bank:- Notification regarding issuing of letter of credit may bedirectly sent to the 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 which advises the letter of credit to the beneficiary is known asadvising bank.

5. Confirming Bank:- A letter of credit substitutes the credit worthinessofthe buyer with that of 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 confirmation which amounts to an additional undertaking beinggiven by that bank to the beneficiary. The bank adding its confirmation is known

as confirming bank. The confirming bank has the same liabilities towards thebeneficiary as that of opening bank.

6. Negotiating Bank:- The bank who negotiates the documents drawn underletter of credit and makes payment to beneficiary. The function of advising bank,

confirming bank and negotiating bank may be undertaken by a single bank only.


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5.3 Process for establishing a Letter of Credit

Specific letter of credit transaction follow somewhat different procedures:

1) After the buyer and seller agree on the terms of a sale, the buyer arranges forhis bank to open a letter of credit in favour of the seller.

2) The buyers issuing bank prepares the letter of credit, including all of thebuyers instructions to the seller concerning shipment and requireddocumentation.

3) The buyers bank sends the letter of credit to the sellers advising bank.4) The sellers advising bank forwards the letter of credit to the seller.5) The seller carefully reviews all condition stipulated in the letter of credit. If the

seller cannot comply with any of the provisions, it will ask the buyer to amend theletter of credit.

6) After final terms are agreed upon, the seller ship the goods to the appropriate

port or location.

7) After shipping the goods, the seller obtain the required documents. The seller

may have to obtain some documents prior to shipment.

8) The seller presents the documents to its advising bank along with a draft for

payment.

Exporter banks i.e.

advising i.e.

confirming banks

Importers

banks i.e.

issuing banks

Exporter

Importer


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9) The sellers advising bank review the documents. If they are in order, it will

forward them to the buyers issuing bank. If a confirmed letter of credit, the

advising bank will pay the seller.

10) Once the buyers issuing bank receives and reviews the documents, it either

(i) pays if there are no discrepancies, or

(ii) forwards the documents to the buyer if there are discrepancies for its review

and approval.


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5.4 Letter of Credit Mechanism

Any business/industrial venture will involve purchase transactions relating to

machine/other capital goods and raw material etc., and also sale transactions

relating to its products. The customer may, therefore, find himself on either side

of a L/C transaction at different times depending upon his position at that

particular moment. He may be an applicant for a letter of credit for his purchases

while be the beneficiary under other letter of credit for his sale transaction. It is,

therefore, necessary that complete L/C mechanism covering the liabilities and

rights & both the applicant and the beneficiary are understood for maximum

advantage.

The complete mechanism of a letter of credit may be divided in three parts as

under:

1. 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 andverifying the authenticity of signature of issuing bank and is under no

commitment to pay the seller.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. Refer to diagram given below forcomplete process of issuance of credit.

2. Negotiation of Documents by beneficiary:- On receipt of letter ofcredit, the beneficiary shall arrange to supply the goods as per the terms of L/C

and draw necessary documents as required underL/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

reimbursement from the opening bank in terms of credit. The entire process of

negotiation is diagrammatically represented as under:

3. Settlement of Bills Drawn under Letter of Credit by the

opener:- The last step involved in letter of credit mechanism is retirement of

documents received under L/C by the opener, On receipt of documents drawnunder 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 tothe 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. This aspect of L/C transaction is represented as under:-


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1. Bank should normally open letters of credit for their own customers whoenjoy credit facilities with them Customers maintaining current account only

and not enjoying any credit limits should not be granted L/C facilities except

in cases where no other credit facility is needed by the customer.

2. The request of such customer for sanctioning and opening of letter of credit

should be properly scrutinized to establish the genuine need of the customer. The

customer may be, required to submit a complete loan proposal Including financial

statements to satisfy the bank about his, needs and also his financial resources, to

mire the bills drawn under

3. Where a customer enjoys credit facilities with some other bank, the reasons for

his approaching the bank for sanctioning L/C limits have to be clearly stated. The

bank opening L/C on behalf of such customer should invariably make a reference

to the, existing banker of the customer.

4. All cases of opening of letters of credit, the bank has to ensure that thecustomer is able to retire the bills drawn under L/C as per the financial

arrangement already finalized.


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5.5 Characteristics of letter of credit

1) Negotiability -Letter of credit usually negotiable. The issuing bank is obligated to pay not only

the beneficiary, but also any bank nominated by the beneficiary. Negotiable

instrument are passed freely from one party to another almost in the same way as

money to be negotiable, the letter of credit must include an unconditional promiseto pay, on demand or at a definite time. The nominated bank becomes a holder in

due course. As the holder in due course, the holder takes the letter of credit for

value, in good faith, without not notice of any claims against it. A holder in due

course is treated favorably vcc.

The transaction is considered a straight negotiation if the issuingbanks

payment obligation extends only to the beneficiary of the credit. If a letter ofcredit is a straight negotiation it is referred on its face by we engage with you oravailable with ourselves. Under these conditions, the promise does not pass to a

purchaser of the draft as a holder in due course.

2) Revocability:-Letter of credit may be either revocable or irrevocable. A revocable letter of

credit may be revoked and modified for any reason, at any time by the issuingbank without notification. A revocable letter of credit cannot be confirmed. If a

correspondent bank is engaged in a transaction that involve revocable letter of

credit, it serves as advising bank.

Once the document is presented and meet the terms and condition in the

letter of credit, and draft is honored the letter of credit cannot revoked.the

revocable letter of credit is not commonly used instrument. It is generally used toprovide guidelines for shipment. If a letter of credit is revocable it would be

referenced on its face.

The irrevocable letter of credit may not be revoked or amended without

the agreement of the issuing banks, the confirming banks, and the beneficiary. An

irrevocable letter of credit from the issuing banks insures the beneficiary that if

the required document are presented and the terms and condition are complied

with, payment will be made if a letter of credit is irrevocable it is referenced on itsface.

3) Transfer and Assignment:-The beneficiary has right to transfer or assign the right to draw, under a credit

only when the credit states that it is transferable or assignable credits governed by


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the uniform commercial code [domestic] may be transferred an unlimited number

of times under the uniform customs practice for documentary credit

[international]. The credit may be transferred or non-assignable, the beneficiarymay transfer theirs right prior to performance of conditions of the credits.

4) Sight and Time draft:-All letter of credit require the beneficiary to present a draft and specified

document in order to receive payment. A draft is a written order by which the

party is creating it, order another party to pay money to a third party. A draft isalso called as bill of exchange.

There are two types of draft:- sight and time

A sight draft is payable as soon as it is presented for payment. The banks isallowed a reasonable time to review the document before making payment.

A time draft is not payable until the lapse of a particular time period stated on

the draft. The bank is requested to accept the draft as soon as the documentcomply with credit terms. The issuing banks has a reasonable time to examine

those document. The issuing banks is obligated to accept the draft and pay them at

maturity.


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Chapter 6

Types of non fund based activities

6.1 Co acceptance of Bills

1. Limits for co acceptance of bills will be sanctioned by the banks after detailed

appraisal of customer's requirement is completed and the bank is fully satisfiedabout the genuineness of the need of the customer. Further customers who enjoy

other limits with the bank should be extended such limits.

2. Only genuine trade bills shall be co accepted and the banks should ensure thatthe goods covered by bills co accepted are actually received in the stock accounts

of the borrowers. The valuation of goods as mentioned in the accompanying

invoice should be verified to see that there is no overvaluation of stocks.

3. The banks shall not extend their co acceptance to house bills/ accommodation

bills drawn by group concerns on one another.

4. Before discounting/purchasing bills co accepted by other banks for Rs.2 lakh

and above from a single party, the bank should obtain written confirmation of the

concerned controlling office of the accepting bank.

5. When the value of total bills discounted/purchased (which have been

co-accepted by other banks) exceed Rs.20 lakh for a single borrower/ group of

borrowers prior approval of the Head Office of the co accepting bank shall beobtained by the discounting bank in writing.

6. Banks are precluded from co accepting bills drawn under Buyer's Line of

Credit schemes of financial institutions like IDBI, SIDBI, PFC etc. Similarlybanks should not co accept bills drawn by NBFCs. Further, banks should not

extend co acceptance on behalf of their buyers/constituents under the SIDBI

scheme.

7. However, banks may co accept bills drawn, under Seller's Line of Credit

schemes for Bill Discounting operated by the financial institutions like IDBI,

SIDBI, PFC etc. without any limit subject to buyer's capacity to pay and thecompliance with exposure norms applicable to the borrower.

8. Where banks open L/C and also co accept bills drawn under such L/C, thediscounting banks, before discounting such co accepted bills, must ascertain the

reason for co acceptance of bills and satisfy themselves about the genuineness of

the transaction.


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9. Co acceptance facilities will normally not be sanctioned to customers enjoying

credit limit with other banks.

Operational aspects of IDBI bills rediscounting scheme have already been

discussed and similar procedure shall be adopted while allowing co-acceptancefacilities which are not covered under the scheme. Important operational aspectsin respect of letter of credit facilities and issuance of guarantees will be discussed

in this chapter.


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6.2 Corporate restructuring

Corporate restructuring is the process of redesigning one or more aspects of a

company. The process of reorganizing a company may be implemented due to anumber of different factors, such as positioning the company to be more

competitive, survive a currently adverse economic climate, or poise thecorporation to move in an entirely new direction. Here are some examples of why

corporate restructuring may take place and what it can mean for the company.

Restructuring a corporate entity is often a necessity when the company has grown

to the point that the original structure can no longer efficiently manage the output

and general interests of the company. For example, a corporate restructuring may

call for spinning off some departments into subsidiaries as a means of creating amore effective management model as well as taking advantage of tax breaks that

would allow the corporation to divert more revenue to the production process. Inthis scenario, the restructuring is seen as a positive sign of growth of the companyand is often welcome by those who wish to see the corporation gain a larger

market share.

Corporate restructuring may take place as a result of the acquisition of the

company by new owners. The acquisition may be in the form of a leveraged

buyout, a hostile takeover, or a merger of some type that keeps the company intactas a subsidiary of the controlling corporation. When the restructuring is due to a

hostile takeover, corporate raiders often implement a dismantling of the company,

selling off properties and other assets in order to make a profit from the buyout.

What remains after this restructuring may be a smaller entity that can continue tofunction, albeit not at the level possible before the takeover took place.

In general, the idea of corporate restructuring is to allow the company to continuefunctioning in some manner. Even when corporate raiders break up the company

and leave behind a shell of the original structure, there is still usually the hope that

what remains can function well enough for a new buyer to purchase thediminished corporation and return it to profitability.


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6.3 Portfolio management

A Portfolio Management refers to the science of analyzing the strengths,

weaknesses, opportunities and threats for performing wide range of activitiesrelated to the ones portfolio for maximizing the return at a given risk. It helps in

making selection of Debt Vs Equity, Growth Vs Safety, and various othertradeoffs.

Major tasks involved with Portfolio Management are as follows:-

Taking decisions about investment mix and policy Matching investments to objectives Asset allocation for individuals and institution Balancing risk against performance

There are basically two types of portfolio management in case of mutual andexchange-traded funds including passive and active.

Passive management involves tracking of the market index or index investing. Active management involves active management of a funds portfolio by manager

or team of managers who take research based investment decisions and decisionson individual holdings.

Facts about Portfolio

There are many investment vehicles in a portfolio. Building a portfolio involves making wide range of decisions regarding buying or

selling of stocks, bonds, or other financial instruments. Also, one needs to make

decision regarding the quantity and timing of the buy and sell.

Portfolio Management is goal-driven and target oriented. There are inherent risks involved in the managing a portfolio.

The basics and ideas of Investment Portfolio Management are also applied to

portfolio management in other industry sectors.


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6.4 Hedging

Hedging is the process of managing the risk of price changes in physical material

by offsetting that risk in the futures market. Hedging can vary in complexity from

a relatively simple activity, through to a highly complex strategies, including the

use of options.

The ability to hedge means that industry can decide on the amount of risk it is

prepared to accept. It may wish to eliminate the risk entirely and can generally do

so quickly and easily using the LME.

Managing price risk means achieving greater control of either the cost of inputs,

or revenues from sales, or both; planning for the future based on assured costs and

revenues; and eliminating concerns that a sharply adverse move in the price ofmaterial could turn an otherwise flourishing and efficient business into a loss

maker.

Hedging by trade and industry is the opposite of speculation and is undertaken in

order to eliminate an existing physical price risk, by taking a compensating

position in the futures market. Speculators come to the futures market with no

initial risk. They assume risk by taking futures positions.

Hedgers reduce or eliminate the chance of further losses or profits, while the

speculators risk losses in order to make profits.

Before starting a hedging programme it is essential to assess the risk due to

exposure to the price of physical material. Once the hedger has an understanding

of the tools available at the LME, it is relatively easy to select the appropriate

action to manage this risk. It is important that this action is properly managed at

all times and that the appropriate controls and approval procedures are in place.

It is generally advisable to work with an LME broker so that expert advice can betaken in devising a hedging programme.


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Canara banksoffers non fund based products to its clients as follows :-

a) Letter of Credit:- We offer import as well as domestic Letter of Creditfacility to our clients for procurement of goods on DA/DP basis as per their needs

at very competitive rates. Considering our international network of branches /offices coupled with worldwide correspondent relationship arrangements, our

clients enjoy market acceptability and comfort in business deals.

b) Bank Guarantee:- We offer Bank Guarantee facility to our clientsguaranteeing their performance / financial obligations in the domestic as well asinternational market.

c) LC Advising / Confirming Services:- In case of Letters of Creditreceived by our clients, we offer LC advising as well as LC confirmation services

under our correspondent relationships with domestic as well as international

banks.

d) Co-acceptance facilities:- Sometimes in business deals on credit basis,buyers are required to offer adequate comforts to the sellers such as bankguarantee or co-acceptance of bills by the bankers. Bank of Baroda offers co-

acceptance of bills facility to the top rated clients.

e) Banc assurance:- Bank of Baroda has tie-up arrangement with NationalInsurance Company (NIC), under which we arrange for issuance of general

insurance policies to our clients thereby taking away their worries of timely and

adequate insurance cover of the assets.

f) Solvency Certificate:- We provide Solvency Certificate to our clients incase it is required for providing to Government authorities, other corporates in

business deals / bids etc.

g) Credit Reports:- We provide Credit Reports on our clients to otherbanks/FIs and we also obtain Credit information required by our clients on their

counter parties, through our correspondent relationship.


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Chapter 7

7.1 FUND BASED ACTIVITIES

The traditional services which come under fund based activities are the following.

a) Underwriting of or investment in shares, debentures, bonds, etc of new issues

(primary markets activities)

b) Dealing in secondary market activities.

c) Participating in money market instrument like commercial papers, certificate of

deposits, treasury bills, discounting of bills etc

d) Involving in equipments leasing, hire purchases, venture capital seeds capitaletc.

e) Dealing in foreign exchange market activities


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7.2 Fund based Limit

Fund based limits can be categorized as sources of actual finance. Here banks

allocate certain fund towards the borrower or forwards certain credit to the

borrower. Fund based limits consist of various lending facilities:

1. Term Loans

2. Working Capital Term Loans3. Cash Credit / Overdraft

4. Discounting of bills

5. Pre shipment Credit

6. Export Packing Credit

1. Term Loans:-Term Loans are generally taken to acquire capital assets. The repayment is in the

form of either installments (Actual + Interest) or EMI. Repayment of Term Loanis through future earnings from the Capital Asset acquired. The purpose of the

term loan is defined well in advance.

2. Working Capital Term Loans:-When contribution to working capital has to be brought immediately; workingcapital term loans are used. Generally organizations availing working capital

limits under the second method of financing use working capital term loan as a

source of quick finance. The interest rate applicable is around 1% higher then the

cash credit account. Working capital term loans are financed on the basis ofrecommendation by Tandon committee.

3. Cash Credit Facility:-Cash Credit Facility is generally granted under the running account facility.

Availed for maintenance of inventory and day to day business activities; Cash

Credit Facility, or CC limit is generally used to meet a major part of workingcapital requirement.

4.Discounting Of Bills:-A borrower obtains credit from banks against the bills he possesses. The bank

here discounts the bill i.e. purchases the bill after analyzing the credit worthiness

of the drawer. The borrower gets discounted amount of the bill. (Full amount of

bill Discount charges of bank) Discounted amount of bill.

5. Pre- Shipment Credit:-All credit facilities sanctioned to exporters for producing / manufacturing /

processing/ packing / warehousing / shipping the goods for exports are termed

as Pre -Shipment Credit. The credit limits for pre-shipment advance areconsidered simultaneously along with other facilities and it is generally made a


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sub-limit within the overall cash credit limit sanctioned to the borrower. The

assessment of working capital requirement may be based upon the export orders

on hand with the exporter besides his capacity to meet that commitment. Theexporters, to whom this facility is allowed, will be required to produce letters of

credit/firm export orders within a reasonable period of time. Pre-Shipment Credit

limits can be extended through the running account facility. No repayment of pre-shipment advance can be effected from local funds in which case the advance willnot be treated as pre-shipment advance and no benefits of concessional rate

will be available to such an advance from the date of original advance. Quantum

of advances and interest rate structure is based on the commodity to be exportedand the current PLR. Advance is granted for a period of 180 days and if the export

is not executed by that time a further extension of 90 days can be given.

6. Export Packing Credit:-Packing credit may be taken as equivalent to cash credit in domestic business

except that cash credit facility is sanctioned as a continuous/running facility

whereas packing credit advance is disbursed for a specific purpose to enable theexporter to meet a specific export obligation.

Guarantee of Export Credit Guarantee Corporation of India Ltd. (ECGC). ECGCissues packing credit guarantees on each exporter individually and also has the

system of issuing a guarantee in favor of the bank on whole turnover basis.

Premium on the guarantee is generally recovered from the exporter. The rates ofpremium on individual guarantees are higher in comparison to rates on Whole

Turnover Packing Credit guarantee issued to banks. It is necessary to obtain this

information from the bank as cost of additional premium for individual guarantee

may sometimes be quite heavy depending upon the turnover in the account.

Guarantees issued by ECGC are in addition to various policies issued by ECGC infavor of exporters to cover the risk of non-payment or other political risk involved

in export trade. Full details of these policies may be obtained from any office ofECGC.


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7.3 Types of fund based activities

a) Hire purchase:-

Hire purchase (abbreviated HP, colloquially sometimes never-never) is thelegal term for a contract, in which persons usually agree to pay for goods in parts

or a percentage at a time. It was developed in the United Kingdom and can now

be found in Australia, China, India, Jamaica, Japan, Malaysia, New Zealand, andSouth Africa. It is also called closed-end leasing. In cases where a buyer cannot

afford to pay the asked price for an item of property as a lump sum but can afford

to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire

the goods for a monthly rent. When a sum equal to the original full price plusinterest has been paid in equal installments, the buyer may then exercise an option

to buy the goods at a predetermined price (usually a nominal sum) or return the

goods to the owner. In Canada and the United States, a hire purchase is termed aninstallment plan; other analogous practices are described as closed-end leasing or

rent to own.

If the buyer defaults in paying the installments, the owner may repossess the

goods, a vendor protection not available with unsecured-consumer-credit systems.

HP is frequently advantageous to consumers because it spreads the cost ofexpensive items over an extended time period. Business consumers may find the

different balance sheet and taxation treatment of hire-purchased goods beneficial

to their taxable income. The need for HP is reduced when consumers have

collateral or other forms of credit readily available.

b) Venture capital:-

Venture capital (VC) is financial capital provided to early-stage, high-potential,high risk, growth startup companies. The venture capital fund makes money by

owning equity in the companies it invests in, which usually have a novel

technology or business model in high technology industries, such asbiotechnology, IT, software, etc. The typical venture capital investment occurs

after the seed funding round as growth funding round (also referred to as Series A

round) in the interest of generating a return through an eventual realization event,

such as an IPO or trade sale of the company. Venture capital is a subset of privateequity. Therefore, all venture capital is private equity, but not all private equity isventure capital.


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c) Working Capital Finance:-

We offer working capital facilities - both fund-based and fee-based. Fund-based

working capital products include cash credit, overdraft, bill discounting, short-term loans, export financing (pre-shipment as well as post-shipment). Fee basedfacilities include letters of credit and bank guarantees.

Working Capital facilities are provided to finance the day-to-day businessrequirements. Funding requirements are structured to finance procurement of raw

materials/stores and payment towards manufacturing costs and other overheads.

Sales are financed against sundry debtors/ receivables. The Bank offers a

combination of operative cash credit and working capital demand loan to meet thedomestic working capital requirements of our clients.

d) Short Term Finance:-

The Bank offers short-term loans for a period ranging from 3 months to 12months to sound corporate for meeting their specific short-term working capitalrequirements. The funds are provided with interest rates either linked to our

BPLR or at a fixed rate with varying repayment patterns.

e) Bill Discounting:-

This product enables corporate to fund their operating cycle right from the stageof procurement to sale. Bill Financing is extended by IndusInd Bank to its clients

at competitive rates. Letter of credit backed bill discounting and clean billdiscounting are the convenient mode of financing for domestic trade transactions.BOE could be broadly classified into Demand and Usance bills and are further

classified into clean and documentary bills

f) Export Finance:-

As an important incentive to the exporters community for boosting exports,

financial assistance in Rupees is extended to exporters on priority basis on

relatively liberal terms. Such finance is provided both at pre-shipment stage (asworking capital finance) and at post-shipment stage (to bridge the time lag

between the shipment of goods and the realization of proceeds). Interest charged

on export credit is exempted from the purview of interest tax.


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g) Term Lending:-

We offer term loans to both Industrial as well as Infrastructure sectors promoted

by strong business houses. These loans are for a period of 3-5 years with a

moratorium period. Interest rates could be fixed or floating linked to the bank's

BPLR.

h) Buyers Credit / Suppliers Credit:-

This facility provides total flexibility to corporate to utilize the line (sanctionedlimit) of credit. The terms of the line of credit are either predetermined or

negotiated at the time of a ailment. This facility is used as and when the client has

a requirement

i) Asset based financing:-

Two Wheeler Loan Construction Equipments


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Chapter 8

FINDINGS

We deem it desirable to review the various aspect of over study and sum up the

important observations. As such, this chapter epitomizes the major findings andoffer new suggestion for the Non-Fund Based Income of banks in India. Main

findings of this research work can be summarized as follow:-

1)Canara banks provided non fund based facilities to customer like letter of credit,

guarantee, etc.

2)They provided letter of credit only inside India. Interest rate charged by isappropriate 10%-12%, as per the rule govern by RBI.

3)Guarantee is issued on both that is financial and performance on the basis

credit worthiness. Portfolio management is given in case of active mutual andexchange traded funded

4)Canara banks also provided fund based activities to their customer. Such as hirepurchase bill discounting term lending asset based financing etc.

5)Repayment of term loan is done EMI. Credit limit is given for preshipment

periods.

SUGGESTIONS

Bank is in theBusiness of Maintaining Risk not avoiding it

We deem it desirable to review the various aspect of over study and sum up theimportant observations. As such, this chapter epitomizes the major findings and

offer new suggestion for the increasing Non-Fund Based Income of Banking

industry in India.

1. The banks in India need to focus at ensuring greater financial stability to

tackle lots of challenges successfully to keep growing and strengthen of banking

sector.

2. Bank must create strategic alliance with the rural regional banks to open up

rural branches and increased use of technology for improved products andservices.

3. For the financial repression construct Indian banking industry have to focusing


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and concerning the challenges intensity of the change in three polices likely,

interest rate controls, strategy pre-emption and directed credit.

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.

5. Public sector banks required to set up modern IT infrastructure in place within

a short time of period.

6. Both of banks need to expand branches in rural area.

7. Required to launch innovative products and services as per the customer`s

Expectation.

8. This study suggests that Indian regulators should consider requiring increased

disclosure of the composition of bank non-interest income. Such disclosure wouldaid in understanding the changing nature of banking in India.

9. Given the recent sub-prime crisis at global level and the role played by fee

based income sourced from securitization, increased disclosure of the nature ofbank noninterest income is now of global importance.

10. Banking sector in India need to start moving into areas that yield Non-FundBased Income activities that earn more income rather than interest income.

11. Banks in India required potential diversification benefits from the shifting

nontraditional activity.

12. Banking sector in India needs to require risk management information

system and to achieve a better credit portfolio equilibrium.

13. Banks should extend the technology which is used in internet banking in

Order to remove the difficulties.

14. Bank should provide the services in different language.


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Chapter 9

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 aninformation technology for banking business and they trying to provide

technology based banking products and services to their customers. Indian banks

also trying to Universalization of banking products and services to one top

banking shop for customer delight, but comparatively private and foreign banksexisting in Indian economy are having a higher level of modernization and those

providing numbers of modern services to their customers. For a long term successof banking institution to require effective management of credit risk and

diversified into fee based activities. Non-traditional activities of banks are moresophisticated and versatile instrument for risk assessment. 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 thatfee based non-intermediation financial services have become more important.


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Chapter 10

Bibliography

www.googlke.com

www.yahoo.com

www.wikipedia.com

book reference from international banking finance
http://www.googlke.com/http://www.googlke.com/http://www.yahoo.com/http://www.yahoo.com/http://www.wikipedia.com/http://www.wikipedia.com/http://www.wikipedia.com/http://www.yahoo.com/http://www.googlke.com/


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Chapter 11

Annexure

1. If your bank provide non fund based service to customer?Yes No

2. Which types of service you provide to customer?a) Letter of credit .b) Guarantee..c) Co-acceptance..d) Capital restructuring.e) Portfolio management..3. If your bank provide letter of credit facilities to importer and exporter?

Yes No

4.

What is interest rate charged by your banks on letter of credit?

__________________________________________________________________

__________________________________________________________________

___________________________________________________

5. What is rule and regulation followed by your bank while given letter of creditfacilities?

__________________________________________________________________

__________________________________________________________________

__________________________________________________________________

6. Whether your banks gives letter of credit inside the India or internationalcountry?

Yes No


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7. If your bank provide guarantee facilities to their customer?Yes No

8. Which types of guarantee issued by your banks?a) financial

b) performance

9. If your banks gives funds to company for capital restructuring?Yes No

10.Which types of portfolio management in case of mutual and exchange tradedfunded used?

a) Passiveb) Active11.If your bank provide co-acceptance facilities to your clients?

Yes No

12.If your banks provide fund based activities to customers?Yes No

13.In which form the repayment of term loans is done?a) Installmentb) Emi14.What credit limit is given for preshipment advance?

__________________________________________________________________

__________________________________________________________________

_________________________________________________________________


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15.If your banks provide fund based activities to companies?a) Hire purchaseb) Venture capitalc) Short term financed) Bill discountinge) Asset based managementf) Working capital finance