BANK CREDIT AND
WORKING CAPITAL FINANCE
and
MANAGEMENT OF BANK FUNDS
INDIAN FINANCIAL SYSTEM
BANK CREDIT AND
WORKING CAPITAL FINANCE
BANK: Meaning & Definition
• Bank is a financial intermediary between Money Savers and
Money Seekers.
• Bank is engaged in the business of purchasing and selling of
MONEY.
• Bank is a financial intermediary which accepts/takes deposits
from public at large and make loans to different entities.
Modern Outlook of BANKS:
Para Banking Services
1. Merchant Banking
2. ATMs/Credit Cards
3. Venture Capital Funds
4. Factoring
5. Bancassurance
6. Internet/Mobile Banking
7. Mutual Funds
8. FOREX Services/Money Transfer
9. Bill Payment Services
10. D – Mat. Accounts
Banking in India
Legal frame work of
Banks
Banking Regulation
Act, 1949
Reserve Bank of India
Act, 1934
MPBF :
(MAX. PERMISSIBLE BANK FINANCE)
 THREE BASIC APPROACH:
A. 0.75 (CA – CL)
B. 0.75 CA – CL
C. 0.75 (CA – CCA) – CL
FORMS OF CREDIT (FINANCE)
• CASH CREDIT
 Banks lend money against the security of commodities and debt.
 overdrawing from a Bank account.
 Interest is charged only on RUNNING BALANCE and not on Entire Amt.
• OVERDRAFTS
 The word overdraft means the act of overdrawing from a Bank
account. In other words, the account holder withdraws more money
from a Bank Account than has been deposited in it.
 Interest is charged only on RUNNING BALANCE and not on Entire Amt.
FORMS OF CREDIT (FINANCE)
• TERM LOANS
 Longer term finance to acquire fixed assets generally 2 to 10 years
 Repayment is made in installments and interest is charged on entire
balance.
• BILLS DISCOUNTING/PURCHASE
• LETTER OF CREDIT/BANK GAURANTEE
MODE OF SECURITY
• HYPOTHECATION
• PLEDGE
• MORTGAGE
Credit Appraisal: FIVE C Framework:
• Character
• Capital
• Capacity
• Collateral
• Condition
MANAGEMENT OF BANK FUNDS
Reserve Bank of India
 RBI IS THE CENTRAL BANK OF INDIA
 ESTABLISHED ON 1st APRIL 1935 UNDER THE RBI ACT
 HEAD QUARTER IS LOCATED IN MUMBAI
 PRESENT GOVERNER IS MR. SUBBARAO
 RBI HAS 22 REGIONAL OFFICES IN INDIA
 BASIC OBJECTIVE:
“TO REGULATE THE ISSUE OF BANK NOTES AND
KEEPING OF RESERVES WITH A VIEW TO SECURING
MONETARY STABILITY IN INDIA AND GENERALLY TO
OPERATE THE CURRENCY AND CREDIT SYSTEM OF
THE COUNTRY TO ITS ADVANTAGE”
Functions of RBI (APEX Bank)
CENTRAL
BANK
RBI
REGULATOR
SUPERVISOR
PROMOTER
RESERVE BANK OF INDIA:
MAJOR FUNCTIONS
A. CENTRAL BANKING FUNCTIONS:
 Issuance of currency notes
 Issue Currency Notes of different denominations
 Issues and exchanges or destroys currency and
coins not fit for circulation.
 Banker to BANKS
 RBI Control the volume of reserves of the banks.
 RBI offer short term advances to banks.
RESERVE BANK OF INDIA:
MAJOR FUNCTIONS…
 Banker to GOVERNMENT
 Govt. Accounts are managed by RBI
 RBI Offer Secured and Unsecured Advances to Govt.
 Exchange Control & Forex Management
 Manages the Foreign Exchange Management Act,
1999.
 Decide Exchange Rates of various foreign currencies.
RESERVE BANK OF INDIA:
MAJOR FUNCTIONS…
B. SUPERVISORY FUNCTIONS:
 ISSUE LICENSE FOR NEW BANKS
 ISSUE LICENSE FOR SETTING NEW BRANCHES/ATMs
 PRESCRIBE MINIMUM REQUIREMENTS REGARDING CAPITAL AND
RESOURCES (CRR AND SLR)
 TO INSPECT THE WORKINGS OF THE BANKS
 TO INVESTIGATE THE COMPLAINTS AND FRAUDS IN RESPECT OF
BANKS
 CONTROL APPOINTMENT/REAPPOINTMENT OF CEOs OF
PRIVATE SECTOR BANKS
 TO APPROVE MERGER /ACQUISITION /RECONSTRUCTION /
LIQUIDATION OF BANKS
RESERVE BANK OF INDIA:
MAJOR FUNCTIONS…
C. PROMOTIONAL FUNCTIONS:
• RBI HAS PROMOTED VARIOUS DFI/PFIs LIKE,
• IDBI, IFCI, ICICI, SFC, SIDBI, EXIM BANK, SIDC,
SIIC, NIDC, ECGC, DICGC NABARD, ETC…
RESERVE BANK OF INDIA:
MAJOR FUNCTIONS…
D. REGULATOR OF MONEY & CREDIT:
› CRR
› SLR
›
›
›
›
›
›
›
›
›
Key Objectives:
To restrict expansion of bank credit
To ensure solvency of the banks.
To divert the bank funds to govt. (in case of SLR)
BANK RATE
OPEN MARKET OPERATIONS
DIRECTED CREDIT AND CREDIT RATIONING
CAS/CMA
FIXATION OF INVENTORY/CREDIT NORMS
RBI PRUDENTIAL NORMS
• INCOME RECOGNISITION:
• INCOME OF NPA ACCOUNTS SHUOLD BE RECORDED
ON CASH BASIS.
• CRITERIAS FOR “PAST DUE”
• DIVIDEND INCOME – CASH BASIS
• INTEREST FROM GOVT. SEC. – ACCURAL BASIS
• NPA CRITERIAS FOR TERM LOAN, CC AND OD, AND
BILLS DISCOUNTED
RBI PRUDENTIAL NORMS…
• ASSET CLASSIFICATION:
1. STANDARD ASSET
 DISCLOSE NO PROBLEMS AND CONTAIN NORMAL RISK.
2. SUB-STANDARD ASSET

CLASSIFIED AS NPA FOR A PERIOD NOT EXCEEDING 24 MONTHS.
3. DOUBTFUL ASSET

CLASSIFIED AS NPA FOR A PERIOD EXCEEDING 24 MONTHS.
4. LOSS ASSET
 WHERE THE LOSS HAS BEEN IDENTIFIED OR BORROWER
HAS MADE DEFAULT OR BECOMES INSOLVENT.
RBI PRUDENTIAL NORMS…
• PROVISIONING FOR LOAN AND ADVANCES:
1.
2.
LOSS ASSETS:
100% PROVISIONING
DOUBTFUL ASSETS:
PERIOD FOR WHICH THE
PERCENTAGE OF PROVISION
ASSET HAS BEEN CONSIDERED
DOUBTFUL
3.
4.
UP TO 1 YEAR
20 %
1 TO 3 YEAR
30%
MORE THAN 3 YEARS
50%
SUB STANDARD ASSETS: A GENERAL PROVISION OF 10% OF TOTAL
OUTSTANDING AMOUNT
STANDARD ASSETS: A GENERAL PROVISION OF 0.25%
RBI PRUDENTIAL NORMS…
• CAPITAL FUNDS:
• TIRE – I CAPITAL INCLUDES THE NET OWNED FUNDS OF THE BANKS
• TIRE – I CAPITAL SHOULD NOT BE LESS THAN 50% OF TOTAL CAPITAL.
• CAPITAL ADEQUACY FOR INDIAN BANKS STANDS AT 8% OF O/S DEPOSITS.
• TIRE – II CAPITAL
- TIRE – II CAPITAL MAINLY INCLUDES PREFERENCE SHARE, REVALUATION
RESERVES, GENERAL PROVISIONS AND LOSS RESERVES, HYBRID DEBT ETC.
ASSET LIABILITY MANAGEMENT (ALM)
(A) ASSET MANAGEMNT:
1. CASH AND LIQUIDITY MANAGEMENT
– FACTORS AFFECTING LIQUIDITY:
A.
–
–
–
–
EXTERNAL FACTORS:
GENERAL ECO. CONDITION
MONETARY POLICY
TAXATION POLICY
POLITICAL CONDITION
B.
–
–
–
–
–
INTERNAL FACTORS:
BANKING HABITS
NUMBER AND SIZE OF DEPOSIT ACCOUNTS
MATURITY PATTERNS OF INVESTMENT
NATURE OF BANK LOAN
ACCESS TO MONEY MARKET
ASSET LIABILITY MANAGEMENT (ALM)…
• MEASURING LIQUIDITY:
–
–
–
–
CASH ASSET TO TOTAL ASSET RATIO
CASH ASSET TO TOTAL DEPOSITE RATIO
LOAN TO DEPOSIT RATIO
CURRENT RATIO
2. RESERVE POSTION MANAGEMENT
–
–
PRIMARY RESERVE (CRR)
SECONDARY RESERVE (SLR)
3. INVESTMENT (SECURITY) MANAGEMENT
4. LOAN/ADVANCES MANAGEMENT
ASSET LIABILITY MANAGEMENT (ALM)…
(B) LIABILITY MANAGEMENT:
1. DEPOSIT MANAGEMENT
2. MANAGEMENT OF CAPITAL
–
SOME IMPORTANT MEASURES:
1. CAPITAL TO DEPOSIT RATIO
2. CAPITAL TO ASSET RATIO
ASSET LIABILITY MANAGEMENT (ALM)…
• RISK MANAGEMENT PRACTISES:
• LIQUIDITY RISK
• CURRENCY RISK
• INTEREST RATE RISK