BANKING BASICS

Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheques, draft, order or otherwise." Most of the activities a Bank performs are derived from the above definition. In addition, Banks are allowed to perform certain activities which are ancillary to this business of accepting deposits and lending. A bank's relationship with the public, therefore, revolves around accepting deposits and lending money. Another activity which is assuming increasing importance is transfer of money - both domestic and foreign - from one place to another. This activity is generally known as "remittance business" in banking parlance. The so called forex (foreign exchange) business is largely a part of remittance albeit it involves buying and selling of foreign currencies. The law governing Banking Activities in India is called "Negotiable Instruments Act 1881". The banking activities can be classified as : Accepting Deposits from public/others (Deposits) Lending money to public (Loans) Transferring money from one place to another (Remittances) Acting as trustees Acting as intermediaries Keeping valuables in safe custody Collection Business Government business

LOANS Cash credit Account This account is the primary method in which Banks lend money against the security of commodities and debt. It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called "limit" or "credit facility" in excess of the amount deposited in the account. Cash Credits are, in theory, payable on demand. These are, therefore, counter part of demand deposits of the Bank. Overdraft 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. How does this account then differ from a Cash Credit Account? The difference is very subtle and relates to the operation of the account. In the case of Cash Credit, a proper limit is sanctioned which normally is a certain percentage of the value of the commodities/debts pledged by the account holder with the Bank. Overdraft, on the other hand, is allowed against a host of other securities including financial instruments like shares, units of mutual funds, surrender value of LIC policy and debentures etc. Some overdrafts are even granted against the perceived "worth" of an individual. Such overdrafts are called clean overdrafts. Bill Discounting Bill discounting is a major activity with some of the smaller Banks. Under this type of lending, Bank takes the bill drawn by borrower on his(borrower's) customer and pay him immediately deducting some amount as discount/commission. The Bank then presents the Bill to the borrower's customer

on the due date of the Bill and collect the total amount. If the bill is delayed, the borrower or his customer pay the Bank a pre-determined interest depending upon the terms of transaction. Term Loan Term Loans are the counter parts of Fixed Deposits in the Bank. Banks lend money in this mode when the repayment is sought to be made in fixed, predetermined installments. This type of loan is normally given to the borrowers for acquiring long term assets i.e. assets which will benefit the borrower over a long period (exceeding at least one year). Purchases of plant and machinery, constructing building for factory, setting up new projects fall in this category. Financing for purchase of automobiles, consumer durables, real estate and creation of infra structure also falls in this category. Classification of loans Another way to classify the loans is through the activity being financed. Viewed from this angle, bank loans are bifurcated into :

Priority sector lending Commercial lending

Securitisation Securitisation involves financing of existing or future identifiable cash flows/receivables, with limited/full recourse to the company, with overcollateral of 1.5 to 3 times and a liquidity account equal to 3-6 months. The normal tenure would be between 3-7 years and the amortization would mirror the cash flow profile of the securitised receivables. Securitisation results in better balance sheet management in terms of capital adequacy ratio and debt equity ratio, shifting of credit risk for non-recourse structures, liquidity support and better pricing. A brief outline of the

various securitisation deals and their structure, concluded by ICICI Bank are mentioned below :

NEW PRODUCTS IN MARKET ICICI Bank has launched `Global Indian Credit Card' for NRIs. It is an international credit card denominated in Indian rupees and will cater to NRIs visiting India. It can be issued in both India and overseas. The card is available in two variants Silver with maximum credit limit of Rs 1,00,000 and Gold with maximum credit limit of Rs 3,00,000. The cards also provide insurance, which includes household insurance, baggage insurance and hospitalisation benefits for both primary and add-on cards up to Rs 20 lakh. The card will be accepted at 22 million merchant establishments and the re-payment for purchases can be made through an automatic debit of the customer's savings account.

Bank of Rajasthan (BoR) has launched international credit card operations in December 2005. Bank has joined hands with Visa International to facilitate realtime transaction through Visa gateway. Bank of Rajasthan will offer three types of international credit cards - Silver Card, Gold Card and Platinum card. Their features include hospitalisation expenses covered up to Rs 50,000, baggage insurance expenses up to Rs 30,000, purchase protection up to Rs 40,000 and 30 per cent credit limit against cash advance. It has also tied up with Electra Card Services (ECS) to provide complete back-end support for the banks credit card business. SBI Card in March 2005, launched a credit card, SBI Social Card, the first affinity card in the country to feature four non-governmental organizations (NGOs). The social card allows the cardholder to donate to the NGOs every time they use it. The card will earn the customers double reward points. While one half will go to the NGOs. SBI Card will donate 20 per cent of the annual fees or renewal fees to the NGOs. Moreover, customers also have the option to issue standing instructions for a fixed amount to be donated to any of the NGOs. The non-governmental organisations that have the tie-up with SBI Card are Cancer Patients Aid Association, National Association for the Blind, SOS Children's Villages of India and World Wildlife Fund, India. National Securities Depository Ltd (NSDL) and IDBI Bank have launched countrys first online direct tax payment facility. This facility will enable individuals as well as corporate tax payers, to make payments for income tax, corporation tax, gift tax, tax deducted at source (TDS) etc over internet. The details entered by the assessee would be validated by NSDL and control would be passed to IDBI bank through a secure payment gateway. The bank will debit the customer account after authentication and.

GUIDELINES ON ENTRY OF NEW BANKS IN THE PRIVATE SECTOR (AS ON 3RD JAN 2001)

1. Background The guidelines for licensing of new banks in the private sector were issued by the Reserve Bank of India (RBI) on January 22, 1993. Out of various applications received, RBI had granted licences to 10 banks. After a review of the experience gained on the functioning of the new banks in the private sector, in consultation with the Government, it has now been decided to revise the licensing guidelines. The revised guidelines for entry of new banks in private sector are given below. The guidelines are indicative and any other relevant factor or circumstances would be kept in view while considering an application. With the issue of revised guidelines, applications pending with RBI would be treated as lapsed. 2. Guidelines The initial minimum paid-up capital for a new bank shall be Rs.200 crore. The initial capital will be raised to Rs.300 crore within three years of commencement of business. The overall capital structure of the proposed bank including the authorised capital shall be approved by the RBI. The promoters contribution shall be a minimum of 40 per cent of the paid-up capital of the bank at any point of time. The initial capital, other than the promoters contribution, could be raised through public issue or private placement. In case the promoters contribution to the initial capital is in excess of the minimum proportion of 40 per cent, they shall dilute their excess stake after one year of the banks operations. (In case divestment after one year is proposed to be

spread over a period of time, this would require specific approval of the RBI). Promoters contribution of 40% of the initial capital shall be locked in for a period of five years from the date of licensing of the bank. While augmenting capital to Rs.300 crore within three years of commencement of business, the promoters will have to bring in additional capital, which would be at least 40 per cent of the fresh capital raised. The remaining portion could be raised through public issue or private placement. The promoters contribution of a minimum of 40% of additional capital will also be locked in for a minimum period of 5 years from the date of receipt of capital by the bank. NRI participation in the primary equity of a new bank shall be to the maximum extent of 40 per cent. In the case of a foreign banking company or finance company (including multilateral institutions) as a technical collaborator or a copromoter, equity participation shall be restricted to 20 per cent within the above ceiling of 40 per cent. In cases of shortfall in foreign equity contributions by NRIs, designated multilateral institutions would be allowed to contribute foreign equity to the extent of the shortfall in NRI contribution to the equity. The proposed bank shall obtain necessary approval of Foreign Investment Promotion Board of the Government of India and Exchange Control Department of RBI. The new bank should not be promoted by a large industrial house. However, individual companies, directly or indirectly connected with large industrial houses may be permitted to participate in the equity of a new private sector bank up to a maximum of 10 per cent but will not have controlling interest in the bank. The 10 per cent limit would apply to all inter- connected companies belonging to the concerned large industrial houses. In taking a view on whether the companies, either as promoters or investors, belong to a large industrial house or to a company connected to a large industrial house, the decision of the RBI will be final. The proposed bank shall maintain an arms length relationship with business

entities in the promoter group and the individual company/ies investing upto 10% of the equity as stipulated above. It shall not extend any credit facilities to the promoters and company/ies investing up to 10 per cent of the equity. The relationship between business entities in the promoter group and the proposed bank shall be of a similar nature as between two independent and unconnected entities. In taking view on whether a company belongs to a particular Promoter Group or not, the decision of RBI shall be final. Also read guidelines for Conversion of NBFCs into private sector banks 3. Other Requirements 4. Procedure for Applications 5. Procedure for RBI decisions

BANKING OVERVIEW The major participants of the Indian financial system are the commercial banks, the financial institutions (FIs), encompassing term-lending institutions, investment institutions, specialized financial institutions and the state-level development banks, Non-Bank Financial Companies (NBFCs) and other market intermediaries such as the stock brokers and money-lenders. The commercial banks and certain variants of NBFCs are among the oldest of the market participants. The FIs, on the other hand, are relatively new entities in the financial market place. Historical perspective Bank of Hindustan, set up in 1870, was the earliest Indian Bank . Banking in India on modern lines started with the establishment of three presidency banks under

Presidency Bank's act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras. In 1921, all presidency banks were amalgamated to form the Imperial Bank of India. Imperial bank carried out limited central banking functions also prior to establishment of RBI. It engaged in all types of commercial banking business except dealing in foreign exchange. Resrve Bank of India Act was passed in 1934 & Reserve Bank of India (RBI) was constituted as an apex bank without major government ownership. Banking Regulations Act was passed in 1949. This regulation brought Reserve Bank of India under government control. Under the act, RBI got wide ranging powers for supervision & control of banks. The Act also vested licensing powers & the authority to conduct inspections in RBI.

RATIO ANALYSIS Ratio analysis is a useful tool of for both micro and macro financial appraisal. Like all other analytical tools, its usefulness depends on the user and the purpose. There are no standard ratios applicable to all purposes and situations. Certain ratios are more useful at micro level and others at macro level. Broadly, ratios represent a relation between two variables chosen and the type of relation set out has to be

seen for a particular purpose. Any number of such ratios can be designed depending upon the purpose of the analysis. In isolation, ratios can be used only for time-series analysis of the company' performance. In such an analysis, continuing inefficiencies built into the system of a corporate escape observation. Very important factors in ratio analysis, therefore, are benchmarking and crosssectional analysis. With the availability of commercial databases in the market these tools can also be used to accurately analyse the performance of a corporate. Not all corporates can raise capital from the market. Capital market is an information driven arena. The availability of market capital to an existing corporate depends solely on its perceived performance. The market watchers have, at their disposal, various tools to make this value judgement. Ratio analysis is one such oft used (or abused) tool. The trends in management, financial viability and other factors relevant from the point of view of the market can be studied from the various financial ratios such as: Leverage Indicators (debt-equity ratio) Cost ratios Current ratios Retained earning ratios Dividend ratios etc. The indicators of profitability of companies are: Profits to sales ratios Profits (EBDIT) to total capital employed ratio, Operating profit to sales ratios and Profit to tangible Net worth ratio.

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REGULATORS IN INDIA Regulatory Institutions are statutory bodies assigned with the job of monitoring and controlling different segments of the Indian Financial System (IFS). These Institutions have been given adequate powers through the vehicle of their respective Acts to enable them to supervise the segments assigned to them. It is the job of the regulator to ensure that the players in the segment work within recognised business parameters, maintain sufficient level of disclosure and transparency of operations and do not act against the national interests. At present, there are two regulators directly connected to IFS:

Reserve Bank of India Security and Exchange Board of India

The Reserve Bank of India Reserve Bank of India, the Central Bank of the country, is at the center of the Indian Financial and Monetary system. RBI is an Institution of recent vintage as compared to some of its counterparts in developed countries like US, UK, Sweden and Germany. However, among the developing countries it is the oldest. It was inaugurated on April 1, 1935 as a private shareholders' institution under the Reserve Bank of India Act 1934. It was nationalised in January 1949, under the Reserve Bank (Transfer to Public Ownership) of India Act, 1948. This act empowers the central government, in consultation with the Governor of the Bank, to issue such directions to RBI as might be considered necessary in the public interest . RBI is governed by a Central Board of Directors with 20 members consisting of the Governor and the Deputy Governors. The Governor and the deputy Governors of the Bank are Government of India appointees.

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Securities Exchange Board of India The SEBI was established on April 12, 1988 through an administrative order, but it became a statutory and really powerful organisation only in 1992 when CICA was repealed and the office of the Controller of Capital Issues was abolished. Government of India (GOI) issued an ordinance on 30th Jan 1992 and pursuant to this ordinance SEBI was set up on 21st Feb 1992. The SEBI Act replaced this ordinance on 4th April 1992. The regulatory powers of the SEBI were increased through the Securities Laws (Amendment) Ordinance of January 1995 which was subsequently replaced by an Act of Parliament. SEBI is under the overall control of the Ministry of Finance. Its Head Office is at Mumbai (formerly Bombay). It has since become a very important constituent of the financial regulatory framework in India. SEBI's governing board comprises of the Chairman, two members from the ministries of the central government dealing with finance and law, two professional members with experience or special knowledge of securities market, and one member from the RBI. All members, except the RBI member, are appointed by GOI. Their terms of office, tenure, and conditions of service is also laid down by GOI. It can also remove any member from office under certain circumstances. GOI is empowered to supersede the SEBI in any of the following cases:

If it is deemed to be expedient in public interest If SEBI's board is unable to discharge its functions or duties If it persistently defaults in complying with any direction issued by the government

If its financial position and administration deteriorates.

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ALL INDIA FINANCIAL INSTITUTIONS - COMPLETE LIST

Industrial Development Bank of India (IDBI) Industrial Finance Corporation of India (IFCI) Export - Import Bank of India (Exim Bank) Industrial Reconstruction Bank of India (IRBI) now (Industrial Investment Bank of India) National Bank for Agriculture and Rural Development (NABARD) Small Industries Development Bank of India (SIDBI) National Housing Bank (NHB) Unit Trust of India (UTI) Life Insurance Corporation of India (LIC)

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General Insurance Corporation of India (GIC) Risk Capital and Technology Finance Corporation Ltd. (RCTC) Technology Development and Information Company of India Ltd.(TDICI) Tourism Finance Corporation of India Ltd. (TFCI) Shipping Credit and Investment Company of India Ltd. (SCICI) Discount and Finance House of India Ltd. (DFHI) Securities Trading Corporation of India Ltd. (STCI) Power Finance Corporation Ltd. Rural Electrification Corporation Ltd. Indian Railways Finance Corporation Ltd. Infrastructure Development Finance Co. Ltd. Housing and Urban Development Corporation Ltd. (HUDCO) Indian Renewable Energy Development Agency Ltd. (IREDA)

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