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BNK601 Short Notes

Banking Laws & ractices

Consortium finance Under consortium financing, several banks (or financial institutions) finance a single borrower with common appraisal, common documentation, joint supervision and followup exercises. It is a subsidiar bank owned b several different banks. !ach owner bank has an e"ual share so that no bank is the majorit shareholder. #he owner banks are often in different countries. $ consortium bank is created to finance a specific project% once the project is complete, the consortium bank dissolves itself. &hile the are not as common as the once were, the are useful when a project involves multiple currencies. Hypothecation ' pothecation is a legal transaction, whereb goods ma be made available as securit for a debt without transferring possession to the lender. ' pothecation is the practice where a borrower pledges collateral to secure a debt. #he borrower retains ownership of the collateral, but it is (h potheticall ( controlled b the creditor in that he has the right to sei)e possession if the borrower defaults. Money market *one *arket is a financial market which deals in short term debt instruments. #he mone market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one ear or shorter time frames. Differentiation between blank and full endorsement

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+&hen the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, and is called endorser,. $n endorsement ma be made in blank or full. It ma also be restrictive. -inds of !ndorsement. #he endorsements are divided as under. /lank or general 0ull or special endorsement 1estrictive endorsement 2artial endorsement Instrument endorsed in blank: Sec 54 3ubject to the provisions hereinafter contained as to crossed che"ues, a negotiable instrument endorsed in blank is pa able to the bearer thereof even although originall pa able to order. Full or special endorsement: Sec ! If the endorser signs his name onl , the endorsement is said to be (in blank(, and if he adds a direction to pa the amount mentioned in the instrument to, or to the order of, a specified person, the endorsement is said to be 4in full(, and the person so specified is called the (endorsee( of the instrument. " 4 #uto $oans $uto 5oans mean the loans to purchase the vehicle for personal use. 1!6U5$#I78 1-9:- ;lassifications. #he auto loans shall be classified and provided for in the following manner. ;lassification. 3ubstandard. <eterminant. where mark up interest or principle is overdue b => da s or more from the due date. #reatment of Income. Unreali)ed mark-up? interest to be kept in *emorandum account and not to be credited to Income account except when reali)ed in cash. Unreali)ed

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mark up?interest alread *emorandum account. 2rovisions to be made. 2rovision of 9>@ (AB@ from C9 st <ecember A>>D) of the difference resulting from the outstanding balance of principal less the amount of li"uid assets. "%&%C$#SSIFIC#'I() #)D *"(+ISI()I), #he credit card advances shall be classified and provided for in the following manner. ;lassification. 5oss. 2rincipal is overdue b 9E> da s or more from the due date. <eterminant. &here mark-up ? interest. #reatment of Income. Unreali)ed mark-up ? interest to be 2rovisions to be made. 2rovision of 9>>@ of the difference. "%!%M#",I) "-./I"-M-)'S /anks ? <0Is are free to determine the margin re"uirements on consumer facilities provided b them to their clients taking into account the risk profile of the borrower(s) in order to secure their interests. 'owever, this relaxation shall not appl in case of items, import of which is banned b the 6overnment. /anks ? <0Is will continue to observe margin restrictions on shares ? #0;s as per existing instructions under 2rudential 1egulations for ;orporate ? ;ommercial /anking (1-D). 0urther, the restrictions prescribed under paragraph 9.$ of 1egulation 1-D of the 2rudential 1egulations for ;orporate ? ;ommercial /anking will also be applicable in case of ;onsumer 0inancing. 3tate /ank of 2akistan shall continue to exercise its powers for fixation ? reinstatement of margin re"uirements on consumer facilities being provided b banks?<0Is for various purposes, as and when re"uired. Differentiation between Si0ht and /sance $etter of credit taken to income account to be reversed and kept in

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$ 4sight4 5; means that pa ment is made immediatel to the beneficiar ?seller?exporter upon presentation of the correct documents in the re"uired time frame. In a sight pa ment, the commercial letter of credit is pa able when the beneficiar presents the compl ing documents and if the presentation takes place on or before the expiration of the commercial letter of credit. &hereas Usance 5etter of ;redit (5?;) is a 5etter of credit that calls for pa ment at a future date. It is generall within six months and re"uires a draft drawn on the issuing?pa ing bank for the amount of the invoice. -ndorsement &hen the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, and is called endorser,. Differentiation between li1uidity risk 2 operational risk 5i"uidit risk is the current and potential risk to earnings and the market value of

stockholdersF e"uit that results from a bankFs inabilit to meet pa ment or clearing obligations in a timel and cost-effective manner. &here operational risk refers to the possibilit that operating expenses might var significantl from what is expected, producing a decline in net income and firm value. 7perational risk is the risk of loss resulting from inade"uate or failed internal processes, people, and s stems, or from external events. #d3anta0es of letter of credit risk 0ollowing are the advantages of 5;. 4 6eneral global acceptabilit b the interacting parties.

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54 #he beneficiar is assured of pa ment as long as it complies with the terms and conditions of the letter of credit. #he letter of credit identifies which documents must be presented and the data content of those documents. #he credit risk is transferred from the applicant to the issuing bank. 64 #he beneficiar can enjo the advantage of mitigating the issuing bankFs countr risk b re"uiring that a bank in its own countr confirm the letter of credit. #hat bank then takes on the countr beneficiar . 44 #he beneficiar minimi)es collection time as the letter of credit accelerates pa ment of the receivables. 54 #he beneficiar Fs foreign exchange risk is eliminated with a letter of credit issued in the currenc of the beneficiar Fs countr . SM3mall and medium enterprises are companies whose headcount or turnover falls below certain limits. #he companies are usuall defined as an organi)ation with fewer than 9> emplo ees. *owers of arbitrator 7a84 #he arbitrators or umpire shall, unless a different intention is expressed in agreement, have power to (a) administer oath to the parties and witnesses appearing. 7b84 state a special case for the opinion of the ;ourt on an "uestion of law involved, or state the award, wholl or in part, in the form of a special case of such "uestion for the opinion of the ;ourt. 7c84 #he arbitrators or umpire shall, unless a different intention is expressed in agreement, have power to (c) make the award conditional or in the alternative. 7d84 ;orrect in an award an clerical mistake or error arising from an accidental slip or omission. 7e84 $dminister to an part to arbitration such interrogatories as ma , in the opinion of the arbitrators or umpire, be necessar . and commercial risk of the issuing bank and protects the

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#ttributes of 0ood collateral ;ollateral is considered to be good collateral if it possesses the following attributes. 4 $de"uate 54 1eadil en cashable reali)able 64 3ufficient. 9ank /ank means a banking compan as defined in the /anking ;ompanies 7rdinance, 9=DA. 9orrower /orrower means an individual to whom a bank ? <0I has allowed an financing during the course of business. Corporate 9onds ;orporate bonds are intermediate-term and long-term obligations issued b large, high"ualit corporations to finance plant and e"uipment spending. # picall , corporate are less bonds pa interest twice a ear and repa the principal amount borrowed at maturit . ;orporate bonds are not as li"uid as government securities because the the generall fluctuate less in price than corporate e"uities. :hy preferred bond is called hybrid security ' brid securities are a broad group of securities that combine the elements of the two broader groups of securities, debt and e"uit . widel traded. ;orporate bonds have greater default risk than government bonds, but consumer

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2referred stock is a h brid securit because it combines features of common stocks and bonds. $t the same time, it has several uni"ue features that set it apart from both.

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