BANKING REGULATION ACT ,1949 License from RBI establish; expand; close; shift .

. Closer look over the over all management of banks appoint / terminate the chairman Exercise control over advances given by banks Can put restriction on any transaction Can inspect books of accounts

PRUDENTIAL NORMS Income recognition not on accrual basis but on realization basis Asset classification : standard sub standard till 12 months doubtful after 12 months Capital adequacy :desirable 10% of the risk (credit risk) weighted assets as base capital NPAs should be less than 3% of net advances

Provision of bad debts for doubtful assets Standard Assets: 1% Sub Standard Assets: Secured - 10% Unsecured - 20%

Doubtful Assets: Secured - up to 12 months - 20% 12-36 months - 30% more than 36 months - 100% Unsecured -100% Loss Assets: value of security goes below 10% of outstanding liabilities. Provision required is 100%

USE OF FUNDS 6% CRR 25% SLR 40% Priority Sector Lending : agriculture ,SSE, artisans ; self employment 29% Others

Tier I Capital core capital consist of most permanent and readily available support. Tier I capital of banks should be at least 6 per cent of risk-weighted assets by March 31, 2010. It comprises of : Paid up capital Statutory reserve Other free reserves Tier II Capital consists of Undisclosed reserves Revaluation reserves General provision and loss reserve Investment fluctuation reserve Hybrid debt instruments Cumulative preference debentures

Arrangement of Funds
Source of fund CASA: Savings a/c Current a/c Fixed Deposit: Retails Customer Corporate Bond Money Market: Call Repo COD Discounting 4.75% 4.75% 8% 6% 5% 10% 8% 9% 9% 30% 10% 5% 3.5% 0 30% 10% Cost of fund weightage

If bank maintains a high CASA cost effective i.e. cost of fund is less ; large number of retail customers so more liquidity needs to be maintained; less risky for banks as crores of customers will not ask for withdrawal of funds at the same time. If bank maintains a low CASA shows that bank is not accepted by large number of people; funds are screwed towards term deposits , this is a costly method to arrange funds; risky proposition as there are a few corporates deposit huge amounts with the bank and if they decide to withdraw funds, then huge amounts get withdrawn at once.

Cash Reserve Ratio

[ Sec 42 RBI ACT ,1934]

Every bank has to maintain an average daily balance with RBI 3% to15 % of Net Demand and Time Liabilities.

Objective: This is to control money supply in the economy.

CRR earlier was 7.5 % , was brought down to 5% and now a days it is 6 % . CRR is maintained in the form of Cash Deposit with RBI Yield : 2006 Apex bank provides a yield of 6% on CRR maintained i.e. ** No yield for first 3% CRR ** 6 % yield if CRR is greater than 3 % This is payable quarterly Penalty: Incase of default a penalty is charged on CRR generally greater than bank rate. On the discretion of RBI. This needs to be displayed in the Balance Sheet and thus gives rise to reputational risk. Occasional explanatory default monetary penalty Frequent / continuous default refusal for further expansion , denial for subsidy/ financial support

Statutory Liquidity Ratio [Section 24 (2A)] In addition to CRR bank has to maintain statutory reserve in the form of : ** Cash in hand ** Approved securities ** Balance in the form of current account with RBI Objective: This is to control money supply for credit purpose and increase bank investment in government in government securities. Earlier this SLR was 38.5 % and now a days it is 25 % of Net Demand and Time Liabilities. Yield : Investment in selected portfolio earns large yields for the bank. Penalty: Penalty is charged at the rate of 3% p.a. in case of default . 5 % in case of continuous default.

Net Demand and Time Liabilities

DEMAND

LIABILITIES

TIME LIABILITIES
Fixed Deposits Cash Certificate Indian Development Bonds Staff Security Deposits

Current Deposit Savings Deposit Margin against LC/Guarantee Recurring Deposit Balance of Cash Credit Account

Excludes : Liabilities of overseas branches Interbank liabilities Non resident deposits Vostro account balance

Benchmark Prime Lending Rate [BPLR] BPLR = present expenses + future requirements present expenses : cost of fund (6%) (weighted average cost of different types of liabilities) + operating expense (2%) (salary , rent , electricity , ,stationary , IT ) + revenue forgone due to CRR (0.5%) (mark up for CRR) future requirements : + mark up for future loss (1%)(creating provisions for NPAs) + provision for additional capital (0.5%) + profit (3%) total = 13%

Balance Sheet of a Bank

Liability

Rs CRR SLR

Assets

Rs

Tier I Capital
[core capital + profits]

Tier II Capital
Capital Bonds
Revaluation Reserve

Demand Deposits: Current a/c Savings a/c Time Deposit: Retail customer Corporate client Borrowings from RBI: Repo,Refinance Cd Inter-bank Borrowing Borrowing from Japan,Singapore etc

Cash

Call Money Lending

Loans & Advances

Investments Fixed Assets Other Assets

Asset Liability Management in Banks

Maturity Period

Inflows on account of Assets(+)

Outflows on account of Liabilities(-)

Gap=Inflow(-) Outflow

Day 1 2-7 days 8-14 days 15 -28 days 29 days -3 mth Over 3- upto6 mth Over 6mth upto1 yr Over 1-upto 2 yrs Over 2 yrs-5 yrs Over 5 yrs

If Gap is (+)= no problem ; deployment of fund is needed If Gap is (-)= then bank must arrange funds Objective of ALM**Ensure liquidity **Optimize earnings If Outflows > Inflow , Liquidity Risk is High