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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

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P RUDENTIAL NORMS

Income recognition not on accrual basis but on realizationbasis

Asset classification :standardsub standard till 12 monthsdoubtful after 12 months

Capital adequacy :desirable 10% of the risk(credit risk) weighted assets as base capital

NP As should be less than 3% of net advances

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P rovision 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 outstandingliabilities. Provision required is 100%

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USE OF FUNDS

6% CRR25% SLR40% Priority Sector Lending : agriculture ,SSE, artisans ;

self employment29% Others

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Tier I Capital core capital consist of most permanent andreadily available support . Tier I capital of banks should be atleast 6 per cent of risk-weighted assets by March 31, 2010. Itcomprises of :Paid up capitalStatutory reserveOther free reserves

Tier II Capital consists of Undisclosed reservesRevaluation reservesGeneral provision and loss reserve

Investment fluctuation reserveHybrid debt instrumentsCumulative preference debentures

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Source of fund Cost of fund weightage

CASA:

Savings a/c 3.5% 30%

Current a/c 0 10%

Fixed Deposit:

Retails Customer 8% 30%

Corporate 9% 10%

Bond 9% 5%

Money Market:

Call 4.75% 5%

Repo 4.75% 10%

COD 8%

Discounting 6%

Arrangement of Funds

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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.

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Cash Reserve Ratio [ Sec 42 RBI ACT ,1934]

Every bank has to maintain an average daily balance with RBI 3% to15 % of NetDemand 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

P enalty:Incase of default a penalty is charged on CRR generally greater than bank rate . On thediscretion of RBI. This needs to be displayed in the Balance Sheet and thus gives rise toreputational risk.

Occasional explanatory default monetary penaltyFrequent / continuous default refusal for further expansion , denial for subsidy/

financial support

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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 andincrease bank investment in government in government securities.

Earlier this SLR was 38.5 % and now a days it is 25 % of Net Demandand Time Liabilities.

Yield :Investment in selected portfolio earns large yields for the bank.

P enalty:Penalty is charged at the rate of 3% p.a. in case of default .5 % in case of continuous default.

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DEMAND LIABILITIES

Current DepositSavings DepositMargin against LC/GuaranteeRecurring DepositBalance of Cash Credit Account

TIME LIABILITIES

Fixed DepositsCash CertificateIndian Development BondsStaff Security Deposits

Net Demand and Time Liabilities

Excludes :

Liabilities of overseas branchesInterbank liabilitiesNon resident deposits

Vostro account balance

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Benchmark P rime Lending Rate [B P LR]

BP LR = 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%

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Balance Sheet of a Bank

L iability Rs Assets Rs

Tier I Capital[core capital + profits]CRR

Tier II CapitalC apital BondsRevaluation Reserve

SLR

D emand D eposits:Cu rrent a/c

Savings a/c

C ash

Time D eposit:Retail c u stomer C orporate client

C all Money Lending

Borrowings from RBI: Repo,RefinanceC dInter-bank Borrowing

Loans & Advances

Borrowing from Japan,Singapore etc Investments

Fixed Assets

Other Assets

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Asset Liability Management in Banks

Maturity Period Inflows on accountof Assets(+)

Outflows onaccount of

L iabilities(-)

Gap=Inflow(-)Outflow

Day 12 -7 days

8-14 days

15 - 2 8 days

29 days -3 mth

Over 3- u pto6 mthOver 6mth u pto1 yr

Over 1- u pto 2 yrs

Over 2 yrs-5 yrs

Over 5 yrs

If Gap is (+)= no problem ; d eployment of fun d is nee d e d If Gap is (-)= then bank must arrange fun d sObjective of ALM-

**Ensure liquidity**Optimize earnings

If Outflows > Inflow , Liquidity Risk is High