1. Repo Rate - Repo stands for repurchase option rate. Repo rate means the rate at which the commercial banks borrows money from central bank.
a) It is basically a contract in which the bank provides securities such as treasury bills, commercial paper etc while availing loans with a commitment to repay at a predetermined price.
b) Central bank gives 1 day or overnight loan to commercial banks. Banks repay the loan and repurchase the securities given as collateral.
c) Repo rate is the important part of monetary policy of India as central bank used it to regulate the inflation.
d) When inflation is on the rise, the purpose of central bank is to reduce the money supply in the economy for which it increases the repo rate, so that commercial bank gets loans at higher rate and it provide loans to customers at higher rate of interest, so that less customer takes loan and spend less. Thus causing the reduction in money supply in the economy.
e) On the other hand, when the central banks wants to increase the money flow in the economy. It reduces the repo rate, so that commercial banks get loan at lower rate and it provides loan to customers at lower rate, then more and more customer takes loans and spend more. Thus, increasing the money flow in the economy.
2. Reverse Repo Rate
a) Reverse repo rate means the rate at which interest is earned by commercial banks on the surplus amount deposited with central bank. When the banks have idle cash that is not used for lending, then they deposit the amount with central bank to earn interest on the idle funds.
b) Reverse repo rate has a inverse relationship with inflation. In case of inflation, central bank increase reverse repo rate because in case of inflation less people will take loans as interest rate increases, so banks have more idle funds. Therefore, central bank encourage commercial banks to deposit the idle funds with central bank by increasing the reverse repo rate.
3. Cash Reserve Ratio (CRR)
a) CRR is the amount that the commercial banks are required to kept in the form of cash and cash equivalents with central bank and this amount cannot be given as loan to customers. CRR is calculated as percentage of their Net Demand and Time Liabilities (NDTL). The objective of CRR is to ensure the liquidity and solvency of the Banks.
b) When CRR is reduced, the banks have to kept less amount of money with central bank and it increases the money supply in the economy. This means banks have more money to provide as loans and due to this interest rates comes down.
c) When CRR is increased, the banks have to kept more amount of money with central bank and it reduces the money supply in the economy. This means banks have less money to provide as loans and due to this interest rate increases.
d) No interest is received on amount kept as CRR with central bank. Therefore banks prefer to have lower CRR because they can earn interest on the amount disbursed as loan.
e) CRR is to be maintained daily as percentage of NDTL on last friday of second preceding fortnight.
f) Banks have to pay penalties in case they not maintain CRR of bank rate + 3% on shortfall in case of one day and bank rate + 5% on shortfall in case of subsequent default days.
4. Statutory Liquidity Ratio (SLR)
a) SLR is the amount that is calculated as a percentage of their Net Demand and Time Liabilities (NDTL) that the banks has to kept in the form of liquid assets like cash, gold , government securities etc.
b) All the commercial banks in India are required to maintain SLR asper section 24 and section 56 of the Banking Regulations Act 1949.
c) The main objective of maintaining SLR is to impose restriction on banks to liquidate their liquid assets when the CRR is raised by central bank because when CRR is raised, the commercial banks have to kept more money with central bank and banks have less money to disburse as loan in the economy. So, to avoid liquidating liquid assets, central bank has made mandatory for banks to maintain SLR every day.
d) Interest is received on amount kept in the form of liquid assets for the purpose of SLR.
e) SLR is to be maintained daily as percentage of NDTL on last friday of second preceding fortnight.
f) In order to monitor the flow of money in the economy, central bank uses the tool of SLR.
5. Marginal Cost of Funds based Lending Rate (MCLR)
a) History
i) In April 2003, Benchmark Prime Lending Rate (BPLR) policy was introduced which says that banks have to charged interest rate to its creditworthy customers, every bank has to approve its BPLR by its Board but no fixed formula is defined and there is no transparency. No effect of Repo Rate on Interest Rate.
ii) In July 2010, Base Rate was introduced in which banks are defined to charge minimum rate of interest to its customers. Formula was defined to calculate base rate. In this interest rate is calculated by base rate plus spread. Banks clearly defines the base rate and the extra rate charged to customers. But there is flexibility in calculating the bank's cost of funds and there is still no transparency in base rate.
iii) In April 2016, MCLR policy was introduced. In this RBI has mentioned the exact formula for calculating MCLR. So, the banks used to charged the MCLR plus spread.
b) Marginal cost of funds is calculated by taking 92% of marginal cost of borrowings plus 8% return on net worth.
c) Marginal cost of borrowings includes marginal rate (rate given on new deposits) on current, savings and term deposits and marginal rate on short term (Repo), long term (other banks & bonds) & foreign currency borrowings, interest not earned on CRR deposit with central bank, operating cost of banks and tenor premium (banks charged premium for long term loans).
d) MCLR is applicable only on commercial banks not on NBFCs they have PLR (Prime lending rate).
e) MCLR is to published every month for atleast overnight MCLR, one-month MCLR, three-month MCLR, six-month MCLR, one year MCLR. It means interest rate is reset after the defined period and MCLR is also changed.
f) Still Repo rate changes are not directly reflected in interest rates. Central bank need to consider the issues and come out with changes in regulations related to MCLR.
6. CIBIL Report
a) CIBIL is a credit bureau or credit information company. The registered banks and several other financial institutions periodically submit their information to CIBIL. On the basis of information, CIBIL provides CIR (Credit Information Report) as well as credit score.
b) CIBIL offers :-
i) Credit Score - It refers to a 3 digit numeric value which defines the creditworthiness of the customer. It ranges between 300 to 900. Customer having score of 750 or more are considered creditworthy and assumed that they are able to pay the sum due to them.
ii) Credit Report - Credit report contains various information that CIBIL fetches from various financial institutions.The important part of this report are credit score, individual's personal information, employment details, contact information and account details.
iii) Credit Report for Companies - Credit report for companies contains its past credit history. Companies potential lenders, existing credit which the company has, any pending lawsuits and outstanding amount.
c) Credit score provided by CIBIL report can be influenced by the repayment history of the borrower, the amount of credit utilize by the borrower against the credit authorize to him, increase in the number of credit cards and loans sanctioned to you which simply provide the amount of increase in debt.
7. Non - Performing Assets
a) Non - performing assets are the loans which are disbursed by the banks and financial institutions and on which payments are not received regularly.
b) Following are the different conditions in which the loans disbursed by banks are considered as NPA as per master circular RBI/2012-13/39 issued by RBI dated July 2, 2012 :-
i) Interest and/or installment or principal remain overdue for a period of more than 90 days in respect of a term loan.
ii) The accounts remains out of order in respect of an Overdraft/ Cash Credit (CC).
iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.
iv) The installment of principal or interest there on remains overdue for two crop seasons for short duration crops.
v) The installment of principal or interest there on remains overdue for one crop season for long duration crops.
vi) The amount of liquidity facility remains outstanding for more than 90 days in respect of securitisation transaction undertaken.
vii) In respect of derivative transactions, the overdue receivables representing positive mark to market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.
c) Income from non performing asset is not recognised on accrued basis but on the basis when income is actually received.
d) Categories of Assets
i) Standard Assets - Assets which are not NPA and on which regular payment of installment and/ or interest are received.
ii) Substandard Assets - Assets which remain NPA for a period less than or equal to 12 months.
iii) Doubtful Assets - Assets which remains under substandard category for a period of 12 months.
iv) Loss Assets - A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.
e) Provisioning of NPA
i) Standard Assets - Banks should make general provision for standard assets at the following rates:
- Direct advances to agricultural and small and medium enterprises (SME) sectors at 0.25 percent.
- Advances to commercial real estates (CRE) sector at 1 percent.
- All other loans and advances not included above at 0.40 percent.
ii) Substandard Assets
- In case of loans which are secured by collateral security like immovable property,movable property, fixed deposits, life insurance policy etc, the provision on NPA loans is 15%.
- In case of loans which are not secured, the provision on NPA loans is 25% because in case of unsecured loans, risk is more than secured loans as in case of secured loans, banks/financial institutions have collateral security to recover the money in case of loans become NPA.
iii) Doubtful Assets
- If loans remained doubtful for upto one year, then in case of secured loan provision is 25%.
- If loans remained doubtful for one to three years, then in case of secured loan provision is 40%.
- If loans remained doubtful for more than three years, then in case of secured loan provision is 100%.
- In case of unsecured loans, irrespective of period of loans, the provision is 100%.
iv) Loss Assets - In case of loss assets, provision is for 100%.
8. Letter of Credit
i) Letter of credit is a secure way to make payments in case of import of goods.
ii) Steps involved in the process of letter of credit:-
- Buyer (Importer) in India make a sales contract for the sale of goods with the seller (exporter).
- Buyer (Importer) makes a request to open the letter of credit to the importer's bank (opening bank/issuing bank) in India.
- Importer's bank send the letter of credit to the exporter's bank (advising bank) outside India.
- Seller's (exporter's) bank deliver the letter of credit to the seller (exporter).
- After receiving the letter of credit, the seller releases the goods to buyer.
- After releasing the goods, seller present the documents to the nominated or negotiating bank and the nominated bank make payment to seller.
- Nominated bank demands payment by sending documents to opening bank and opening bank send all documents to the importer and take approval of applicant (buyer) whether the goods are received as per the requirement.
- After that the opening bank demands payment from applicant.
-Then, applicant makes payment to opening bank.
- After receiving payment from applicant, opening bank makes payment to the nominated bank.
iii) An letter of credit is a way to ensure payment will be received correctly in international transaction. It guarantees the buyer's payment will be paid to the seller on time.
iv) A letter of credit is issued against collateral security like Bank Deposits, Fixed Deposits etc.
v) Bank charges fees for issuing letter of credit.
vi) All parties in letter of credit deal in documents and not goods or services.
vii) Payment will not depend on defects in goods or services.
viii) Advantages of Letter of Credit
a) For Seller
- Protection against buyer's payment default.
- Reduced production risk in case order is changed or cancelled as if buyer cancels the order and letter of credit is issued then buyer has to take the goods already ordered.
b) For Buyer
- Certainty of goods to be received.
- Letter of credit shows solvency for the buyer and allows the buyer to reduce or eliminate initial payment.
9. Bank Guarantee
i) A promise from a bank that the liabilities of a borrower will be met in the event that the borrower fails to fulfill his contractual obligations.
ii) If the borrower makes payment as per the contract or fulfills his obligations as per the contract, bank need not to pay. It reduces the transaction risk and trust issues.
iii) Important features of Bank Guarantee
- It defines the validity period of bank guarantee like 3 months, 6 months, 12 months, 10 years etc.
- It mentions the specific amount of which bank guarantee is given.
- It mentions the purpose of bank guarantee.
- Events under which it can be invoked.
- Bank guarantees given against collateral security like bank deposits, fixed deposits, mutual funds, any other securities etc.
- Bank charges a fee to issue bank guarantee.
iv) Bank provides guarantee for contracts, government tenders etc.
v) Both the parties does not have trust on each other, bank guarantee reduces the risk and execute the transaction.
10. Banking Ombudsman
i) Banking ombudsman is an authority formed to resolve the complaints of customer of banks.Initially commercial banks, regional rural banks and scheduled primary co-operative banks are covered but now RBI has extends it to NBFC also.
ii) Following are the few grounds of compliant under banking ombudsman:-
- Non payment or inordinate delay in the payment or collection of cheques, drafts, bills etc.
- Non acceptance, without sufficient cause, of small denomination notes tendered for any purpose and for charging of commission in respect thereof.
- Non acceptance, without sufficient cause, of coins tendered and for charging of commission in respect thereof.
- Non acceptance or delay in payment of inward remittances.
- Failure to issue or delay in issue of drafts, pay orders or bankers cheques.
- Non-adherence to prescribed working hours.
- Failures to provide or delay in providing a banking facility (other than loans and advances) promised in writing by a bank or its direct or its direct selling agents.
- Other grounds of complaints
iii) A complaint filed can be rejected if:
- The bank has not approached for redressal of grievance.
- No complaint has been made within one year from the date of receipt of the reply of the bank of if no reply is received and the complaint to banking ombudsmen is made after the time period of one year and one month from the date of complaint to the bank.
- The subject matter of the complaint is pending for disposal/ has already been dealt with at another forum.
- If the complaint has the same subject matter that was settled in the past through the office of banking ombudsman in any proceedings.
- Frivolous (not having any serious purpose) or vexatious (causing or tending to cause annoyance, frustration or worry) complaints.
iv) Procedure for filing complaint with banking ombudsman
- A complaint can be filed online by visiting the following link:
Banking Ombudsman
- Following questions will be asked:-
a) Have you made a written complaint to the bank? - Yes/No
b) If yes, whether 30 days are over from the date of lodging the complaint? - Yes/No
c) If the above two questions are answered Yes, then the following details are required:
- Bank Name
- Account Number
- Complainant Name
- Mobile Number
d) Once the details are filled, the website is redirected to the complaint form.
e) There is also an option to upload documents against the concerned bank.
v) Limit on the amount of compensation (Award)
- The amount to be paid by bank to the complainant by way of compensation for any loss suffered by the complainant is the lower of
a) Loss suffered due to any act or omission of the bank.
b) Rs 20 lakhs.
- In case of mental agony and harassment, the banking ombudsmen may award compensation not exceeding Rs 1 lakh to the complainant and while passing an award the banking ombudsmen may consider the time lost by the complainant, expenses incurred by the complainant and harassment and mental agony suffered by the complainant.
vi) If one is unhappy with the decision of banking ombudsman, an option is given to file an appeal with the Appellate Authority within a period of 30 days from the date of receipt of award.
11. Bank Overdraft
i) Overdraft stands for a credit facility which is provided to an individual or company against their collateral security from the bank. It is similar to taking loans from bank.
ii) An overdraft limit is determined on the basis of credit worthiness of a borrower and the availability of collateral or a guarantee.
iii) There are different types of overdraft facility provided by the banks like overdraft against salary, overdraft on savings account, overdraft against time deposits, overdraft against mortgages.
iv) Interest is calculated on the overdrawn amount. A business only pays interest on the amount of overdraft facility used.
v) If the overdraft facility is based on security, then the maximum limit of overdraft is 60-85% of security value and if there is no security provided for overdraft, then it is upon bank's discretion for the limit of overdraft.
vi) In case of secured overdraft, security can be fixed deposits, life insurance policies, mutual funds etc and the unsecured overdraft is based on average balance in current account and past relationship with the bank.
12. Cash Credit
i) Cash credit is a short term load provided to the business entity to meet its working capital requirements.
ii) There is a cash cycle period comprising the period starting from purchase of raw material, conversion of raw material into work in progress, conversion of work in progress into finished goods, sale of finished goods to customer and payment received from customer. Till whole period there is no outflow, only your working capital is blocked. So, to run the business in that period, organisation has to take short term working capital loan.
iii) Cash credit is a secured loan against inventories and receivables.
iv) Maximum limit of cash credit is 50 to 60% of total value of inventory and receivables.
v) Purpose of cash credit is only for purchasing and keeping inventory and receivables.
13. Drawing Power (DP)
i) Drawing power is a term used in cash credit and it means the limit upto which the amount can be withdrawn from cash credit account.
ii) It is calculated on receivables plus inventory less payables.
iii) Banks have a practice to update the drawing power on monthly or quarterly basis.
iv) The customer has to periodically submit the stock statements and the value of receivables and payables to calculate the amount of drawing power.
v) Stock considered for calculating drawing power should be insured stock as stock not covered under insurance does not reflect the true drawing power and increases the risk of bank.
vi) The margin is deducted from the amount net of creditors and stock and the margin on debtors is also deducted.
vii) Less than 90 days debtors are considered for calculating drawing power.
14. Nostro Account
i) A Nostro account is an account denominated in foreign currency established through your local bank at a bank in the respective country of the currency desired.
ii) The nostro word is derived from latin terms meaning ours.
iii) A nostro account is always in foreign currency.
iv) For example, Citi Bank, America uses nostro account to refer to account that's held by SBI means citi bank says our money deposited in SBI.
15. Vostro Account
i) A Vostro account is an account denominated in local currency maintained by foreign bank.
ii) The vostro word is derived from latin word meaning yours.
iii) A vostro account is always in local currency.
v) In above example of nostro account, similarly SBI refers to Citi Bank account as vostro means your money deposited in our account.
Thank you for Reading!
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