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ACKNOWLEDGEMENT
This is the fact that Success can never be achieved single handled. The
project work is always an outcome of team efforts. A number of people have
contributed towards making this project a success. Some have given advice,
contributed towards making this project a success. Some have given advice, while
some have given their valuable suggestions. Without the help and guidance of The
Bhuj Mercantile Co-operative Banks staff members we would have neither instigate
nor accomplished this project to such a great extent. So we are very much thankful to
all of them for their kind co-operation and their efforts that made complete this project
successfully.
We express our deep sense of gratitude and special thanks to Mr. Mahendra
Morabia (Chairman) and Mr. V. P. Shankarwala ( Branch manager ), who gave us to
grab the opportunity our talent. We extent our sincere thanks to project guides Mr.
Ravi Pamwani (Assistant Manager), Mrs.Anjali Mulchandani (Chief Officer),
Mr.Hitesh Tank (EDP Clerk), Mr. Ashok Mishra (Chief Officer), Mrs. Charanjeet
Panjriwala (Officer),Miss Sandhya Tanna (Clerical staff) of BMCB Gandhidham
branch who helped us during the course of our project and for their gracious attitude.
We would like to thank the full staff of BMCB and would admit that they were very
cooperative and willing to share information.
We take this opportunity of expressing our heartiest gratitude to Dr.
Sampada Kapse and Prof.Suresh lalwani, faculties of TIMS for their kind cooperation
and guidance for the project. We thank them for their special interest, counsel and
encouragement.
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EXECUTIVE SUMMARY
This study is attempted with an objective of getting knowledge regarding
risk management, policies and procedure of The Bhuj Mercantile Co-operative Bank
Ltd., Gandhidham Branch. The whole project also gives us the knowledge regarding
core banking that is operational banking with risk associated with each activity. And
analysis of activities is done to understand the risk and its measuring tools.
Risk is inherent in any walk of life in general and in financial sectors inparticular. Till recently, due to regulated environment, banks could not afford to take
risks. But of late, banks are exposed to same competition and hence are compeled to
encounter various types of financial and non-financial risks. Risks and uncertainties
form an integral part of banking which by nature entails taking risks.
Thus the basis idea behind studying and analyzing the financial terms is not
only comparing their performance but to find out the scope and importance of it.
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DECLARATION
We, Komal Lalwani and Dinky Khandor students of Tolani Institute of
Management Studies, perusing post graduate diploma in business management declare
that the summer training project report prepared by our self at BMCB is our original
work and is based on study we have undertaken during two months training at BMCB
Dinky Khandor Komal lalwani
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OBJECTIVE
As we all know without aim life is nothing; in the same way each and every
activity also requires specific objective. Following were our objectives for this
project.
To study the banking operations in detail and risk associated with it.
To obtain general information about risk management and its measuring
tools. Measures taken by bank to reduce the risk which are faced by them.
To get the deeper knowledge of the banking sector.
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METHODOLOGY
Primary data:
Personal meetings with manager constituted as our basic source of
information. This includes discussion on various topics in different department and
with concerned person.
Secondary data:
Our secondary data constituted from various websites related to risk management.
The names of the websites respectively are mentioned in the bibliography.
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[1] INTRODUCTION
[1.1] Introduction of Banking
Define: Banking
Banking regulation act of India, 1949 defines banking as financial
intermediary that accepts deposits and channels those deposits into lending activities.
Banks are a fundamental component of the financial system, and are also active player
in financial markets. The essential role of a bank is to connect those who have capital
(such as investors or depositors), with those who seek capital (such as individuals
wanting a loan, or businesses wanting to grow). Accepting ,for the purpose of lending
or investment of deposits of money from the public ,repayable on demand or
otherwise and withdrawals by cheques, drafts, and order or otherwise.
The RBI was established to organize effective control over the currency
management in the interest of country benefits and to maintain financial stability. The
power of control and supervise the cooperative bank is with the RBI. The UCB is
wedded to the social objectives with a strong sense of social purpose. It has
democratic management and predominantly a democratic character which is the
essence of co-operation.
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ABOUT BANKS
An institute providing banking service is known as a bank. This
institute continuously tries to maintain balance between profitability and
liquidity. For maintaining this balance the management of the bank must be of a
high level. The History of banking in India dates back to the early half of the
18th century. 3 Presidency Banks that were established in the country namely
the Bank of Hindustan, Bank of Madras and Bank of Bombay can also be
referred to as some of the oldest banking institutions in the country. The State
Bank of India that was earlier known as the Bank of Bengal is also one of the
oldest in the genre.
IN modern age, banks have become centres of faith of millions of
persons that is why in real life its meaning has been derived as a place of
putting faith. For expressing faith it is said proverbially, I bank on you. Such
deposits are used for lending to others and not for financing its own business of
any kind. The term lending includes both direct lending to borrowers and
indirect lending through investment in open market securities. A bank generates
a profit from the differential between what level of interest it pays for deposits
and other sources of funds, and what level of interest it charges in its lending
activities. This difference is referred to as the spread between the cost of funds
and the loan interest rate.
Banks safeguard money and valuables and provide loans, credit, and
payment services, such as checking accounts, money orders, and cashiers
checks. Banks also may offer investment and insurance products. In spite of
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these changes, banks continue to maintain and perform their primary role
accepting deposits and lending funds from these deposits.
BANKING SECTOR IN INDIA
The banking sector is a lifeline of any modern economy. It is one of the
important financial systems, which plays a vital role in the success / failure of any
economy. Banks are one of the oldest financial intermediaries in the financial system.
They play an important role in the mobilization of deposits and disbursement of credit
to various sector of the economy. The banking system is the fuel injection system
which spurs economic efficiency by mobilizing savings and allocating them to high
return investments.
The banking system reflects the economic health of the country and
efficiency of financial system, which, in turn, depends on a sound and solvent banking
system. A sound banking system efficiently deploys mobilized saving in productive
sectors and a solvent banking system ensures that the bank is capable of meeting its
obligation to the depositors.
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Types of bank
Public sector banks in India - All government owned banks fall in this variety.
Besides the RBI, SBI and its associate banks and about 20 nationalized banks. Many
of the regional rural banks that are funded by the government banks can also be
clubbed in this genre.
Private sector banks in India - A new wave in the banking industry came about
with the private sector banks in India. With policies on liberalization being
generously taken up, these private banks were established in the country that also
contributed heavily towards the growth of the economy and also offering numerous
services to its customers. Some of the most popular banks in this genre are: Axis
Bank,HDFC Bank, ICICI Bank, Kotak Mahindra Bank and SBI Commercial and
International Bank.
Cooperative banks in India - With the aim to specifically cater to the rural
population, the cooperative banks in India were set up through the country. Issues
like agricultural credit and the likes are taken care of by these banks.
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SERVICES OFFERED BY BANKS:-
Although the type of services offered by a bank depends upon the
type of bank and the country, services provided usually includes:
1. Acceptance of deposits from the public.
2. Lending out money to companies and individuals.
3. Facilitating money transfers such as online transfers and Demand drafts.4. Issuing credit card, ATMs and debit card.
5. Internet banking.
6. Storing valuables particularly in a safe deposit vault or lockers to keep
jewellery.and valuable documents of customers in safe custody.
7. Acting as trustees.
8. Acting as intermediaries for customers to buy and sell securities on their
behalf, making and receiving payments on behalf of its depositor.
9. Issues letter of credit, Bank Guarantees.
10. Issues travellers cheques for the convenience of customers.
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[Chart-1] STRUCTURE OF BANKING IN INDIA
ABOUT CO-OPERATIVE BANKS
Co-operative bank is a special form of business organization aiming
at the economic enlistment of the members and laying a great emphasis on
moral principles and human value. The cooperative bank gave a special task of
taking up the responsibility of helping the economically weaker and poor as
well as other marginal sector of the society. These banks originated in India
with enactment of the cooperative credit societys act of 1904. a new act was
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passed in 1912, which provided for the establishment of cooperative banks by
the union of primary credit societies and individuals.
The Co-operative banks have a history of 100 years. The Co-operative
movement originated in the west, but the importance that such banks have
assumed in India is rarely paralleled anywhere else in the world. Their role in
rural financing continues to be important even today, and their business in the
urban areas also has increased phenomenally in recent years mainly due to the
sharp increase in the number of primary co-operative banks.
While the co-operative banks in rural areas mainly finance agricultural
based activities including farming, cattle, milk, hatchery, personal finance etc.
along with some small scale industries and some employment driven activities,
the co-operative banks in urban areas mainly finance various categories of
people for self employment, industries, small scale units, home finance,
customer finance, personal finance etc. Some of the co-operative banks are
quite forward looking and have developed sufficient core competencies to
challenge state and private sector banks.
According to NAFCUB the total deposits & lending of Co-operative
banks in much more than Old Private Sector Banks & also the new private
Sector Banks. This exponential growth of Private Sector Banks is attributed
mainly to their much better local reach, personal interaction with customers, and
their ability to catch the nerve of the local clientele.
[1.2] Introduction of BMCB
[Table-1]The Bhuj Mercantile Cooperative Bank
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NAME THE BHUJ MERCANTILE CO-OPERATIVE BANK LTD.
CORPORATE
OFFICE
PLOT NO. 19, SECTOR NO. 9, OPP.SBI,BMCB HOUSE,
BANKING AREA GANDHIDHAM- 370 201
TYPE PUBLIC
ESTABLISHED 2001
LOCATION GANDHIDHAM
KEY PERSONS SHRI MAHENDRA MORABIA( CHAIRMAN)
SHRI (VICE CHAIRMAN)
SHRI (MANAGING DIRECTOR)
GENERAL
MANAGER
MR.. V. P. SHANKARVALA
INDUSTRY BANKING
` FINANCIAL SERVICE
WEBSITE www.bmcbonline.com
DEPOSITS Rs.2279751046.49
LOANS &
ADVANCES
Rs.1071827396.42
NET INCOME Rs.10593527.64
NO. OF
EMPLOYEES
24
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Need is the origin of creation. True, The Bhuj Mercantile
Cooperative Bank Limited was registered in April 1994 and commenced
Banking Business on 15/05/1995 with Bhuj branch. The Bank has been
promoted by its Founder Chairman Shri Mahendra H. Morabia (Chartered
Accountant).
The Bhuj Mercantile Cooperative Bank comes under the control of
RBI and UCB. To maintain the working of the bank properly the first step is to
study the basic operations of the bank. The basic operations help to study
management of the bank. The main power to control the currency supply in the
economy rests with the RBI. By credit control analysis is the way to find how
the bank maintains its liquidity
BMCB VISSION STATEMENT: To maximize customers and
shareholders value continuously.
BMCBS POLICY TO SURVIVE IN COMPETITIVE BANKING
SECTOR
Prime motto ANYTIME ANYWHERE BANKING SERVICE.
BMCB is the ONLY Cooperative Bank to have DOUBLED its Deposits
from 2001 to 2003 in the aftermath of MMCB crisis.
BMCB is the FIRST Bank in India to give ANYTIME ANYWHERE
BANKING through leased line and Optical Fiber Cable interconnectivity linking ALL
EIGHT BRANCHES. The NON PERFORMING ADVANCES of the Bank are NIL for NINE YEARS
IN A ROW! This shows SOUNDNESS of the Loans and Advances APPRAISEL,
DISBURSEMENT AND RECOVERY system in the Bank.
BMCB- The only Bank in the Country providing 365 days non-stop complete
banking. It offers 24hours total banking along with Telebanking, Homebanking and
ATM services.
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BMCB believes in CUSTOMER SATISFACTION (provides the banking
product as per the requirement of the customer.
BMCB takes into consideration the SOCIAL RESPONSIBILITY (like
maintenance of amusement park, school, hospital etc).
BMCB also provides BORROWERS FRIENDLY LOAN schemes.
BMCB has also made the special DEPOSIT SCHEMES for senior citizens, NRI,
shareholder.
Every service provided by BMCB is VALUE INTENSIVE AND COST-
EFFECTIVE.
BMCB have been in the forefront in removing economic backwardness of Kutch
district by providing TIMELY, QUICK AND CONTINUOUS finance to various
sectors.
Opened up its branches at many places in Kutch. It has its eight branches spread
all over Gujarat which include:
[Table-2] Different Branches of BMCB
Sr. no Branch Opening year
1 BMCB Bhid Bazaar now
(Market Yard) Bhuj
1995
2 BMCB station road Bhuj 1997
3 BMCB hospital road Bhuj 1999
4 BMCB Anjar 2000
5 BMCB Gandhiham 2001
6 BMCB Madhapar 2001
7 BMCB Nakhatrana 2001
8 BMCB Ahmedabad 2003
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BMCB - Special Features
Online Real Time Inter Branch Connectivity.
Internet Banking.
Mobile Banking.
Tele Banking.
Home Banking.
24*7 ATMs.
Safe Deposit Vaults.
DICGC Deposit Insurance cover upto Rs. 1 lac.
Accepting NRI Deposit
ACHIEVEMENTS OF BMCB:
1. Net profit (2006-07) - Rs.5.10 crores.
2. Net profit (first 5 months 2007-08) - Rs.3.78 crores.
3. 0% NPA Award.
4. Bank with difference Award 2007.
5. Best Bank Award.
6. Rajeev Gandhi shiromani Award.
7. BMCB- The fastest growing Bank
Future planning of BMCB.
Merger & acquisition.
Installation of ATMs at various branches.
Installation of KIOSK at various branches.
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[1.3] Introduction of Risk Management
The etymology of the word Risk can be traced to the Latin word
Rescummeaning Risk at Sea or that which cuts. Risk is associated with uncertainty
and reflected by way of charge on the fundamental/basic i.e. in the case of business it
is the Capital, which is the cushion that protects the liability holders of an institution.
These risks are inter-dependent and events affecting one area of risk can have
ramifications and penetrations for a range of other categories of risks. Foremost thing
is to understand the risks run by the bank and to ensure that the risks are properly
confronted, effectively controlled and rightly managed. Each transaction that the bank
undertakes changes the risk profile of the bank. The extent of calculations that need to
be performed to understand the impact of each such risk on the transactions of the
bank makes it nearly impossible to continuously update the risk calculations. Hence,
providing real time risk information is one of the key challenges of risk management
exercise.
Till recently all the activities of banks were regulated and hence operationalenvironment was not conducive to risk taking. Better insight, sharp intuition and
longer experience were adequate to manage the limited risks; Business is the art of
extracting money from others pocket, without resorting to violence. But profiting in
business without exposing to risk is like trying to live without being born. Everyone
knows that risk taking is failure prone as otherwise it would be treated as sure taking.
Hence risk is inherent in any walk of life in general and in financial sectors in
particular. Of late, banks have grown from being a financial intermediary into a risk
intermediary at present. In the process of financial intermediation, the gap of which
becomes thinner and thinner, banks are exposed to severe competition and hence are
compelled to encounter various types of financial and non-financial risks. Risks and
uncertainties form an integral part of banking which by nature entails taking risks.
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Business grows mainly by taking risk. Greater the risk, higher the profit and
hence the business unit must strike a trade off between the two. The essential
functions of risk management are to identify measure and more importantly monitor
the profile of the bank. While Non-Performing Assets are the legacy of the past in the
present, Risk Management system is the pro-active action in the present for the future.
Managing risk is nothing but managing the change before the risk manages. While
new avenues for the bank has opened up they have brought with them new risks as
well, which the banks will have to handle and overcome.
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OPERATIONS
IN
BMCB
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Banks usually perform these two basic services:
1. Accept deposit from general public.
2. Lending loan to general public.
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[2]
DEPOSITS
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[2.1] INTRODUCTION OF DEPOSITS
Acceptance of deposits and maintenance of deposits account in the core
activity in any bank. The very basic legal interpretation of the word BANKING as
defined in the baking regulation act, 1949 means accepting deposits of money, for the
purpose of lending or investment, from the public, repayable on demand or otherwise,
and withdrawable by cheque, draft, order or otherwise. Thus, deposits are the measure
resources and mainstay of a bank and the main objective of a bank are to mobilize
adequate deposits. Various instruction, guidelines, etc. issued from time to time
primary co-operative banks in regard to opening and conduct/monitoring of deposit
accounts.
Accepting deposit from general public
Banks provide this facility to their customer so that the customers can keep
their money in safe place. Banks also provide benefits to their customer in the form of
interest on deposit, which is based on the type of deposit which varies in period.
Deposits are of three types:
Demand deposit:
It is one type of current deposit. The customer can withdraw the
amount from current deposit at any time. In this type of deposit, the bank does
not pay any interest. But infact charges some amount from the customer.
Saving deposit:
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In this type of deposit, Bank pays certain percentage of interest to the
customer and also places certain restrictions on the withdrawals.
Fixed deposit:
In this type of deposit, period is fixed and a person can withdraw the
amount on at the expiry of specific period. Interest is also paid to customers
which vary from time to time.
PRODUCTS OF BMCB
Saving Accounts:
Minimum Balance: Rs. 1000
Ordinary saving account
Current Accounts:
Ordinary Current Account.
Minimum Balance: Rs. 2500
ADVANTAGE Current Account.
VISHESH Current Account: If minimum balance of Rs.1 lakh is there in the
account then no extra charges or commission on DD and for clearing is
taken
Fixed Deposit:
FD Simple (less than 18 months)
FD Quarterly
FD Double ( Period 84 months)
FD Accumulate (Above 18 months)In FD customer receive compound
interest.
FD Recurring: In FD Recurring, customer deposit the fixed amount.
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[Table-3] Fixed Deposits Interest Rate
Period Interest Rate
15 days to 30 days 3.5%
31 days to 90 days 4.5%
91 days to 180 days 6.0%
]181 days to 365 days 7.0%
366 days to 5 years 8.0%
For
Shareholder,Sr.Citizen & Trust
0.5%more
Expenses on activities pertaining to deposits accounts include:
Cost of opening an account including not only the cost of making
book entries, but verification of your antecedents.
Cost of transaction of deposit.
Cost of transaction of withdrawals.
Cost of transacting an inquiry.
Cost of processing cheques and other banking tools discussed earlier.
Cost of maintaining accounts.
Cost of making passbook or receipts.
Cost of closing account.
Cash Credit Accounts:
Ordinary Cash Credit Account
Interest charges on the basis of days
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Overdraft Account
When a customer maintain a current account is allowed by the bank to draw
more than the credit balance in the current account or in a separate loan account called
as overdraft account and such facilities is called an overdraft facility.
Overdraft is a running account and hence debits and credits are freely
allowed. Interest is applied on daily product basis and debited to the account on
monthly basis. Overdrafts are generally against the government securities, National
Saving Certificates, LIC policies and banks own deposits etc.
DOCUMENTS REQUIRED
1. Sanctioned Letter
2. FDR Duly Discharged
3. Letter of Appropriation
4. D.P. Note
5. Continuing Security Letter
6. Letter of lien and set off
FACILITIES PROVIDED
ATM facility is provided
In Outward Billing Collection commission is not charged by the customers.
Pass book and cheque book facility is provided.
Free Demand Draft facility up to opening balance for Gujarat / Mumbai
If pass book is not issued then bank statement is given once a month without
any charges taken.
Nomination facility is provided
Tele banking facility is provided
Net banking facility is provided
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Insurance up to Rs.100000
No charges on cash transaction
No limits for cash withdrawal
No switching charges
[Table-4] FINANCIAL FIGURES (In Rs.)
Sr.
No. Particular 31/03/2006 31/03/2007 31/03/2008 31/03/2009 31/03/2010
1 Deposits 1141093115 1426181431 1585778581 1900101781.51 2279271046.49
2 Advances 732891970 852798340 744051401 844026992.69 1071827396.19
3 Net Profit 24064462 32018382 22035178 61376055.70 10593527.64
4 Reserves 201614920 227943138 280044401 314386327.96 352871043.23
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[Chart -2]Deposits
[Chart-3] Advances
[Chart-4] Net Profit
[Chart-5] Reserves
POINTS TO BE TAKEN IN TO CONSIDERATION WHILE
RECEIVING THE CHEQUE
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Date on the cheque should not be post dated.
Name and amount on the cheque and voucher should be same.
Place should be kept in mind while receiving the cheque.
On counter & voucher, the name of the account, account number, dates etc.
Amount in words and figures should be same.
Validity of cheque is up to 6 months.
Cheques should be account payee only.
Vouchers should be filled according to their types of accounts.
[Table-5] Different Voucher for Different Types of Account
ACCOUNT TYPE COLOR
SAVING ACCOUNT WHITE WITH GREEN
CURRENT ACCOUNT WHITE WITH BLUE
LOAN YELLOW WITH BOTTLE GREEN
RECURRING ACCOUN/ FIXED
DEPOSIT
WHITE WITH LIGHT PINK
DEMAND DRAFT WHITE WITH DARK PINK
FRANKING WHITE WITH BROWN
CASH CREDIT/ OVERDRAFT WHITE WITH PURPLE
TELEPHONIC TRANFER CREAM WITH BLACK
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[2.2] TRANSFER
In Transfer, both the parties have accounts in the bank, and transfer of money
from one account to another is done.
PROCESS OF TRANSFER
Cheques are received from customer of BMCB during whole day.
Voucher is filled according to the types of accounts, voucher includes
details like account name, account number, date, drawee bank, cheque
number, customer name, amount in figures & words, customers contactnumber.
Transfer stamp is stamped on voucher and cheque.
Stamped counter is returned to customer and rest is sent for entry.
Before passing the entry, balance is checked.
If balance is sufficient then entry is passed in which amount is debited and
credited to accounts of account holders.
If there is insufficient then BMCB debited return charges, Rs.50/- from
cheque issuer and Rs.30/- from cheque receiver.
At the time of passing the entry scroll number is written on the cheque and
voucher.
After passing of entry authorization is done by high grade of officers with
the help of scroll number.
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[2.3]CLEARING
In clearing, the cheques received from other banks by the account holder of
the bank and are deposited in their accounts after the cheques are cleared.
PROCESS OF CLEARING
Cheques are received from the customers of different banks up to specified
time.
Cheques of 37 banks are received in clearing.
Voucher is filled according to the types of accounts, voucher includes
details like account name, account number, date, drawee bank, cheque
number, customer name, amount in figures & words, customers contact
number.
Clearing stamp is stamped on voucher and cheque.
Stamped counter is returned to customer and rest is sent for entry.
Entry includes account number, parties name, amount, bank code, bank
name, branch code, cheque number. Scroll number is written on the
voucher.
After passing of entry authorization is done by high grade of officers with
the help of scroll number.
Bank wise statement is printed and is attached with cheques of specified
banks.
Instruments are counted according to bank wise statement.
Daily there are two clearings in clearing house.
i. First at 1:00pm for exchanging of cheques.
ii. Second at 4:00pm for exchanging of returned cheques.
At 1:00pm one employee of BMCB takes all the cheques and a floppy disk
to clearing house. In Gandhidham clearing house is at State Bank of India.
At clearing house all 37 banks come to exchange their cheques with other
banks.
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Statement is received at clearing house by S.B.I. including all information
about exchanging of cheques.
In the case of GL/PL vouchers, ensure that the relevant particulars of
transaction are entered in the computer. Proper GL/PL head is
Debited/Credited. Such vouchers bear signatures of TWO authorized
officials of which one should be of branch head.
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[Table-6] THE BHUJ MERCANTILE CO-OP BANK
CLEARING HOUSE BALANCE REGISTEROf 27th
June,2010
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Sr.No. Name of the banks To Pay To Receive
Cheques Amount (Rs.) cheques Amount (Rs.)
1 STATE BANK OF INDIA 26 4638172 22 1229553
2 BANK OF BARODA 18 309239 21 4299552
3 BANK OF INDIA 11 1601078 22 1141383
4 CENTRAL BANK OF INDIA 2 22320 2 180615
5 STATE BANK OF SAURASHTRA
6 THE KUTCH DIST. CENT. 1 19800
7 DENA BANK 4 183465 7 49525
8 UCO BANK 5 600788 2 20370
9 GANDHIDHAM CO-OP BANK 22 356225 29 379687
10 INDIAN OVERSEAS BANK 5 93364 12 612707
11 SYNDICATE BANK 2 27475 1 14900
12 PUNJAB NATIONAL BANK 4 2124615 2 16122
13 STATE BANK OF INDORE 4 99403 4 205852
14 GANDHIDHAM MER.CO-OP.BANK 24 955968 36 1585194
15 DENA GUJARAT GRAMIN BANK 3 25688 3 229125
16 STATE BANK OF BIKANER &
JAIPUR
2 377070 3 344739
17 CORPORATION BANK 8 595750 37 936905
18 ORIENTAL BANK OF COMM. 2 51660 2 175000
19 MEHSANA URBAN CO OP BANK 3 64429 14 117162
20 UNION BANK OF INDIA 2 93189
21 LAXMI VILAS BANK 1 11000
23 HDFC BANK LTD 98 16584440 43 2047505
24 UTI BANK 18 911976 40 1615805.6
25 VIJYA BANK 6 61966 2 16300
26 ICICI BANK LTD 19 1706834 9 213296
27 INDUSIND BANK 12 1143469 12 304857
CENTURION BANK
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IN WHAT WAYS CHEQUE CAN BE RETURNED
Effects not yet cleared, please present again tomorrow
Not arranged for.
Drawers signature required.
Drawers joint signature required.
Refer to drawer.
Drawers signature differs.
Endorsements required banks guarantee.
Alteration requires full signatures of drawer.
Cheque is post-dated.
Cheque is out of date.
Amount in words and figures differs.
Crossed cheque is out of date.
Amount in words and figures differs.
Crossed cheque must be presented through a bank.
Advice not received, please present again.
Payment stopped by the drawer.
Payees separate discharge to the bank required.
Date incomplete.
Insufficient funds.
Account closed.
Today clearing stamp required.
Not drawn on us.
Exceeds arrangement
Fund expected, please present again tomorrow.
Cheque is incomplete.
Cheques are mutilated.
Thumb impression authentication required.
Account is frozen.
Cheque is crossed by two banks
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[Table-6] DIFFERENCE BETWEEN TRANSFER AND CLEARING
POINT OF
DIFFERENCE
TRANSFER CLEARING
DEFINITION In Transfer, both the parties
have accounts in the bank, and
transfer of money from one
account to another is done.
In clearing, the cheques
received from other banks
by the account holders of
the bank and are deposited
in their accounts after the
cheques are cleared.
STAMPING Red colour stamp is used for
transfer cheques.
Green colour stamp is used
for clearing cheques.
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TIME
DURATION
It takes maximum half an
hour.
It takes approximately one
day.
SERVICE Service is provided for whole
day.
From Monday to Friday
cheques are received up to
12:30am and on Saturday
cheques are received up to
11:00am
WITHDRAW In transfer, money can be
withdrawn within half an hour.
In clearing, money can be
withdrawn after one day.
RETURNED
CHARGES
Rs.25/- is charged if the
cheque is returned.
Rs.50/- is charged if the
cheque is returned.
DATE Same date cheques are
received.
Next date cheques are
received after 12:30/11:00.
STAMPS
INCLUDED
Banks name, date and transfer. Bank name, date, and
received payment through
clearing house payeesaccount credited.
[2.4] INWARD BILLS COLLECTION
In IBC, the cheques are received from different banks all over India other then local
cities.
Once IBC is received, bank checks whether it is BMCB cheque or it is local.
Than it is entered in the IBC register manually including all details like, date,
amount, banks name, in favour of, cheque number.
If it is BMCBs cheque, then it is sent for transfer or if it is local (other banks)
cheques then it is sent for clearing.
After that same process is followed of transfer and clearing.
Payment for IBC is made in three ways:
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i. Gujarat State Co-operative advised.
ii. Account payees.
iii. Demand Draft.
If cheque is of BMCB then, balance is checked, and if cheques are of other
banks then send for clearing.
1. If there is sufficient balance then,
i. GUJARAT STATE CO-OPERATIVE:
If cheque is of co-operative bank and having tie-up with Gujarat state
co-operative (mutual arrangement scheme code) then advised is sent to
Gujarat state co-operative and no commission and postage is charged.
ii. ACCOUNT PAYEE:
The bank sending IBC having account in BMCB then bank transfers
amount to their account. Bank sends a statement showing all the
details.
iii. DEMAND DRAFT:
If bank does not having tie-up with GSC and not even having account
then bank issues demand draft in favor of opposite bank. For that bank
takes commission of Rs.1.25/1000 and Rs.35/- for postage charges.
1. If there is insufficient balance then,
i. Cheque is sent back with written memo.
ii. Return charges are taken Rs.50/-
iii. It is sent through value payable post.
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After this procedure, entry is passed in the IBC register and then IBC send
back through post.
[2.5] OUTWARD BILLS COLLECTION
Once cheques are received and if it is not local then OBC stamped is on the
cheque.
Entries are made in the computer, details like: banks name, city name, banks
code, commission charges, postage charges, document number, document
amount etc.
After entries are made then endorsement stamps are stamped behind the
cheque.
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Authorization of cheques is done by officer.
There are no commission charges and up to Rs.1000/- no postage charges are
taken in saving accounts and above that Rs.35/- are taken.
The BMCB is having tie up with HDFC, State bank of Patiala etc.
OBC number is on the cheque and on the voucher so that whenever customer
needs any information then with the help of that number information is
provided.
According to the tie-up with banks, cheques and statement are sent.
If cheques are passed then payments are made in 3 ways:
i. Advised
ii. Account payee
iii. Demand Draft.
i. GUJARAT STATE CO-OPERATIVE:
If cheque is of co-operative bank and having tie-up with Gujarat state
co-operative (mutual arrangement scheme code) then advised is
received from Gujarat state co-operative and no commission and
postage is charged.
ii. ACCOUNT PAYEE:
The bank receiving OBC having BMCB account in there bank then
bank transfers amount to BMCB account. Bank sends a statement
showing all the details.
iii. DEMAND DRAFT:
If bank does not having tie-up with GSC and not even having account
then bank issues demand draft in favour of BMCB bank.
If cheques are not cleared then return charges are taken according to the banks.
BMCB takes Rs.50/- as return charges from their customers.
When OBC is realized, net amount (after commission and postage charges) is
credited to customers account.
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[2.6] BILLTY
It is one type of service provided to its customers, it is mainly for safety
purpose, and bank acts as a mediator between two parties. For that it earns
commission. For their safety, supplier takes the decision for keeping the bank.
As per buyers convenience, they decide the bank.
Commission is charged on invoice amount Rs.1/1000.
As per buyers order supplier sends the goods in transport and invoice, lorry
number, etc. is sent to bank.
Invoice including instructions framed by supplier relating to delivery of goods.
I. Collect all charges from drawee- like, commission charges,
transportation charges, courier etc.
II. Discount is allowed if payment is made within stipulated time.
III. Penalty is charged from buyer if payment is not made within
stipulated time.
IV. Ways of payment are specified.
Bank informs the buyer about the Billty received.
When buyer comes to make the payment then billty is realized.
After payment is made lorry receipt is given to them.
As per suppliers instruction bank sends the payment.
If payment is not made, then billty is send back to supplier.
[3.] DEMAND DRAFT
It is a service provided to the customer by the bank. It is a safe instrument for
making payment. If one company does not have trust on their opposite party then they
to issue demand draft. Authorization is must in D.D. for which bank follows scale-1&
scale-2.In scale-1 there are 3 managers and in scale-2 there are 3officers.1manager
from scale-1 & 1 officer from scale-2 are required for authorization.
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Demand draft is issued by 2 ways:
i) CASH
ii) TRANSFER
i) CASH:
Firstly, Pink colour voucher is filled by a customer, all details are included in
that voucher e.g. in favour of, customer details, amount with commission, place, date
etc. then cash is paid at payment counter. And demand draft is issued as per voucher.
For that bank charges commission from the customer. DEMAND DRAFT in cash is
made up to Rs.50000/- including commission above that cash is not accepted.
Charges
For all parties and all centers bank charge Rs.3.00/1000
Minimum charges are taken by bank Rs.30/-
i) TRANSFER:
Firstly, Cream colored voucher is filled by a customer, all details are
included in that voucher e.g. in favor of, customer details, amount with commission,
place, date etc. cheque of yourself is attached with the voucher. Cheques are stamped
and send for further processing. And demand draft is issued as per voucher. For that
bank charges commission from the customer.
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BMCB have tie up with HDFC BANK, STATE BANK OF PATIALA
(NATIONALISE D.D.),ICICI BANK,GSC, ETC.
Bank mainly prefers to make demand draft of HDFC Bank, if nothing is
specified by the customer. If branch of HDFC bank is not located in that area
then other tie up banks D.D. is made.
[Table -7] D.D Commission
Sr.No. Mode of issue Ordinary CA/SB with
minimum balanceRs.2500/Rs.1000 & OD
A/c
Minimum commission
1 On BMCB
Branches
Re.1 per RS. 1000 Rs.25
2 On other center Rs.2per RS.1000 Rs.25
GUJARAT STATE CO-OPERATIVE
If there is no bank facility available in village area then D.D. of GSC bank is issued
by BMCB.
NATIONALIZED DEMAND DRAFT
Nationalized D.D. are issued when customers/parties does not have trust on
private & co-operative banks. As per the requirement of the customer bank issue D.D.
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of nationalized bank. The bank issue the D.D. of STATE BANK OF PATIALA as it
have tie up.
Charges taken by BMCB Rs.3/Rs.1000
Minimum charges Rs. 30/-
BMCM pay commission to state bank of Patiala is Rs.1.25/Rs.1000
Rs.3-Rs.1.25/Rs.1000 = Rs.1.75/1000
For that BMCB earns of 17.5% commission on issuance of D.D.
In what all ways D.D. can be cancelled
Stop payment made by the issuer
Lost or torn
Above validity (valid for 6 months)
Mistake in opposite partys name.
For cancellation of D.D. bank takes charges Rs.50/-.
[3.1] PAY ORDER
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Pay order is also known as BANKERS CHEQUE. It is issued for local
parties (GANDHIDHAM & KANDLA). For authorization, it is not compulsory for
the managers to authorize the pay order two officers can do the authorization.
BMCB take charges as same as demand draft from the customer.
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[4.] CASH DEPARTMENT
Cash section of the bank is the custodian of the cash. It has to keep the cash
of the bank safe and at the time give prompt service to the customers without delay.
To meet day to day obligations the bank has to maintain certain amount of cash on
hand.
The board may fix up a cash retention limit for every branch taking into
consideration the turnover of the cash for that branch. The retention limit will be fixed
for all types of cash including cash on counter and reserve cash in safe etc. Limit of
the cash on closing is fixed by the bank i.e. Rs. 2.5crore at BMCB.
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[Table-8] DAILY REGISTER OF CASH TAKEN AND KEPT IN
SAFEOPENING BALANCE
(+) RECEIVED TODAY
TOTAL
(-) PAID TODAY
CLOSING BALANCE
PARTICULAR OF COINS PARTICULAR OF CURRENCY
NO.
OF
COINS
DENOMINATIO
N
AMOUN
T
NO.
OF
NOTE
S
DENOMINATIO
N
AMOUN
T
500 np Rs. 1000
200 np Rs. 500
100 np Rs. 100
50 np Rs. 50
25 np Rs 20
20 np Rs. 10
10 np Rs. 5
Rs. 2
Rs. 1
COINS
TOTAL
CLOSING BALANCE IN WORDS RS.
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Firstly opening balance is written in the daily register of cash taken and kept
in safe. After that the total cash received during the day is added in the opening
balance, and the payment made during the day is deducted in the total of opening and
cash received. Finally closing balance is calculated, which is the opening balance
[4.1] RECEIPT OF CASH
Receipt of cash is the most important function of the cash department in the
bank. In BMCB there is one counters of cash receipt.
The cash is received through the pay-in-slips filled in by the customer on
different accounts.
Pay-in-slip includes of account name, date, depositors name, amount in words
and figures, number of notes and coins, account number, contact number.
Cash can be received up to Rs.99000/- without pan card and above that pan
card is needed.
Points must be kept in mind while receiving the cash:
1) Once the cash is received check it twice.
2) Physical notes and notes written in voucher should be tallied.
3) Count manually and by machine.
4) Money should be deposited correctly in the said account.
After entry is passed, the amount is deposited at customers account and
received voucher is stamped and counter foil is returned back to customer.
Then the slip is submitted to the higher official where it is verified that
whether the amount is credited to right persons account with right amount. The
cahier and the higher official should sign the slip.
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[4.2] PAYMENT OF CASH
Payment of cash is the most important function of the cash department in the
bank.
In BMCB there is one counters of cash payment.
The cash is given according to the daily requirements of the counter.
Before giving the cash it is written in the cash register and cash officer
distributes it among the cashier.
After that cashier passes the opening entry in the Book and starts the
payments.
Payment is made by two ways:
1. Withdrawal form
2. Cheque
If account holder does not have cheque book then with the help of withdrawal
form they can withdraw the cash.
If money is withdrawn with the help of cheque then, cheque should be in the
account holders name or it should of SELF.
Firstly balance is checked, if balance is sufficient then entry is passed.
Scroll number and transaction is written on the cheque or withdrawal form
while passing the entry.
Authorization is done by high grade officer. And for these both officers are
responsible.
In authorization, signature, balance, date, cheque number, is checked with the
scroll number.
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[5.] SAFE DEPOSIT VAULT
BMCB provides dedicated services to safe holders for their valuables.
BMCB lead in the local banking industry with the highest number of lockers.
Customer has to deposit the amount as locker deposit for utilizing this facility, which
is refundable. The bank does not charge any other rent except deposit. Bank provides
four types of lockers.
[Table-9]TYPES OF LOCKERS:
LOCKER TYPE SECURITY DEPOSIT
A RS. 7000/-
B RS. 12000/-
C RS. 15000/-
D RS. 50000/-
DOCUMENTS REQUIRED
Customers account number if not then it is opened
Passport size photograph
Residence proof
Photo id-
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1) Election card
2) Pan card
3) Licence
UNIQUE FEATURES
One time securing deposit instead of yearly rentals.
Four categories of safe deposit vaults available.
Providing a separate floor for operators.
Quite specious safe room.
Offers maximum time for in local area.
There is no limit of members opening the locker.
Master key is kept with the bank and locker holders key is given to the
operator. Locker is not open until both the keys are inserted together. There is no
duplicate key of the locker with the bank. So, in case of keys are misplaced or lost by
the customers then locker is broken and all the cost is bear by the locker holder. The
expense for breaking the locker is RS.3500/-. Locker can be sealed when there is income tax
inquiry.
To verify the photo, signature, locker number, the locker card is maintained
by the bank for daily check during the locker is operated.
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PROCESS FOR OPERATING LOCKER
Firstly, one register is maintained consisting of sr. number, locker number,
time, and signature.
When customer comes to operate locker he has to write all the details in the
register.
Then signature, photo, locker number is verified by the operator.
After that operators key and locker holders key is inserted in the locker
Finally locker is opened.
Locker surrender charges taken by BMCB is Rs.250/-.
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[6.] SHARE DEPARTMENT
Co-operative banks can obtain their capital by issuing shares. Even BMCB
has issued shares to obtain the capital. Every year bank issues right shares to the share
holders only from the authorized capital. Bank does not allow people other than its
share holders, so it issues right shares only.
Membership fee is Rs.10/share. Shares can be transferred in blood relation
only. Transfer is not allowed to outsiders. There is no Transfer fee. Shares can
be sold to the shareholders only. Shares are sold on market value.
Bank pays dividend up to 15%. Gifts are also given to its share holders. Paid
up capital for 31/03/2010 was RS.4,35,83,100 and authorized capital is RS.
5,00,00,000.
According to R.B.I, co-operative banks can pay maximum 15% dividend to its
share holders. Since last three years BMCB has maintained this percentage.
TRANSFER OF SHARES
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Shares of BMCB can be transferred in three ways:
i) Member to Member Transfer
ii) Transfer in blood relation
iii) Transfer in death case
i) Member to Member Transfer
A) Already a member
In case of partly transfer of shares; share holder can transfer their shares only to share
holders.
B) Not a member
Share holder can transfer their shares to a person who is not a share holder in
that case, his membership gets cancelled and a new member comes in to
existence.
ii) Transfer in blood relation
Fully transfer of shares is done only in blood relation. The person transfers
their shares then their membership is cancelled and new member gets the
membership.
iii) Transfer in death case
In case of the death of a share holder then their all the shares are transferred
to their nominee. And in case there is no nominee then shares are transferred to any of
their family members.
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NOTE Transfer of shares is done after one year.
Why people wish to be share holder of the BMCB
i) Loan:
It is a facility provided to their share holders only. BMCB does not provide
loan other than share holders.
ii) Dividend:
According to R.B.I norms a co-operative bank can declare dividend up to
15%, and BMCB maintains this percentage since three years, which attracts the
people to buy the shares.
iii) Gifts:
Every year during Diwali share holders are given gifts, which is one type of
attraction to the people for becoming the member of the bank.
iv) Goodwill:
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Trust and reputation of the BMCB is good in the market, so people want to
be its member.
v) Voting Rights:
Share holders are having the rights to vote at the time of selection of
board of directors.
Facilities
i) Insurance:
Bank has tie up with ICICI for accident insurance of share members. Bank
provides Rs.100000 Insurance to its share members and its premium is paid by bank.
This money of insurance is given to the nominee of the share member only in the case
of death due to accident of the share member
In case ofNatural death of any member Rs.10000 is given to nominee.
ii) Tax Deducted At Source:
All the share holders get the benefit of TDS in all the deposits. Once
membership number is feed in to the data then TDS is not deducted from the deposits
of the share holders.
DUPLICATE SHARES
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i) Lost of shares:
If shares are lost by the share holders then duplicate shares are issued by the
bank on request of share holders. In that case forms are to be filled for the same. If in
case lost shares are found then original shares are to be returned to bank.
ii) Torn or Destroyed:
If shares are torn or destroyed then shares are returned to the bank.
Duplicate shares are issued for the same.
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[7]
LOANS
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Lending in form of loan involves a number of risks. In addition to the risks
related to creditworthiness of the borrower, the banks are also exposed to interest risk.
Credit risk involves inability or unwillingness of the borrower to repay the loan.
Bank provides loan in the form of TERM LOAN, DEMAND LOAN,
VEHICLE LOAN, HOUSING LOAN, BUSSINESS LOAN AGAINST PROPERTY
etc. Loan policy of the bank should decide the exposure limit to particular firm/sector.
When the exposure limit per firm is decided no loan should be granted beyond that
limit to that firm. It applies to the financial limit for the sector. The exposure limit to
sensitive sectors such as advances against equity shares, real estates etc, which are
subject to high degree of price volatility. Some specific industries where there are
frequent business cycles more dependent on market conditions/natural calamities are
high risk prone for advances. Any excess exposure should be backed by adequatecollateral security.
There are two types of credit i.e. fund based and non fund based.
Fund based: loans and advances, cash credit, overdraft,
purchasing/discounting of bills.
Non fund based: bank guarantees and letter of credit.
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[7.1] FACTORS TO BE CONSIDERED WHILE GIVING LOANS
Credit risk for a bank depends on external and internal factors.
EXTERNAL FACTORS
1. State of economy
2. Foreign exchange rates and interest rate
3. Trade restrictions
4. Government policies
5. Failure of borrower
INTERNAL FACTORS
1. Deficiency in loan policies
2. Absence of prudential credit limits
3. Deficiency in appraisal of borrowers financial position
4. More dependence on securities
5. Inadequate risk pricing
6. Absence of post sanction supervision on borrowers account
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[7.2] PROCESS
1. Analysis of the financial statement and project report
The loan in charge/manager makes the detailed financial analysis considering
various RBI guidelines; banks specific policies and procedures, accounting standards
issued by ICAI and prepare LOAN REVIEW REPORT.
2. Pre inspection report
After getting the loan proposal from the party and making the preliminary
analysis of the loan proposal, the authorized loan officer/manager makes the site visit
of the party. (Business place, property/ security visit for verification) after the site
visit and interview of the party, and considering the available documents, the
concerned officer/manager prepares the pre inspection report giving his
recommendation for the loan subject to the terms and conditions required to be
fulfilled. A copy of the inspection report has been attached.
1. Sanction of the board
In the board meeting the loan proposal file containing the necessary
documents along the pre inspection report and the branch managers remark is
presented for consideration. The member of the board discuss the loan proposal with
the concerned officer/manager and finally either approve or reject or modify the loan
proposal subject to some specific terms and conditions to be compiled with either
before or after the disbursement of the loan amount.
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2. Completion of documentation formalities
After the board sanction of the loan proposal, security charge/
mortgage/hypothecation/pledge/lien (what so ever applicable) formalities are
completed through the advocate nominated by bank. Then the banks documentation
procedures are completed within 7 days of sanction of the board.
3. Pre disbursement audit report
Before making the disbursement of the loan amount the internal auditor of
the bank verifies the compliance of terms and conditions of loan specified by the
board and gives his report for any deviation for non compliance of terms and
conditions.
4. Disbursement of loan amount
After the completion of all documentation formalities, procedures and
rectifying any discrepancy reported by the internal auditor the bank makes the
disbursement of loan amount as per terms of sanction of the board.
Expenses on activities pertaining to loans include:
Cost of organizing loan.
Cost of processing/appraisal of loan application.
Cost of processing payment.
Cost of maintaining account.
Cost of recovery procedure.
Cost of bad loans.
Cost of final realization/settlement
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[8.]
RISK
MANAGEMENT
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[8.1] Define RISK
Risk is the probability or likelihood of injury, damage or loss in some
specific environment and over some stated period of time. Thus, Risk involves
two elements
Probability
Loss of amount
RISK MANAGEMENT
Risk management is the culture, processes, and structures that are
directed towards the effective management of potential opportunities and
adverse effects.
This definition applies rightly in nearly all fields of management from
financial and human resources management. Risk management can be taken to
mean the process of gathering information to make informed decisions to
minimize the risk of adverse effects to people and the Environment.
Banking is the management of risk. Banks accept risk in order to earn
profits. They must balance alternative strategies in terms of their risk/ return
characteristics with a goal of maximizing shareholders wealth. In doing so,
banks recognize that there are different type of risk and that the impact of a
particular investment strategy on shareholders depends on the impact on the
total risk of the organization.
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[8.2] Risk drivers
Risk drivers helps in identifying what kind of risks your business is
exposed to. There are two types of risk drivers. They are as follows:
External drivers
Strategic risks: Competition, Customer needs & demands, Industry
changes
Operational risks: Government regulations, Political environment,
Culture, Vendors/suppliers, contracts
Financial risks: Interest rates, Foreign exchange, Credit analysis.
Hazardous risks: Natural disasters
Internal drivers
Strategic risks: R&D, Intellectual capital
Operational risks: HR, Systems & processes
Financial risks: Cash flow, liquidity
Hazardous risk: Safety (Employee and Equipment), Security
The next step is to analyze and evaluate your risks.
Risk assessment: It involves estimating the level of risk estimating the
probability of an event occurring and the magnitude of effects if the event does
occur. Essentially risk assessment lies at the heart of risk management,
because it assists in providing the information required to respond to a potential
risk.
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Risk analysis: It is a technique to identify and assess factors that may
endanger the success of a project or achieving a goal. This technique also helps
to define preventive measures to reduce the probability of these factors from
occurring and identify countermeasures to successfully deal with these
constraints when they develop to avert possible negative effects on the
competitiveness of the company.
There are a number of tools you can employ to analyze risks:
Market surveys.
Research & Development.
SWOT: Analysis of Strengths, Weakness, Opportunities, and Threats.
PEST: Political, Economic, Social and Technology analysis.
Scenario Analysis: It is a process of analyzing possible future events by
considering possible outcomes (scenarios). It is also useful for decision
making.
Auditing and Inspection.
Industry benchmarking: It is the process of measuring an organizations
internal processes then identifying, understanding and adapting
outstanding practices from other organizations considered to be best in
class.
Business process analysis.
Risk map: It is a way to visualize the risk of the market. The purpose of
a risk map is to identify and classify areas, taking into account the
probable damages that could occur as a result of a disaster.
Brainstorming: To think quickly and creatively and to have a rigorous
group discussion in order to generate creative ideas and to encourage
problem solving.
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Once the risks have been identified, one can usually rank them basedon their probability of occurrence and their impact.
Dealing with risk
Once the risk have been identified, evaluated and analyzed, the next
step is how to deal with them. One can do one of four things for each risk:
Accept: There are certain risks which are not in our control and the
cost of eliminating such risks is also very high.
Transfer: A well-known method to transfer risk is insurance.
Reduce: By introducing systems and processes one can reduce risks.
Eliminate it: It is ideal situation to deal with the risk.
BENEFITS OF RISK MANAGEMENT
Provides a structured framework for more effective strategic planning to
ensure maximizing of opportunities and minimization of losses.
Widens management perspective and encourages initiative and pro-
active behaviour.
Contributes to improved organizational efficiency and effectiveness
Optimizes the use of resources.
Promotes greater openness in decision-making and improves
communication.
Provides senior management with a concise summary of the major risks
affecting the organization and a mechanism to ensure that appropriate
resources are directed towards areas of high risk.
Provides a framework for ensuring that unavoidable risks are adequately
insured.
Provides an effective and systematic approach which enables
management to focus on areas of risk in their operations.
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Improves the level of accountability in the organizations.
[8.3] RISK MANAGEMENT PROCESS
It is the systematic application of management policies, procedures
and practices to the tasks of establishing the context, identifying, analyzing,
assessing, treating, monitoring and communicating risks.
It is a repetitive process of well defined steps which, when taken in
sequence, helps in continual improvement in decision making by providing
management with a greater insight into organizational risks and their impact.
[Chart-6] Risk Management Process
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[8.4] BANKS EXPOSURE TO RISK
Banks in the process of financial dealing of various natures face various
kinds of financial and non financial risks such as credit risk, interest rate risk foreign
exchange risk, etc. There are also other areas of risk such as liquidity, equity price,
commodity price, legal, regulatory, reputation etc. all this risks are highly
interdependent on each other and events that affect on area can have ramifications for
a range of other risk categories. The risk factors if triggered in adverse direction can
bring the bank in trouble in different ways. It effects may be very serious and may
bring the bank in danger for even its existence. Therefore, any bank management has
to attach considerable importance to improve the ability to identify, measure, monitor
and control the overall level of risks undertaken. Banks are subjected to wide array of
risks in the course of their operations. The four categories of banking risks are as
follows:
Financial risk: Financial risk is often defined as the unexpected variability orvolatility of returns and thus includes both potential worse-than-expected as well as
better-than-expected returns. References to negative risk below should be read as
applying to positive impacts or opportunity unless the context precludes
In finance, risk is the probability that an investment's actual return will be
different than expected. This includes the possibility of losing some or all of the
original investment. Some regard a calculation of the standard deviation of the
historical returns or average returns of a specific investment as providing somehistorical measure of risk. Financial risk may be market-dependent, determined by
numerous market factors, or operational, resulting from fraudulent behavior.
It increases banks overall risk profile. For e.g. A bank engaged in the
foreign currency business is normally exposed to currency risk, but will also be
exposed to additional liquidity and interest rate risk.
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Pure risk: It includes liquidity, credit and solvency risk. They can result in aloss for a bank if they are not properly managed.
Speculative risk: It is based on financial arbitrage. If the arbitrage is correct
then it results in profit otherwise it results in loss. The main categories of
speculative risk are as follows:-
Interest rate risk.
Currency risk.
Market price risk.
Operational risk: This risk is related to banks overall organization and
functioning of internal system which includes computer related and other
technologies, compliance with banks policies and procedures and measures
against mismanagement and frauds.
Business risk: They are associated with a banks business environment
including macroeconomic and policy concerns, legal and regulatory factors and
the overall financial sector infrastructure and payment system.
Event risk: It includes all types of exogenous risks which, if they were to
materialize, could endanger banks operations or undermine its financial
condition and capital adequacy.
CAPITAL ADEQUACY RATIO
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Capital Adequacy Ratio, also called Capital to Risk Asset Ratio
(CRAR), is a ratio of banks capital to its risk. Capital adequacy ratio has been
developed to ensure that bank can absorb reasonable level of losses before
becoming insolvent.
Subsequent to nationalization of banks, capitalization in banks was not given
due importance as it was felt necessary for the reason that the ownership of the banks
rested with the government, creating the required confidence in the mind of the
public. Combined forces of globalization and liberalization compelled the public
sector banks, hitherto shielded from the vagaries of market forces, to come to terms
with the market realities where certain minimum capital adequacy has to be
maintained in the face of stiff norms in respect of income recognition, asset
classification and provisioning. It is clear that multi pronged approach would be
required to meet the challenges of maintaining capital at adequate levels in the face of
mounting risks in the banking sector.
Capital adequacy ratio measures the amount of banks capital
expressed as a percentage of its risk weighted credit exposure. This ratio helps
in determining the capacity of the bank in terms of meeting the time liabilities
and risk such as credit, operational risk etc. Banks capital is a Cushion for
potential losses which protect the banks depositors or other lenders. it also
maintains stability and efficiency of financial system.
The specifics of CAR calculations vary from country to country but general
approaches tend to be similar for the countries that apply for the Basel Accords.
Two types of capital are measured Tier One and Tier Two.
Tier one capital absorbs losses without a bank being required to cease
trading e.g. Ordinary Share Capital.
Tier two capital which can absorb losses in the event of winding up and
so provides a lesser degree of protection to depositors e.g. Subordinated
debts.
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The minimum capital adequacy ratios that apply are: Tier one capital to
total risk weighted credit exposure to be not less than 4%. Total capital (tier one
plus tier two less certain deductions) to total risk weighted credit exposure to be
not less than 8%.
The higher the CRAR the higher the level of protection available to
depositors.
There are nine types of risk for the purpose of bank supervision credit,
interest rate, operational, liquidity, market, compliance, foreign exchange,strategic, and reputation.
1. CREDIT RISK: Credit risk is the risk that a loss will be incurred if the
counter party does not fulfill its financial obligations in a timely manner.
Although banks fail for many reasons, the single most important reason is bad
loans. Credit risk is the primary cause of bank failures, and it is the most visible
risk facing bank managers.
2. INTEREST RATE RISK: Risk is the potential negative impact on. the Net
Interest Income and it refers to the vulnerability of an institutions financial condition
to the movement in interest rates. Changes in interest rate affect earnings, value of
assets, liability off-balance sheet items and cash flow. Hence, the objective of interest
rate risk management is to maintain earnings, improve the capability, ability to absorb
potential loss and to ensure the adequacy of the compensation received for the risktaken and effect risk return trade-off.
Interest rate risk arises due to the changes in the general rate of interest,
which depends on the inflation rate, regulatory policies, sudden changes in demand
and supply of money etc.
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1. OPERATIONAL RISK: Always banks live with the risks arising out of
human error, financial fraud and natural disasters. The recent happenings such as
WTC tragedy, Barings debacle etc. has highlighted the potential losses on account of
operational risk. Exponential growth in the use of technology and increase in global
financial inter-linkages are the two primary changes that contributed to such risks.
Operational risk, though defined as any risk that is not categorized as market or credit
risk, is the risk of loss arising from inadequate or failed internal processes, people and
systems or from external events. In order to mitigate this, internal control and internal
audit systems are used as the primary means.
It is the risk of loss resulting from inadequate or failed internal processes,
people and systems, or from external events. Operational risk encompasses the
efficiency and effectiveness of all back-office operations including management
information systems, personnel, external and internal frauds, lawsuits, and so on.
2. LIQUIDITY RISK: Bank Deposits generally have a much shorter
contractual maturity than loans and liquidity management needs to provide a cushion
to cover anticipated deposit withdrawals. Liquidity is the ability to efficiently
accommodate deposit as also reduction in liabilities and to fund the loan growth and
possible funding of the off-balance sheet claims. The cash flows are placed in
different time buckets based on future likely behaviour of assets, liabilities and off-
balance sheet items. Liquidity risk consists of Funding Risk, Time Risk & Call Risk.
Liquidity risk arises from the failure to recognize or address changes in
market conditions that affect the ability to liquidate assets quickly and with minimal
loss in value.
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3. MARKET RISK:
Market Risk may be defined as the possibility of loss to bank caused by the
changes in the market variables. It is the risk that the value of on-/off-balance sheet
positions will be adversely affected by movements in equity and interest rate markets,
currency exchange rates and commodity prices. Market risk is the risk to the banks
earnings and capital due to changes in the market level of interest rates or prices of
securities, foreign exchange and equities, as well as the volatilities, of those prices.
Market Risk Management provides a comprehensive and dynamic frame work for
measuring, monitoring and managing liquidity, interest rate, foreign exchange and
equity as well as commodity price risk of a bank that needs to be closely integrated
with the banks business strategy.
Market risk is the risk that the value of an investment will decrease due
to moves in market factors. Market risk results from changes in the prices of
equity instruments, commodities, money and currencies.
The four standard market factors are:
Equity risk: The risk in which the stock prices changes.
Interest rate risk: It is the risk in which the interest rate will change.
Currency risk: It is the risk in which foreign exchange rates will change.
Commodity risk: It is the risk in which commodity prices will change.
4. COMPLIANCE RISK: Compliance Risk is the risk to earnings or
capital arising from violations of laws, rules, and regulations and so on. For
example, banks failing to meet minimum capital requirements must raise new
capital, or they may be closed, forced to merge, or required to take some other
corrective action.
5. FOREIGN EXCHANGE/CURRENCY RISK: Foreign exchange
risk results from changes in exchange rate between a banks domestic currency
and other currencies. It originates from mismatches between the values of assets
and liabilities denominated in different currencies, or because of mismatch
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between foreign receivable and foreign payables that are expressed in domestic
currency.
Foreign exchange risk is the risk that a bank may suffer loss as a result of
adverse exchange rate movement during a period in which it has an open position,
either spot or forward or both in same foreign currency. Even in case where spot or
forward positions in individual currencies are balanced the maturity pattern of
forward transactions may produce mismatches. There is also a settlement risk arising
out of default of the counter party and out of time lag in settlement of one currency in
one center and the settlement of another currency in another time zone. Banks are also
exposed to interest rate risk,which arises from the maturity mismatch of foreign
currency position.
6. STRATEGIC RISK: In statistics, risk is often mapped to the
probability of some event seen as undesirable. Usually, the probability of that
event and some assessment of its expected harm must be combined into a
believable scenario (an outcome), which combines the set of risk, regret and
reward probabilities into an expected value for that outcome. Strategic Risk is
the risk to earnings or capital arising from making bad business decisions that
adversely affects the value of the bank.
7. REPUTATIONAL RISK: Reputation Risk is the risk to earnings or
capital arising from negative public opinion of the bank. Negative public
opinion can arise from poor service, failure to serve the credit needs of their
communities, and for other reasons. A recent survey revealed that consumers
rank telephone companies ahead of banks in terms of service. Regulators feared
that negative public opinion would contribute to a loss of market
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[Chart-7]THE FOUR MAJOR RISK FACED BY BANKS:
OPERATIONAL RISK
Always banks live with the risks arising out of human error, financial fraud
and natural disasters. The recent happenings such as WTC tragedy, Barings debacle
etc. has highlighted the potential losses on account of operational risk. Exponential
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growth in the use of technology and increase in global financial inter-linkages are the
two primary changes that contributed to such risks. Operational risk, though defined
as any risk that is not categorized as market or credit
risk, is the risk of loss arising from inadequate or failed internal processes, people and
systems or from external events. In order to mitigate this, internal control and internal
audit systems are used as the primary means.
An operational risk is a risk arising from a companys business
functions and from the practical implementation of the managements strategy.
Operational risk includes:
Employee errors.
Systems failures.
Fire, floods or other losses to physical assets.
Fraud or other criminal activity.
Internal Fraud: Loss due to acts of a type intended to defraud,
misappropriate property or avoid regulations, the law or company policy,
excluding diversity / discrimination events, which involves at least one internal
party.
External Fraud: Theft of inf