Saturday, February 21, 2015

General Credit Card - GCC

While Kisan Credit Card (KCC) is aimed to provide credit facility for agricultural / farm activities, General Credit Card (GCC) is aimed to cater to the non-farm entrepreneurial credit needs of individuals.

Note that GCC is not intended for the consumption needs of individuals (normal Credit Cards), but this scheme is made for the entrepreneurial credit needs of individuals under the priority sector.

People who are qualified for Priority Sector Lending (PSL) can avail this facility. This GCC scheme is brought under RBI's Financial Inclusion Plan (FIP).


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Friday, February 20, 2015

Kisan Credit Card - KCC

Kisan Credit Card (KCC)
KCC is a Credit Card (exclusively) for the farmers of India. It allows farmers to have cash credit (CC) facility without visiting bank repeatedly to ask for bank loans for agricultural activities.

KCC scheme was announced in Budget speech of Mr. Yashwant Sinha (FM in 1998-99) and introduced in 1998 by Government of India, RBI and NABARDIt is to be implemented by Commercial banksRRBs and Co-operatives.

Key Benefits -

  • It made the credit facility process much simpler for the farmers, who are generally illiterate or poorly educated.
  • Earlier farmers needed to apply for loan facility every year, but KCC removed the redundant process, by providing hassle-free and on-time credit facility.
  • Repayment is allowed after the harvest period. This made it easier for the farmers, because they got the time to sell their produce to the market, and then repay the debt of the bank.
  • As KCC is a credit cardwithdrawal of funds became much easier (e.g., from ATMs)

Eligibility -

Activities covered under KCC -
  • to meet the short-term requirements for cultivation of crops
  • post harvest expenses
  • produce marketing loan
  • consumption requirements of farmer households
  • working capital for maintenance of farm assets and agriculture-allied activities, like dairy animals, inland fishery, etc.
  • investment credit requirement for agriculture and allied activities, like pump sets, sprayers, dairy animals, etc.

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Thursday, February 19, 2015

Devaluation and Revaluation

Devaluation of a country's currency means the deliberate attempt by the government through its monetary policy to decrease its value (currency's) with respect to foreign currencies. Note that the value is decreased by changing the foreign exchange rate.

Conversely, if the value is deliberately increased by the government by changing the foreign exchange rate of the currency, then it will be Revaluation of the currency.


Devaluation vs. Depreciation
Both Depreciation and Devaluation decreases the value of the country's currency with respect to other currencies (generally a major foreign currency, like USD, etc). But the difference lies on the driving factor -
Depreciation occurs depending on the market forces of the world economy, whereas Devaluation is the result of government's deliberate attempt to reduce its value.

Devaluation vs. Redenomination
If the face value of the currency is changed (reduced, or increased), without changing the foreign exchange rate, then it will be known as Re-denomination. It is neither a devaluation nor a depreciation.
Note that for devaluation or depreciation, foreign exchange rate will be changed.


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Credit Information Bureau - CIBIL

Lending is a risky process for a bank, due to risk of default. Therefore, before offering loans or advances to customers, banks need to evaluate the credit worthiness of its customers. But an individual can be customer of several banks, and may have taken loans from several of them at several time. It is difficult to maintain credit information of each individual in an isolate manner.

Therefore, it will be very much useful, if the credit history of the borrowers is maintained in a common repository, and then the information is shared among the lenders (e.g., banks). 

Credit Information Company (CIC)
CIC performs the role of that common repository. Banks and other Credit institutions provide the records of their customers' (borrowers) payments related to loans and credit cards, to the CIC on a monthly-basis. CIC collects and maintains those records and prepares Credit Information Reports (or, Credit Report). 

CIC then provides these Credit Reports to the lenders (banks or credit institutions), which are then evaluated by the lenders and used for approving loan applications or any other credit applications.


Credit Information Bureau of India Ltd. (CIBIL)
CIBIL is India's first Credit Information Company (CIC) founded in 2000, headquartered in Mumbai
Managing Director - Mr. Arun Thukral
Chairman - Mr. Mavila Vishwanathan Nair

CIBIL provides - Credit Information Reports (CIR) and Credit Scores to - 
  • Member institutions when evaluating loan applications
  • Individuals to review their credit history

Credit Score
If required by the loan provider (e.g., banks), CICs will provide a Credit Score. It is a 3-digit numeric summary of credit report of borrower
e.g., The CIBIL TransUnion Score (ranges from 300 to 900) is used by many lenders during the loan application process. In India, a number more than 750 out of 900 is considered a good score.

Example
Suppose, person X  has a home loan with Bank A and a credit card with Bank B. Both banks A and B will submit X's personal information and payment details to the CIC on a monthly-basis. Now, suppose X applied for a car loan in bank C. 

After receiving the car loan application, bank C will request CIC for the credit report of that person X. Bank C will then assess X's credit history, that how X has been paying his current dues and whether he will be able to manage the additional burden of another loan. If satisfied, then Bank C will offer a car loan to X, otherwise will reject the loan application.

CIBIL vs. CRISIL
Note that CIBIL is a Credit Information Company or repository of credit information, which is provided by member banks or other credit institutions. CIBIL prepares CIR and credit scores on individuals depending on their credit history.
CRISIL is a rating agency, which rates business houses or governments.(For more information on CRISIL, or credit rating agencies, follow the link - http://bankoncepts.blogspot.in/2015/02/credit-rating-agencies.html)


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Wednesday, February 18, 2015

Core Banking Solution (CBS)

Before the advent of advanced technologies and IT, customers were treated as customer of branch of a bank, meaning details of customers were retained within the branch, and the services provided to the customers were branch-centered. To avail services from other branch, it needed to transfer the details of customers from the base branch to other branches manually, which could take much time.

But nowadays, customers are no more branch customers, they are treated as bank's customers, meaning dependency on bank branch is much reduced, and the customer can avail all his services from any branch of the bank. Details about customer are stored in a centralized manner, from where branches have equal access.

Core Banking Solution (CBS)
CBS provides a centralized environment, in which the information of the customer's account is stored in the central server of the bank, and is available to all the CBS networked branches, instead of the branch server.

It has several advantages for both the customers and the banks -

Customers -

  • Transaction from any branch, (anytime anywhere banking facility)
  • Better funds management, due to immediate availability of funds, etc.
Banks -
  • Standardization of process within the bank
  • Better customer service leading to retention of customer
  • Instant reflection of transactions that can be viewed from any branch
  • Better risk management (e.g., loans against same property or mortgage can be checked), etc.

CBS Softwares
  • Finacle (by Infosys)
  • TCS BaNCS (by Tata Consultancy Services (TCS))
  • HCL BancMate (by HCL Infosystems)
  • FinnOne (by Nucleus Software), etc.
CORE
The full form of 'CORE' in Core Banking Solutions (CBS) is often termed as -
Centralized Online Real-Time Exchange.



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Deposit Insurance - DICGC

Customers deposit their money in banks to avail several services provided to them by their respective banks. But what if the bank itself fails, or merges with another bank, or it becomes cease to exist? What will happen to the valuable deposits of the customers?

Considering these, bank deposits are provided with insurance covers in most of the banking systems in the world. India is no exception. However, the insurance cover may be in full or part.

Deposit Insurance in India
All the banks operating in Indian territory (with some exceptions) are covered under the deposit insurance facility provided by Deposit Insurance and Credit Guarantee Corporation (DICGC), a fully owned subsidiary of RBI. It established on July 15, 1978 with Deposit Insurance and Credit Guarantee Corporation Act, 1961.

DICGC insures all bank deposits (including saving, current, fixed, recurring) up to a maximum limit of Rs. 1 lakh (principal with interest).

Banks insured under DICGC
  • Commercial banks - Public sector banks, Private Sector Banks, Foreign Banks operating in Indian territory, Regional Rural Banks, Local Area Banks
  • Cooperative banks - State, Central and Primary Cooperative Banks (collectively called Urban Cooperative Banks, or UCB) that have amended Cooperative Societies Act, empowering RBI to control them
Currently approx. 2,130 banks are insured by DICGC.

Not covered under DICGC
  • Cooperative banks operating in Meghalaya, Chandigarh, Lakshadweep and Dadra & Nagar Haveli
  • Primary Cooperative Societies
Insurance coverage
DICGC protects bank deposits that are payable in India, including savings, current, fixed, recurring, etc. except the following deposits -
  • Foreign government deposits
  • Central and state government deposits
  • Inter-bank deposits, etc.
Note that this insurance is aimed to cover individual customer deposits or small business with maximum cover up to Rs. 1 lakh. Therefore the above exceptions are justified.

Insurance Premiums
Customers need not pay any premium to insure their deposits. DICGC charges a nominal premium from the banks. Customer deposits are automatically (from the customer's point of view) insured when they open any kind of deposits with the bank.

Insurance Claim
In case of a bank failure, customers need not make any claim under deposit insurance (in contrast to other insurances, where insurance claim is needed).

The official liquidator would make a claim on customers' behalf to the DICGCDICGC is bound to pay the valid insurance claim within 2 months period from receipt of claim from the liquidator. The liquidator then provides the claim amount to each customer.

When DICGC is liable to pay
  • If a bank goes into liquidation (fails)
  • If a bank is reconstructed or amalgamated / merged with another bank

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Tuesday, February 17, 2015

Credit Rating Agencies

Lending is the riskiest service for a bank. Because if the borrower fails to pay back the loan amount, then the bank will face the loss, even if supported by collateral (will give an example later).

Therefore, before providing loans to corporate or governments or individuals, banks need to verify the credit worthiness of them, so that risk of default could be minimized. This is same as grading the borrowers.

Credit Rating Agencies
Credit Rating Agencies (CRA) are those institutions / companies who assign credit ratings to corporate, or governments (they generally do not rate individuals), according to their ability to pay back the debt or loans.

A CRA generally rates the credit worthiness of issuers of debt instruments (including government bonds, corporate bonds, CDs, stocks, collateralized securities, etc.)

International CRAs
The Big Three credit rating agencies (international) are -

  • Standards & Poor's (S&P)
  • Moody's
  • Fitch Group


Indian CRAs
Indian credit rating agencies registered with SEBI are -

  • CRISIL Ltd.
  • Fitch Ratings India Pvt. Ltd.
  • ICRA Ltd.
  • Credit Analysis & Research Ltd. (CARE)
  • Brickwork Ratings India Pvt. Ltd.
  • SME Rating Agency of India Ltd. (SMERA), etc.

CRISIL has rated 30,000 debt instruments, covering the entire debt market. The debt obligations rates include -
  • Non-convertible debentures / bonds / preference shares
  • Commercial papers / Certificate of Deposits / Short-term debt
  • Fixed Deposits
  • Loans
  • Structured Debt
CRISIL Ratings' clientele includes all the industry majors - 23 of the BSE Sensex constituent companies and 39 of the NSE constituent companies, accounting for 80 % of the equity market capitalization. 

CRISIL rates a wide range of entities, including -
  • Industrial companies
  • Banks
  • Non-banking financial companies (NBFCs)
  • Infrastructure entities
  • Microfinance institutions
  • Insurance companies
  • Mutual funds (MFs)
  • State governments
  • Urban local bodies

World countries ratings
Standards & Poor's (S&P) rates the countries in 7 major categories - AAA, AA, A, BBB, BB, B, CCC. 
Foreign rating of India by S&P is - BBB



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Monday, February 16, 2015

Capital and Assets

# Readers' Question
What is the difference between capital and asset?

Assets
Assets are those tangible and intangible things that you own. You can sell them in the market to get money, or you can retain those for your personal enjoyment. Also, there are some assets which you cannot directly sell to get the money, or the value of the asset cannot be properly assessed.

  • Tangible Assets - land, building, machinery and equipment, goods, raw materials, factory, cash in bank accounts, etc.
  • Intangible Assets - patents, copyrights, goodwill, etc. Monetary value of these intangible assets is hard to assess. 
Assets can also be classified depending on liquidity  -
  • Fixed assets (property, plant and equipment, i.e., PP&E, which cannot be easily converted into cash)
  • Current assets (liquid assets like cash or bank accounts, which are easily convertible into cash)

Capital

Capital is the fund that is required to run a business, like buying machinery and equipment, etc., to produce goods and services. Generally, funds are arranged from the investors and the lenders.

Only those assets, which are used to make money, or to run business, or to produce goods and services, are considered as Capital.

Now, consider the following example -
Suppose you have bought a van which is used in your business to make profit, then this asset can be considered as Capital Asset, whereas if you have bought a luxury car, which is for your personal use only, but of no-value for your business, then it will be your Asset, not a Capital Asset.

Now, don't confuse Capital Assets with Capital. Capital is only fund, taken from the investors or lenders to run business. Funds taken as loans from banks or bonds from investors will be liabilities of the business, which need to pay back, but is the Capital for the business. Funds taken from shareholders are also Capital, but is not a liability for the business.


Hope this article will help you learn the difference between capital and assets. If there is any doubt please feel free to contact or mail - bankoncepts@gmail.com

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Sunday, February 15, 2015

Interest Rate Swap (IRS)

# Readers' Question
Please explain Interest rate swap with example

An Interest Rate Swap (IRS) is a financial instrument that works in a derivative market, where two parties exchange interest rate payments between them.

IRS is useful when one party wants to receive payment with a variable interest rate, while the other party wants to limit future risk with a fixed interest rate.


Clear the concept with an example -

Example
Suppose, two companies X and Y has come up with an agreement of Interest Rate Swap (IRS) with a nominal value of Rs. 1,00,000

Company X offers a fixed rate of 5 % per annum to Y on the nominal amount, whereas Y agrees to pay a variable rate, like Mibor rate + 2 % per annum to X in return. Note that Mibor rate changes on daily basis, making the rate a variable one. 

(Don't take the following figures of Mibor rate as actual!)

Here, both X and Y know that Mibor rate (variable) will remain roughly around 3 % (just a figure), making it almost equal to the fixed rate, i.e., 3 + 2 = 5 %. Note that X will make a profit if the Mibor rate is greater than 3 %, because in that case, Y will pay X more than 3 + 2 = 5 %. 

Conversely, if the Mibor rate is lower than 3 %, then X will make a loss, because Y will pay less than 3 + 2 = 5 %.

Clear it with figures -

CASE 1 - Mibor rate is greater than 3 %, say 3.5 %
  • Y will pay 3.5 + 2 = 5.5 % interest rate on the nominal amount (i.e., Rs. 1 lakh to X at the end of that year, making total interest = Rs. 1,00,000 x 5.5 % = Rs. 5,500 interest
  • Also, X will pay the fixed 5 % interest rate on the same nominal amount of Rs. 1 lakh, making total interest = Rs. 1,00,000 x 5 % = Rs. 5,000 interest.
Note that only the net difference is settled in case of Interest Rate Swap, meaning only Rs. 5,500 - 5,000 = Rs. 500 will be paid to by Y.
In this case X made a profit, while Y faced a loss of Rs. 500.

CASE 2 - Mibor rate is less than 3 %, say 2.5 %
  • will pay 2.5 + 2 = 4.5 % interest rate on the nominal amount (i.e., Rs. 1 lakh to X at the end of that year, making total interest = Rs. 1,00,000 x 4.5 % = Rs. 4,500 interest
  • Also, will pay the fixed 5 % interest rate on the same nominal amount of Rs. 1 lakh, making total interest = Rs. 1,00,000 x 5 % = Rs. 5,000 interest.
Note that only the net difference is settled in case of this Interest Rate Swap, meaning only Rs. 5,000 - 4,500 = Rs. 500 will be paid to by X.
In this case made a profit, while faced a loss of Rs. 500


Why IRS agreement?
  • To hedge (reduce risk) an investment
  • To earn some extra money, with a little risk (in the above example, Y agreed in IRS with X, because, he hoped that if Mibor rate gets increased, making the total interest rate (Y paying to X) greater than the fixed interest rate (X paying to Y), then he will make a profit (refer Case 2). Albeit he risked a little (refer Case 1)
    Note that the risk is less, because they both know that Mibor rate will remain roughly around 3 % (not making huge difference from 3 %. Mibor rate will never become, say, 6 % or 1 %, etc.) (just a figure). Selecting a good variable rate (like Libor, Mibor, etc.) is very much important for IRS.

Hope this article will help you learn the concept of IRS.

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LIBOR, MIBOR, MIBID

Inter-Bank Offer Rate
When a bank offers loan to other banks (or any other financial institutions), then it charges interest on that loan. The interest rates charged on the loans vary from bank to bank. But these rates need to follow a benchmark, so that interest rates does not differ too much among them (meaning, it should not happen, that an X bank charges 10 % interest per annum on a loan, whereas, Y bank charges 20 % on the same type of loan, it should be at par)

Generally, Inter-bank offer rate is of short-term nature (overnight to 1 year), and is followed for deciding interest rates to be charged on the loans offered to other banks (refer Call / Notice / Term Money) (inter-bank market). It acts like a benchmark for deciding interest rates.


Several financial markets follow different Inter-bank offer rates, like -

  • London Inter-Bank Offer Rate (LIBOR)
  • Mumbai Inter-Bank Offer Rate (MIBOR)
  • Tokyo Inter-Bank Offer Rate (TIBOR)
  • Singapore Inter-Bank Offer Rate (SIBOR)
  • Hong Kong Inter-Bank Offer Rate (HIBOR), etc.


LIBOR
LIBOR was first published in 1986 for three currencies - USD, GBP (Great Britain Pound) and JPY (Japanese Yen). Later on several other currencies were added in the list (currently 10 currencies). It is published daily at 11:30 A.M (London time) by Thomson Reuters, and Libor rates are determined for 15 borrowing periods (e.g., overnight, 1 week, 2 weeks, 1 month, etc. up to 1 year).

Formerly the Libor was maintained by British Bankers' Association (BBA), but the responsibility is now transferred to Intercontinental Exchange.


# Reader's Question
How is Libor rate calculated?
At 11:00 AM, major banks (18 major global banks for the USD Libor) are called to participate on the survey asking for the inter-bank offer rates. The highest four and the lowest four interest rates (on the survey) are trimmed out (not used for calculation). Then the remaining (remaining 10 for USD Libor) interest rates are averaged, and makes the Libor rate.

Libor rate is published at 11:30 A.M. This happens for all the 10 currencies, taking major banks for each currency. 


MIBOR
MIBOR rate is for Indian inter-bank market, and is calculated on daily basis by National Stock Exchange (NSE), along with Fixed Income Money Market and Derivative Association of India (FIMMDA).

It is a weighted average of lending rates of a group of banks (including Public Sector banks, Private Sector Banks, Primary Dealers, Foreign Banks in India, etc.), on funds lent to first-class borrowers (well rated borrowers)

MIBOR is published on different timings (e.g., 9:40 A.M., 11:30 A.M. etc), and for several maturity periods (e.g., overnight, 3 days, 2 weeks, 1 month, etc.)


MIBID
Mumbai Inter-Bank Bid Rate (MIBID) is the opposite of MIBOR. While MIBOR is the benchmark rate at which banks are willing to offer loans to other bank, MIBID is the benchmark rate at which banks are willing to take loans (paying the MIBID interest rate) from other banks.

Note that MIBID rate is always less than MIBOR rate, because, banks will try to pay less interest after taking loans, and will try to get more interest while offering loans. It is also the weighted average of interest rates at which several banks (taken as survey) are willing to pay.


Currently FIMMDA and NSE came with a new product, named as 'FIMMDA-NSE MIBID/MIBOR' which acts like the benchmark for the inter-bank market in India (taking both MIBOR and MIBID together)


Products linked with LIBOR/MIBOR


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