1
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What is
‘paripassu’ charge?
A ‘paripassu’
charge gives lenders a right to the property on which a charge is
created in proportion to the amount lent to the debtor. Let us
assume two banks ‘X’ and ‘Y’ have lent to a company with the outstanding at
Rs 70 lakh and Rs 30 lakh respectively and have ‘paripassu’ charge over the
assets hypothecated. In case of liquidation of that company, the lenders ‘X’
and ‘Y’ will share the proceeds from liquidation in proportion to the
outstanding loan amount, that is, 70:30.
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2
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What are SEZs?
SEZ is an
acronym for a Special Economic Zone. SEZs are a big success
in China. Based on the Chinese model, India too has set up
several SEZs with a view to increasing economic activity, attracting foreign
and domestic investment, creating employment opportunities and developing
infrastructure in the country. As of now, there are 122 operational SEZs
in India, out of a total 155 which received ‘in-principle’ approval from
the Government. The advantage with SEZs is that they can be set up with
single-window clearance and simple rules.
Some of the
well-known SEZs are SEEPZ SEZ, Kandla SEZ, Madras SEZ and Visakhapatnam SEZ
in the Government Sector; Mahindra City SEZ, Chennai, Surat SEZ, Mundra Port
& SEZ and Infosys Technologies SEZ, Managaore in the private sector.
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3
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What is a
no-frill account?
As per the
guidelines given by Reserve Bank of India and in line with the
intentions of the Government of India, commercial banks have been opening
no-frills accounts to large sections of underprivileged sections of the
society. The no-frills accounts are an innovative concept to
introduce banking to the masses. This concept is part of ‘financial
inclusion’ drive started by the Government of India some time back.
Customers
can open no-frills accounts with either a ‘zero’ balance or with bare minimum
balance.
Even
collateral-free loans of up to Rs 50,000 can be obtained by the no-frills
accountholder.
Students
from minority communities can open such accounts to receive Government
Scholarships
Banks
can provide credit cards against no-frills accounts in rural and semi-urban
areas.
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4
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Why are gold
prices rising?
This is a most
difficult question to answer. However, let me try. Gold is a precious
commodity. From time immemorial, gold has fascinated man (man includes woman
also). It is a malleable material and can be converted easily into any form.
It has no economic value meaning it does not offer any regular return (like a
dividend from a stock or interest from a bond) except capital gains.
International gold price is hovering around USD 1,390 per ounce and
in India around Rs 19,700 per 10 gm. The reasons for gold
price rise can be attributed to:
Investors
around the world are worried about the growth of the world economy
They
consider gold as better compared to the depreciating currencies, like, US
dollar
Due
to the global financial crisis of 2007/2008, investors have lost faith in
Governments who have been printing currency notes in thousands of crores
devaluing their currencies
As
a result, purchasing power of currencies has come down
The
sovereign debt crisis in Dubai and Greece have convinced
investors that Governments are broke; so gold is a safe haven
Even
central banks of several countries,
including, India and China, have bought tonnes of gold from
the IMF and international market
Rising
prices bring in more investors to gold
Gold
exchange-traded funds (ETFs) have made it easier for investors to put their
money in gold
The
price of any good or service depends on the principle of demand and supply.
However, sentiments matter a lot in markets rather than fundamentals.
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5
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Base Rate was
recommended by a working group set up by RBI. Who headed the working group?
Reserve Bank
of India set up a working group to introduce Base Rate.
The group was headed by Deepak Mohanty. As per the recommendations of the
working group, Base Rate was introduced in India from July 1, 2010.
What is the
rationale behind introducing Base Rate and shifting from BPLR to Base Rate?
There was a
public perception that banks had been offering lower lending rates to
big corporate
customers, while charging higher rates from small borrowers in the
retail, small
business and agriculture segments. This amounts to cross-subsidization. RBI
had received several complaints to this effect from various industry bodies
and associations. RBI had taken this view into consideration. For several
years especially since the early 2000s, RBI had tried to bring in a
transparent system of lending rates in the banking system. After trying very
hard, RBI has genuinely felt that banks’ BPLRs are not transparent and there
is a large-scale sub-BPLR lending. So, with effect from July 1, 2010, RBI
introduced Base Rate System for loan pricing.
What is Base
Rate?
Base
Rate is the minimum lending rate below
which a bank can not lend to borrowers except in a few cases. Base Rate was
implemented in India with effect from July 1, 2010. From that date,
the existing Benchmark Prime Lending Rate (BPLR) was replaced by the new Base
Rate System. Base Rate differs from bank to bank depending on individual
bank’s cost of deposits/funds and other criteria.
How is Base Rate
Calculated?
Banks are given
freedom to decide their own Base Rates based on cost of deposits, adjustment
for CRR/SLR maintenance, unallocatable overhead costs and average return on
net worth. Base rate is calculated as follows:
BASE
RATE
=
Cost
of deposits/funds
+
Negative
carry on CRR/SLR
+
Unallocatable
overhead cost
+
Average
return on net worth
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6
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RBI has set up a
committee to free interest rate on savings bank deposits. Why has it decided
to do so?
Since the 1990s,
Reserve Bank of India had been deregulating interest rates on
deposits and advances. As part of the financial sector reforms and with a
view to giving more freedom to banks, Reserve Bank of India is now
considering deregulating interest rates on Savings Bank deposits.
Do commercial
banks have freedom to raise/lower interest rate on Savings Bank account?
Commercial banks
in India do not have freedom to set interest rate on
Savings Bank deposits. Reserve Bank of India decides rates on
SB account. However, RBI is preparing a discussion paper to assess the pros
and cons of deregulating interest rates on Savings Banks account. If RBI
decides to deregulate and give freedom to banks to set rates on SB deposits
ultimately, then savers can expect better interest rate on their SB accounts.
As of now,
Savings Bank accounts carry interest rate of 3.5 per cent per annum with
effect from March 1, 2003. From April 1, 2010, banks are giving interest
rates on SB account based on daily product.
Does RBI have
any powers to set interest rates (either for deposits or advances)?
RBI has
progressively deregulated interest rates during the last two decades.
However, RBI still sets interest rates on Savings Bank
deposits and current accounts. Savings Bank deposits fetch 3.5 per cent per
annum while current accountholders do not get any interest. Banks do not have
any freedom with regard to interest rates on DRI loans. DRI loans are lent at
four per cent per annum.
Till recently,
loans up to Rs 2 lakh to small borrowers, under priority sector, were
administered. With the introduction of Base Rate System on July 1, 2010,
banks have the freedom to charge their own rates for such loans
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7
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If you are
appointed as Branch Manager of a worst performing branch, what steps would
you initiate to turn around the Branch?
To
increase profitability, the Branch
Manager shall adopt strategies depending on the specific problems pertaining
to that Branch and the environment. However, some general strategies could
be:
Bank’s
profitability basically depends on the spread between cost of deposits and
yield on advances
CASA
deposits should be improved to reduce cost of deposits
To
increase high-value advances and improve yield on advances
To
improve non-interest income through cross selling and others
To
plug income leakage
Reducing
overhead costs that can be cut
To
concentrate on NPA/AUC recovery and collect un-debited interest and amounts
from interest not collected account
To
speed up legal actions under SARFAESI Act and other means
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8
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What is the rate
of interest paid by RBI for cash reserves, in the form of CRR,
maintained by
Banks with it?
With effect from
March 31, 2007, RBI does not pay any interest on Cash Reserve Ratio maintained
by banks with RBI. With effect from April 1, 2007, RBI prescribes CRR,
depending on monetary policy considerations for banks without any floor or
ceiling rate. With effect from April 24, 2010, CRR is six per cent of net
demand and time liabilities (NDTL).
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9
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What is G-20?
G-20 is
a Group of 20 countries. G-20 consists of most influential countries
financially and economically. G-20 was established in 1999 with a view to
bringing together industrialized nations and developing countries to discuss
key issues in globally economy. The important members of G-20 include:
the USA, Australia,
the UK,Germany, China, India, Brazil, Mexico, the
European Union, and Russia. G-20 Summit will be held on November 11 and
12, 2010 in Seoul, South Korea.
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10
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What is GST?
Goods
and Services Tax (GST) is a
unified tax on goods and services aimed at replacing the multiple tax system
currently being followed by the Central Government and State Governments. GST
will subsume multiple taxes, like, central excise, service tax, surchages,
cesses, VAT, sales tax, entertainment tax, entry tax, etc. GST is a
multi-stage consumption tax imposed on a broad range of goods and services.
It is a tax on transactions and end customers who consume the goods or
services bear the final cost of the tax. It was originally proposed to
introduce GST with effect from 1.4.2010. However, the date of implementation
is postponed due to differences between the Centre and States. The Centre and
States are yet to come into an agreement on the framework of GST.
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11
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Why is
the US putting pressure on China to allow its currency,
the Yuan, to
appreciate?
America
criticizes China for keeping its currency, the Yuan, undervalued. China is
basically an exporting country. It has huge trade surplus running into
billions of dollars. Exports are crucial to jobs in
China. China wants to protect the interests of its exporters and
citizens. Chinese manufactured products are sold everywhere in the world. To
protect its exports, China’s keeps its currency undervalued against
major currencies, like, the US dollar.
America has
a big trade deficit with China. If China allows Yuan to
appreciate, it will benefit American exports to some extent. As
such, America has been putting pressure on Chine since the early
2000s to allow the Yuan to appreciate.
In
1995, China had pegged its currency to the dollar at 8.27 and it
had remained there at that level till July 2005. Between July 2005 and
September 2008, China had allowed the Yuan to appreciate to 6.85 to
the US dollar. Between September 2008 (post Lehman Brothers collapse) and
June 2010, China kept the exchange rate stable at around 6.85.
However, from June 2010, the Yuan has started appreciating again with one
dollar fetching 6.65 Yuan as on November 6, 2010.
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12
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What is cross
selling?
Cross-selling is
a popular concept in banks. Banks sell insurance and mutual products to their
own customers. By cross-selling, banks earn commission from insurance
companies and mutual funds. Banks enter into agreements with insurance
companies and asset management companies for cross-selling.
Within their own
products, banks can cross-sell by the following ways: 1. selling loan
products to depositors, 2. offering SB/current accounts to borrowers, etc.
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13
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What is CIBIL?
CIBIL stands
for Credit Information Bureau (India) Limited. CIBIL was incorporated in
2000. Its original promoters were State Bank of India, HDFC, Dun &
Bradstreet and TransUnion. Now, the shareholding is more diversified with
several more stakeholders, like ICICI Bank, BOB, IOB, UBI, PNB, Hong Kong
Bank etc, included. CIBIL provides credit information on commercial and
individual borrowers to lenders, like, banks, NBFCs and others. The
information is provided for a fee. In credit markets, data sharing is very
important between lenders and borrowers.
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Thursday, May 22, 2014
Knowledge In Banking
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THIS ARTICLE CONTAINS MANY MISLEADING INFORMATIONS SUCH AS REGULATION OF SB ACCOUNT INTEREST WHICH HAS ALREADY BEEN DE-REGULATED. PLEASE AMMEND THE ARTICLE APPOPRIATELY.
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