Knowledge In Banking

1	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.
2	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.
3	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.
4	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.
5	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
6	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
7	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
8	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).
9	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.
10	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.
11	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.
12	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.
13	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.