card issuer(banks)also allow withdrawals of cash for emergency purpose and levy a service charge for such withdrawals.
Saturday, July 31, 2010
In commercial transaction, bank guarantees are required as a security for due fulfillment of a contract by the obligor, in favour of the benificiary. The obligor's financial standing and credentials may be unknown to the beneficiary of a commercial contract and bank's guarantee on behalf of the obligor support for the transaction. These financial instruments are often used in trsde financing when suppliers or vendors are purchasing and selling goods to and from overseas customers with whom they don't have established business relationship. The instruments are designed to reduce the risk taken by each party.
A guarantee is a promise to answer for the debt, default or miscarriage of another, if that person fails to meet the obligation. Guarantees are given by banks. A bank guarantee enables the cuatomer to acquire goods, buy equipment or draw down loans, and thereby expand business activity. The quarantors incurs secondary liablity that is, the quaranter becomes liable to the bank is void, the guaranter will not be liable. Bank guarantees are given in the form of tender bonds, performance guarantees and repayment gurantees in relation to projects in the same country or another country which involves supply of goods o services or the performance of work. these gurantees are currently an important tools of international trade.
Bank gurantee is an undertaking by the bank at the request of a party, whereby the bank in the event of default by the principal in the fulfillment of his obligations has to make payment to the beneficiary within the limits of specified sum of money and within the specified period of time. So, bank guranteee are usually limited with respect to amount and time. As for as the time is concerned, usually a grace period is granted to the beneficiary to claim under the gurantee. This is basically given for the time taken by the beneficiary to present his claim. The bank issues the required gurantee on behalf of the obligor after making a proper assessment of his financial standing and ability to fulfull his part of the contract.
Friday, July 30, 2010
Exchange of goods and services is the basic of every business activity. Goods are bought and sold for cash as well as on credit. All these transactions require flow of cash either immediately or after a certain period. In modern business, large numbers of transactions with huge sum of money are transcated. It is quite inconvenient as well as sometimes risky for either party to make and receive payments in cash. Therefore, it is a common practice for businessman to make use of certain documents as means of making payments. Some of these documents are called negaotiable instruments.Negotiable Instrument is a piece of paper representing ownership of debts and obligations. The ownership is passed on with the delivery of endorsement and delivery of the piece of paper. Negotiable Instruments traded in the money market includes bills of exchange, promissionary note and which are written orders promising to pay a specified sum of money at predetermined time to the order of a specified person of bearer. Bills of echange, Promissionary note, Cheques, Drafts, Shares warrants, Dividend Warrants and Debentures are the examples of Negotiable Instrument. All Negotiable Instrument are transferable but all transferable items are not negotiable eg. a bearer cheque can be negotiated and transferred by mere deaivery, but a title certificate of a property can not be transferred by mere delivery, therefore Title Certificates of a physical property is not negotiable. For transfer of titles of properties certain established rules are followed i.e a sale deed must be there....
TREASURY MANAGEMENT
Tresaury management function includes planning and controlling of profit and the balance sheet structure of the bank within the constraints of liquidity requirements. Assets of the bank and financial institutions include cash at vault as well as cash in other national and foreign institutions, loans and advance, investment, fixed assets and other assets. Liablilities includes deposits, borrowed funds and other liabilities. Assets and liabilities of the bank can be caterogized according to the maturity. Ideally, long- term assets should be financed by long-term liabilities and short term liabilities should be matched with short- term assets.Treasury management involves the management of sources and uses of funds. The management of total available resources / funds in the banks is known as treasury management. The scope of treasury management is very wide and covers every types of organization be it charitable,government or corporate. It is very specilized function. In essence treasury management as all about handling the banking requirements , the funding for the business and managing financial risk. It therefore incorporates raising and managing money, currency, commodity and interest rate risk and dealing with the market. In some organization, the realted areas of insurance, pensions, property and taxation aslo fall under the functions of treasury management. It includes the management of the enterprise holding in and trading government and corporate bonds, currencies, financial futures, options and derivatives, payments system and the associated financial risk management. Managing treasury is to plan , organize and control cash and borrowings sa as to optimize interest and currency flows and minimize the cost of funds. It is investors' confidence in the business.
CREDIT MANAGEMENT
Historically banks have prefered to make short-term loans to busness for non permanent addition to theirs working capital. These loans usually were used to finance the inventory-raw materials or finished goods to sell. Such loans take advanntage of normal cash cycle in a business firm. While banks today make a far wider array of business loans that hust simple liquiditing credits, the short-term load- frequently displaying, may of the features of self liquidiation-continuous to account for over half of bank loans to business firms. the extension of credit is one of the major fucntions of banking business. Major source of income for the banks and financial institutions comes from their Loans and Advances. Credit Management is the management of loans and advances. Success of banking business depends on the efficient and effective managemanet of credit. Poor credit management has proved to be one of the major cause os bank failures throughout the world. Loan uncollectible due to mismanagement, illegal manipulation of loan, misguided lending policies or unexpected economic downturn are main reasons for a bank getting into serious problem.
Credit can be offered in variety of types/ categories as per the need of potential market. Credit management is always a challenging task in the banking business because there are several environmental influences and risks associated with the credit operation and admininstration. Credit riskis the risk which arises the borrower fails to meet the obligation on aggred terms. The volume and impact of credit risk is very high among the various types of risk asscoicted in the banking business. lending fucntion is significant for every as it yields substantial income by means of interest on loan and advances and fee on non- fund based credit activities. Bank lending facilitates the economic development of a country by extending financial support to industry, agriculture, trade, commerce and other sectors. Bank also invest certain part of their loan in social development in the form of deprived sector lending. Banks lending activities are generally governed by certain principles since the lending activities involve depositors money which is repayable on demand or on specified maturities, Bank adhers to the principle of liguidity, safety and profitability in their lending policies and standard guidelines for the operation. Central Bank bas also stipulates mandatory maintenance of Cash Reserve Ratio (CRR)&; Satutory Liquidity Ratio(SLR) to reinforce liquidity and safety principles. Banks also diversify their loan protfolio across a spectrum of borrowers, industries, sectors, securities as per the prudential norms and also follows other risk management practices.
DEPOSIT MANAGEMENT AND ACCOUNT OPERATION
TYPES OF DEPOSITS
General practice in the banking business shows that there are several deposit products in the market. These deposits can vary from one bank to other. Principally these can be categorized as;
CURRENT DEPOSIT:- It can be also knowned as Demand Deposit. These deposits are generally maintained by the traders and businessman who have to make a number of payments frequently and regularly.These deposits are withdrawable by the depositors at any time by means of cheque. Usually no interest is paid on them hence called non-interest bearing. Depositors may have to pay certain charges to the bank for the service rendered. Any amount of money may be deposited in this account.
SAVING DEPOSIT :- These Deposit stand midway between Current and Fixed deposits. Banks may impose certain restrictions on the depositors regarding the number of withdrawals and the amount to be deposited in a given period. Cheque facility is provided to the depositors. Rate of interest paid on these deposits is low as compared to that of fixed deposits. Saving account are offered by commercial banks and financial institutions.Obtaining funds in saving account may not be as profitable as demand deposit account because these deposits are generally paid interest. A bank may insist on receiving prior notice of a planned withdrawal from saving deposit. But this practice has been disappearing gradually due to the cut throat competition. However these deposits are less volatile and less concentrated in nature and are considered as the best type of depostits.
FIXED DEPOSIT :- A fixed deposit is a deposit at banking institution that cannot be withdrawn for a certain term or period time. When the term is over it can be withdrawn or it can be held for another term. The longer the term the better the yield of interest on the deposit. In this type of deposit, a customer is required to keep fixed amount of money with the bank for a specific purpose and period of tme. Depositor is not allowed to withdrawl the amount before the maturity period. In case if depositor has to withdraw the amount the aggrement will be void and no/or less interest is paid.
CALL DEPOSIT :- Call deposit also known as hybrid deposit is a combination of current and fixed deposit invented for meeting customers financial needs in a flexible manner. Increasing competition has facilitated to introduce this deposit product. This deposit mainly serves the need of apprepriate asset liability mnagement of the banks and financial institutions. Generally the practice of inter-bank borrowing and lending activities conducted through this product.
MARGIN DEPOSIT :- This account is menat for holding margin money of the customers as deposit(non-interest bearing) to avail various facilities from the bank . Customers are not allowed to withdraw any amount from such accounts till the expiry of the availed facilities. Margins are required for Guarantee, remittance and some other facilities.
TYPES OF BANKS
Bank can be classified into various types on the basis of their functions, ownership,domicile etc. The following are the various types of banks:
Central Bank :- Central Bank is the apex institution which controls, regulates, supervises the banking system of the country. It occupies a central positon in the monetary banking structure of the country. Important functions of the central bank are; Note Issue; banker; Agent and Financial advisor of the government; Custodiam of the member banks' reserves; Custodian of the Foreign exchange, Lender of the last resort, Clearing, Settlemnet and Transfer; Formulation and Implementation of Monetary and Foreign Exchange Policy,Credit control, Research and Publication ect. Besides these functions Central Banks also performs development functions to promote economic development in the country.Bank of England is the first central bank in the banking history.
Commercial bank:- Commercial bank performs all kinds of banking business and generally finance, trade and commerce. In addition to the primary functions of receiving deposits and lending to others, these banks indertake a wide variety of functions to assist their customers by performing agency service and general utility services. Deposit of the commercial banks are for the short period of time, hence they involve in the short period of lending activities. However, recently the commercial banks have also extended their aresa of operation to medium term ans long term fincnce.
Development Banks
Merchant Banks
Industrial Banks
Exchange Banks
Saving Banks
Rural Banks
Co-operative Banks
Buliding societies
IMPORTANCE OF BANK
A well developed banking system is a necessary precondition for economic development in a modern economy. Banks are to be considered not merely as dealers in money but also the leaders in development.
Bank plays an important role in the development of country. It is the growth of commercial banking in the 18th and 19th centuries that facilitates the occurrence of industrial revolution in Europe. Simlarly the economic progress in the present dsy in developling economies largerly depends on the growth of sound banking system. Banks can contribute to a country's economic development in the following ways
- Capital formation
- Optimum Utilization of Resources
- Encouragement to Enterpreneurial Innovations
- Monetization of the Economy
- Influencing Economic Activity
- Promotion of growth and Stability
- Implementation of Monetary Ploicy
- Promotion of Trade and Industry
- Encouragement to Right types of Industries
- Regional Development
- Development of Agriculture and Other deprived sectors
- Replacement of Informal Lending and so on
BANKING
There are various meaning and definitations of the word banking across the world. The US banking System is different from The British and the Indian banking system. Yet, certain basic tenets of banking are common to all over the worls. These tenets are so fundamnetal that same would characterize almost all banking systems globally.In any economy, the importance of financilal sector in general and banking sector in particular cannot be undermined. Banking sector definitely plays a pivotal role in the overall development of an economy.The economic reforms initiated bt the government more than a decade ago have changed the landscape of several sectors of the world economy. The basic principles of banking are-
- Principle of Intermediation
- Principle of Liquidity
- Principle of Profitability
- Principle of Slovency
- Principle of Trust
ORIGIN OF BANK
The word "Bank" is derived from the word "Bancus or Banque"which means bench. Jews, who were considered to be the early bankers, transacted their business on benches in the market. Some people trace the origin of the German word "Banck" meaning a joint stock fund. Similarly some people believed that it is derived from the French Word "Bangue" while other believed in Italian word "banca". Those ancient money lenders used to conduct their business on a bench. This described quite well what historians have observed concerning the first bankers, who lived more that 2000 years ago. Traditional forms of banking were traced during the civlization of Greek, Rome and Mesopotamia.
The babylonians were consdered to be the earlier people to develop a systemetized banking system. It is said that temples of Babylon were used as banks and as such the temples of Ephesus and Delphi were famous asa great banking instititions. It was in the 12th Century that some banks were established in venice and Geneva. Bank of Venice was established in 1157 AD. These BAnks were Simply receiving deposits and lending money to the people. In fact there werenot banks of the modern type.
The history of modern banks begins from Bank of Venice estblished in 1157AD, Bank of Barcelone established in 1401 AD, Bank of Geneva established in 1407 AD, Bank of Asterdam established in 1609 AD and Bank of England, which was established in 1694 Ad. Modern banking may corre3ctly be attributed to the merchants, the goldsmiths and the money lenders.
The earliest evidence of money-changing activity is depicted on a silver drachm coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350–325 BC, presented in the British Museum in London. The coin shows a banker's table laden with coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza means both a table and a bankBANK
The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter". Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths
Bank is a financial intermediary that accepts deposits from different sources and provide loans to those who requires. In other word bank is a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets and bank connects customers with capital deficits to customers with capital surpluses. Bank server all types of surplus and deficits units which offers deposit accounts with the size and maturity characteristics desired by surplus units and offers funds received from deposits to provide loans of the size amd maturity desired by deficits units.
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