BASIC BANKING KNOWLEDGE - 1

PARA BANKING

All the services provided by banks apart from day to day banking is para banking like debit cards, credit cards, life insurance products, cash management services etc.

TERM REPO

Under term repo, RBI lends through auction of funds. The minimum interest charged has to be above the repo rate and there is no limit for maximum interest rate because auction is made on the rate of interest. (auction hoga toh highest rate pe hi lending ki jaegi).

--Four fridays of a month are divided into two categories: 

non- working fridays (1st and 3rd fridays of a month )
working fridays (2nd and 4th)

RBI Auctions 0.75% of NDTL of all Public Sector Banks on these Working Fridays.....For example suppose 0.75% of NDTL was Rs 5000.So Only PUBLIC SECTOR BANKS can participate in this Auction which occurs at 2nd Friday according to their need of Money by biding for interest rate i.e. bank that bids a certain value of money at higher interest rate gets that amount as a whole or in deduction according to their requirement...For instance suppose Rs 5000 were auctioned and only Rs 3000 were taken by a banks/banks keeping in mind it can be only PUBLIC SECTOR BANK...now the remaining amount will be auctioned on 4th Friday. Now the money that is borrowed on 2nd Friday can be repaid either on 3rd Friday or 4th Friday. i.e. either in 7 days or in 14 days.

--So, term repo is the money borrowed by banks form RBI for 7/14 days.


ASSETS classification

• Standard assets: which brings returns to the banks
• Sub-standard assets: 90 days to 1 year
• Doubtful assets: 1 year to 3 years
• Loss assets: more than 3 years

BILL DISCOUNTING

Let say Vrinda have an account in PNB . And she have availed some services or purchased some goods any goods of 1000rp. from a supplier, so supplier will generate a bill to her which have a due date of future. Now, what PNB will do is it will take the bill from Vrinda at a discounted rate @900 rp. and issue the money to Vrinda. This is called Bill Discounting.

In another words, it's an advance given to the customers taking his bills as security is bill discounting and interest of this amount will be discounted amount of the bill.

DIFFERENCE BETWEEN CASH CREDIT and OVERDRAFT

--In case of cash credit, a proper limit is sanctioned which normally is certain percentage of values of the commodities/debts pledged by the account holder in the bank.

Overdraft, on the other hand, is allowed against the host of the other securities includes financial instruments, shares and debentures etc. Some overdrafts are also granted against the percieved "worth" of an individual, such overdrafts are called 'clean overdrafts'.

--Cash credit is the amount which a current a/c holder may withdraw from his a/c even in case of zero balance in his a/c, here the goods in the stores/godown/factory is kept as security and the client/s enjoy the running loan against these.

Overdraft is the excess money that a current a/c holder may withdraw from his a/c. 

BALANCE OF PAYMENT

It is basically the record of all transactions made between a person/company of a country with the rest of the world.

It has two components: Capital and Current account

Current account is the having record of exports/imports -->> always negative of our country because we do import more than exporting goods. Income from abroad is also included in this account and transfer as well (gifts, remmittances from NRI's to their families etc. are always positive for India because of large diaspora abroad).

Current account is further divided into two parts: visible and invisible

• visible: means the transaction you can see, for example goods import and export
• invisible: means service, income and transfer comes under this

Service-- export and import of services like tourism, transport,insurance etc.

Income-- income generated through interest, dividends on investment by FIIs, FDI.

Transfer-- it includes remittance, grants, loans.

Capital account includes foreign investment in India (FDI, FII, ADR, direct purchase of land, assets),
external commercial borrowings (ECB's) and external assistance.

BALANCE OF TRADE

It is the net difference between import and export of a country. Here import and export can be of Goods(visible) and services(invisible).

Trade deficit: - If balance of trade is negative means import is higher than export
Trade surplus: - If balance of trade is positive means Export is higher than import

Current account deficit

The balance of the current account which is the sum of visible component and invisible component and if it is in deficit means income is less and expenditure is high then it is current account deficit.

For example

goods transaction = 100
Services transaction =-100
Interest transaction = 200
and transaction part = -500
then balance of current part= -300 then it is current account deficit