Types of risks faced by banks

The risks to which a bank is particularly exposed in its operations are: liquidity risk, credit risk, market risks (interest rate risk, foreign exchange risk and risk from change in market price of securities, financial derivatives and commodities), exposure risks, investment risks, risks relating to the country of origin of the entity to which a bank is exposed, operational risk, legal risk, reputational risk and strategic risk.

Liquidity risk is the risk of negative effects on the financial result and capital of the bank caused by the bank’s inability to meet all its due obligations.

Credit risk is the risk of negative effects on the financial result and capital of the bank caused by borrower’s default on its obligations to the bank.
Market risk includes interest rate and foreign exchange risk.

Interest rate risk is the risk of negative effects on the financial result and capital of the bank caused by changes in interest rates.
Foreign exchange risk is the risk of negative effects on the financial result and capital of the bank caused by changes in exchange rates.
A special type of market risk is the risk of change in the market price of securities, financial derivatives or commodities traded or tradable in the market.
Exposure risks include risks of bank’s exposure to a single entity or a group of related entities, and risks of banks’ exposure to a single entity related with the bank.

Investment risks include risks of bank’s investments in entities that are not entities in the financial sector and in fixed assets.

Risks relating to the country of origin of the entity to which a bank is exposed (country risk) is the risk of negative effects on the financial result and capital of the bank due to bank’s inability to collect claims from such entity for reasons arising from political, economic or social conditions in such entity’s country of origin. Country risk includes political and economic risk, and transfer risk.

Operational risk is the risk of negative effects on the financial result and capital of the bank caused by omissions in the work of employees, inadequate internal procedures and processes, inadequate management of information and other systems, and unforeseeable external events.

Legal risk is the risk of loss caused by penalties or sanctions originating from court disputes due to breach of contractual and legal obligations, and penalties and sanctions pronounced by a regulatory body.

Reputational risk is the risk of loss caused by a negative impact on the market positioning of the bank.

Strategic risk is the risk of loss caused by a lack of a long-term development component in the bank’s managing team.

Bill Of Exchange

Section 5 of the Act defines, “A bill of exchange is an instrument in 
writing containing an unconditional order, signed by the maker, directing 
a certain person to pay a certain sum ofmoney only to, or to the order of 
a certain person or to the bearer of the instrument”

The maker of the bill is drawer,the person who is directed to pay is called Drawee.

Monetary Policy

It is the process by which the government,central bank of a country controls

• the supply of money
• availability of money and
• cost of money or rate of interest 

Asset Management Company

A Company registered with SEBI, which takes investment/divestment decisions for the mutual fund, and manages the assets of the mutual fund.

A company that invests its clients' pooled fund into securities that match its declared financial objectives. Asset management companies provide investors with more diversification and investing options than they would have by themselves. 

Mutual funds, hedge funds and pension plans are all run by asset management companies. These companies earn income by charging service fees to their clients. 

Negotiable Instruments

Negotiability means transfer of an instrument from a person/entity to another person/entity.This transfer should be without restriction and in good faith.

A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, with the payer named on the document.

According to Section 13 (a) of the Act, “Negotiable instrument 
means a promissory note, bill of exchange or cheque payable either to 
order or to bearer, whether the word “order” or “ bearer” appear on the 

instrument or not.” 

"A Negotiable instrument means a promissory note,bill of exchange or cheque payable  either to order or bearer".

The following are Nogotiable instruments

1. Promissory Notes
2. Checks
3. Drafts
4. Bill Of Exchanges
5. Bank Notes(not a currency)
6. 
   

Bank draft, Bill of exchange, Bill of lading, Certificate of deposit, Cheque, Commercial paper, Dock warrant, Promissory note, Hundi, Treasury bills and Warehouse receipt

The NI Act has 147 sections.Draft was not included and was made included in the section 85(a).

Currency note is not a negotiable instrument as per section 21 of the indian currency Act.

Questions About Negotiable Instruments Act

1.The Negotiable Instruments Act 1881 came into effect from?

    

• 1st March 1882

2.The Negotiable Instruments Act 1881 is applicable in

• The whole India including Jammu & Kashmir

3.Negotiable instruments are defined under

• Sec 13 of NI Act

4.Withdrawal slips used in SB accounts are

• Non-negotiable instruments

5.Having regard to Section 118 NI Act, consideration in the case of a negotiable instrument is
     

• Presumed

6.Which of the following instruments can not be made payable otherwise than on demand?

   

• Cheque

7.If no time is specified in a promissory note or bill of exchange, such instrument is considered as?

   

• Payable on demand

8.A minor is incompetent to be a?

      

• Drawee

9.The term ‘holder’ refers to the person?

   

• Who is entitled to possess the instrument in his own name and to recover the amount there under

10.Which of the following are the rights of the holder?

     

• A holder can convert the blank endorsement to an endorsement in full
• A holder can obtain a duplicate of the lost bill giving an indemnity if so required by the drawer
• A holder has the right to sue in his own name on the instrument

11.Which of the following condition is not necessary to qualify as a holder in due course

• The holder must have taken the instrument under lawful consideration
• The holder must have taken the instrument with good faith and without negligence or suspicion
• The holder must have taken the instrument before maturity of the instrument

12.A person cannot claim to be a holder in due course but may at most be a holder if he takes

• An instrument which is irregular on the face of it
• An instrument which is overdue
• An inchoate instrument

13.

Nicknames Of Indian Cities

Pink City - Jaipur (Rajastan)
Garden City - Bangalore (Karnataka)
Diamond City - Surat (Gujarat)
Egg city - Namakkal (Tamilnadu)
Lake City - Udaipur (Rajastan)
Sun City - Jodhpur (Rajastan)
City of Palaces - Kolkata (West Bengal)
Bangle City - Hyderabad (Andra Pradesh)
Golden City - Jaisalmer(Rajastan)
City of Dawn - Auroville (Pondichery)
White City - Udaipur (Rajastan)
City of golden Temple - amritsar (Punjab)
Twin Cities - Hyderabad and Secundarabad(Andra pradesh)
Pearl City - Tuticorin (Tamil Nadu)
Weavers city - Panipat (Haryana)
Temple City - Bhuvaneswar (Orissa)
Sandal Wood City - Mysore (Karnataka)
City of Blood - Tezpur (Assam)
Orange City - Nagpur (Maharashtra)
City of seven Islands - Mumbai (Maharashtra)

IMPORTANT BANKING ACTS IN INDIA

Negotiable Instrument Act                                                                        1881

Bankers Book Evidence Act                                                                     1891

Reserve Bank Of India Act                                                                       1934

Industrial Finance Corporation Of India Act                                               1948

Banking Companies Act                                                                            1949

Banking Regulation Act                                                                              1949

State Bank Of India Act                                                                             1955

Companies Act                                                                                          1956

Deposit Insurance And  Credit Corporation Of India Act                            1961

IDBI Act                                                                                                   1964

Banking Services Commission Act                                                             1984

SRFAESI Act                                                                                            2002

Banker-Customer Relationship

The banker-customer relationship is that of a:

1. Debtor and Creditor,
2. Pledger and Pledgee,
3. Licensor and Licensee,
4. Bailor and Bailee,
5. Hypothecator and Hypothecatee,
6. Trustee and Beneficiary,
7. Agent and Principal,
8. Advisor and Client, and
9. Other miscellaneous relationships.

1. Relationship of Debtor and Creditor

When a customer opens an account with a bank and if the account has a credit balance, then the relationship is that of debtor (banker / bank) and creditor (customer).

In case of savings / fixed deposit / current account (with credit balance), the banker is the debtor, and the customer is the creditor. This is because the banker owes money to the customer. The customer has the right to demand back his money whenever he wants it from the banker, and the banker must repay the balance to the customer.

In case of loan / advance accounts, banker is the creditor, and the customer is the debtor because the customer owes money to the banker. The banker can demand the repayment of loan / advance on the due date, and the customer has to repay the debt.

A customer remains a creditor until there is credit balance in his account with the banker. A customer (creditor) does not get any charge over the assets of the banker (debtor). The customer's status is that of an unsecured creditor of the banker.

The debtor-creditor relationship of banker and customer differs from other commercial debts in the following ways:

1. The creditor (the customer) must demand payment. On his own, the debtor (banker) will not repay the debt. However, in case of fixed deposits, the bank must inform a customer about maturity.
2. The creditor must demand the payment at the right time and place. The depositor or creditor must demand the payment at the branch of the bank, where he has opened the account. However, today, some banks allow payment at all their branches and ATM centres. The depositor must demand the payment at the right time (during the working hours) and on the date of maturity in the case of fixed deposits. Today, banks also allow pre-mature withdrawals.
3. The creditor must make the demand for payment in a proper manner. The demand must be in form of cheques; withdrawal slips, or pay order. Now-a-days, banks allow e-banking, ATM, mobile-banking, etc.

2. Relationship of Pledger and Pledgee

The relationship between customer and banker can be that of Pledger and Pledgee. This happens when customer pledges (promises) certain assets or security with the bank in order to get a loan. In this case, the customer becomes the Pledger, and the bank becomes the Pledgee. Under this agreement, the assets or security will remain with the bank until a customer repays the loan.

3. Relationship of Licensor and Licensee

The relationship between banker and customer can be that of a Licensor and Licensee. This happens when the banker gives a sale deposit locker to the customer. So, the banker will become the Licensor, and the customer will become the Licensee.

4. Relationship of Bailor and Bailee

The relationship between banker and customer can be that of Bailor and Bailee.

1. Bailment is a contract for delivering goods by one party to another to be held in trust for a specific period and returned when the purpose is ended.
2. Bailor is the party that delivers property to another.
3. Bailee is the party to whom the property is delivered.

So, when a customer gives a sealed box to the bank for safe keeping, the customer became the bailor, and the bank became the bailee.

5. Relationship of Hypothecator and Hypothecatee

The relationship between customer and banker can be that of Hypothecator and Hypotheatee. This happens when the customer hypothecates (pledges) certain movable or non-movable property or assets with the banker in order to get a loan. In this case, the customer became the Hypothecator, and the Banker became the Hypothecatee.

6. Relationship of Trustee and Beneficiary

A trustee holds property for the beneficiary, and the profit earned from this property belongs to the beneficiary. If the customer deposits securities or valuables with the banker for safe custody, banker becomes a trustee of his customer. The customer is the beneficiary so the ownership remains with the customer.

7. Relationship of Agent and Principal

The banker acts as an agent of the customer (principal) by providing the following agency services:

• Buying and selling securities on his behalf,
• Collection of cheques, dividends, bills or promissory notes on his behalf, and
• Acting as a trustee, attorney, executor, correspondent or representative of a customer.

Banker as an agent performs many other functions such as payment of insurance premium, electricity and gas bills, handling tax problems, etc.

8. Relationship of Advisor and Client

When a customer invests in securities, the banker acts as an advisor. The advice can be given officially or unofficially. While giving advice the banker has to take maximum care and caution. Here, the banker is an Advisor, and the customer is a Client.

9. Other Relationships

Other miscellaneous banker-customer relationships are as follows:

• Obligation to honour cheques : As long as there is sufficient balance in the account of the customer, the banker must honour all his cheques. The cheques must be complete and in proper order. They must be presented within six months from the date of issue. However, the banker can refuse to honour the cheques only in certain cases.
• Secrecy of customer's account : When a customer opens an account in a bank, the banker must not give information about the customer's account to others.
• Banker's right to claim incidental charges : A banker has a right to charge a commission, interest or other charges for the various services given by him to the customer. For e.g. an overdraft facility.
• Law of limitation on bank deposits : Under the law of limitation, generally, a customer gives up the right to recover the amount due at a banker if he has not operated his account since last 10 years

International Monetary Fund(IMF)

The International Monetary Fund (IMF) is an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

The IMF promotes international monetary cooperation and exchange rate stability, facilitates the balanced growth of international trade, and provides resources to help members in balance of payments difficulties or to assist with poverty reduction.

Headquarters	Washington, D.C., United States
Membership	29 countries (founding); 188 countries (to date)
Official language	Arabic, Chinese, English, French, Russian, Spanish
Managing Director	Christine Lagarde

SDR

The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries. SDRs are allocated to member countries in proportion to their IMF quotas. The SDR also serves as the unit of account of the IMF and some other international organizations. Its value is based on a basket of key international currencies.

The Special Drawing Right (SDR) was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in world foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets— gold and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.

MONEY SUPPLY IN INDIA

M0(Reserve money):

Currency in circulation + Banker's deposit with the RBI + Other deposits with the RBI

M1(Narrow money)

Currency with public + Deposit money of the public(Demand deposits with the banking system + other deposits with the RBI)

M2(Near money)

M1+ Savings deposit with post office savings scheme.

M3

M1+ Time deposits with banking system.

M4

M3+ All deposits with post office savings banks(excluding national savings certificate)


Y.V Reddy committee recommended the measurements of M0,M1,M2,M3,M4.

World Bank

The World Bank is an international financial institution which offers loan to developing countries.
It made of two unique development institutions ,the International Bank Reconstruction and Development Bank(IBRD) and International Development Association(IDA).
World Bank / IBRD came into existence in 1944 at the Bretton Woods Conference.

Head Quarters                                          Washington
Established On                                         1944
President                                                 Jim Yong Kim
Member Countries                                     188

BANK & TYPES OF BANKS

European Union(EU)

Capital                                                     Brussels(de facto)

Member States                                          28

President of European Council                      Herman Van Rompuy

President of European Commission              Jose Manuel Barroso(Jean Claude                                                               Junker From Nov 2014)

Newest Member                                        Croatia


Note: The minimum number of votes required to elect president of EU is 376 with 422 votes in favour EU elected Jean Claude Junker.

Asian Development Bank(ADB)

Asian Development Bank finances development in the Asia and Pacific region with the aim of reducing poverty.

ADB helps developing member countries tackle poverty by providing loans, technical assistance and grants for a broad range of development activities.

Motto	Fighting poverty in Asia and the Pacific
Formation	22 August 1966
Type	Regional organization
Legal status	Treaty
Purpose	Crediting
Headquarters	Mandaluyong City, Metro Manila, Philippines
Region served	Asia-Pacific
Membership	67 countries
President	Takehiko Nakao

CURRENCY MATTER

The Reserve Bank can also issue banknotes in the denominations of five thousand rupees and ten thousand rupees, or any other denomination that the Central Government may specify. However, there cannot be banknotes in denominations higher than ten thousand rupees in terms of the current provisions of the Reserve Bank of India Act, 1934. Coins can be issued up to the denomination of Rs.1000 in terms of The Coinage Act, 2011.

The Government of India in consultation with the Reserve Bank of India decided on the design of banknotes.

The highest denomination note ever printed by the Reserve Bank of India was the ` 10000 note in 1938 and again in 1954. These notes were demonetized in 1946 and again in 1978.

The Government of India is responsible for the designing and minting of coins in various denominations.

Currency paper is composed of cotton and cotton rag.

The Reserve Bank based on the demand requirement indicates the volume and value of banknotes to be printed each year to the Government of India which get finalized after mutual consultation. The quantum of banknotes to be printed, broadly depends on the requirement for meeting the demand for banknotes, GDP growth, replacement of soiled banknotes, reserve stock requirements, etc.

The Government of India decides on the quantity of coins to be minted on the basis of indents received from the Reserve Bank.

Notes are printed at four printing presses located at Nashik, Dewas, Mysore and Salboni. Coins are minted at the four mints at Mumbai, Noida, Kolkata and Hyderabad.

To facilitate the distribution of banknotes and rupee coins, the Reserve Bank has authorised select branches of scheduled banks to establish currency chests. These are actually storehouses where banknotes and rupee coins are stocked on behalf of the Reserve Bank. As on December 31, 2013, there were 4209 currency chests. The currency chest branches are expected to distribute banknotes and rupee coins to other bank branches in their area of operation.

(i) "soiled note:" means a note which, has become dirty due to usage and also includes a two piece note pasted together wherein both the pieces presented belong to the same note, and form the entire note.

(ii) Mutilated banknote is a banknote, of which a portion is missing or which is composed of more than two pieces.

(iii) Imperfect banknote means any banknote, which is wholly or partially, obliterated, shrunk, washed, altered or indecipherable but does not include a mutilated banknote.

There are fifteen languages appearing in the language panel of banknotes in addition to Hindi prominently displayed in the centre of the note and English on the reverse of the banknote.

NEFT(National Electronic Funds Transfer)

National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme,  individuals, firms and corporates can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme.

Individuals, firms or corporates maintaining accounts with a bank branch can transfer funds using NEFT. Even such individuals who do not have a bank account (walk-in customers) can also deposit cash at the NEFT-enabled branches with instructions to transfer funds using NEFT. However, such cash remittances will be restricted to a maximum of Rs.50,000/- per transaction. Such customers have to furnish full details including complete address, telephone number, etc.NEFT, thus, facilitates originators or remitters to initiate funds transfer transactions even without having a bank account.

There is no limit – either minimum or maximum – on the amount of funds that could be transferred using NEFT. However, maximum amount per transaction is limited to Rs.50,000/- for cash-based remittances and remittances to Nepal.

Presently, NEFT operates in hourly batches - there are twelve settlements from 8 am to 7 pm on week days (Monday through Friday) and six settlements from 8 am to 1 pm on Saturdays.

The structure of charges that can be levied on the customer for NEFT is given below:

a) Inward transactions at destination bank branches (for credit to beneficiary accounts)
– Free, no charges to be levied from beneficiaries

b) Outward transactions at originating bank branches – charges applicable for the remitter

-  For transactions up to Rs  10,000 : not exceeding Rs 2.50 (+ Service Tax)

- For transactions above Rs 10,000 up to Rs  1 lakh: not exceeding Rs 5 (+ Service Tax)

-  For transactions above Rs 1 lakh and up to Rs 2 lakhs: not exceeding Rs 15 (+ Service Tax)

-  For transactions above Rs 2 lakhs: not exceeding Rs 25 (+ Service Tax)

RTGS(Real time gross settlement)

1. Real time gross settlement systems (RTGS) are specialist funds transfer systems where transfer of money or securities takes place from one bank to another on a "real time" and on "gross" basis. Settlement in "real time" means payment transaction is not subjected to any waiting period.
2. The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the continuous (real-time) settlement of funds transfers individually on an order by order basis (without netting). 'Real Time' means the processing of instructions at the time they are received rather than at some later time; 'Gross Settlement' means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable.
3. The RTGS system is primarily meant for large value transactions. The minimum amount to be remitted through RTGS is ` 2 lakh. There is no upper ceiling for RTGS transactions.
4. The RTGS service window for customer's transactions is available to banks from 9.00 hours to 16.30 hours on week days and from 9.00 hours to 14:00 hours on Saturdays for settlement at the RBI end. However, the timings that the banks follow may vary depending on the customer timings of the bank branches.
5. 
   

   With a view to rationalize the service charges levied by banks for offering funds transfer through RTGS system, a broad framework has been mandated as under:

   a) Inward transactions – Free, no charge to be levied.
   b) Outward transactions – ` 2 lakh to ` 5 lakh - not exceeding ` 30.00 per transaction;
   Above ` 5 lakh – not exceeding ` 55.00 per transaction.

PRIORITY SECTOR

Priority sector refers to those sectors of the economy which may not get timely and adequate credit in the absence of this special dispensation. Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections.

Priority Sector includes the following categories:

(i) Agriculture
(ii) Micro and Small Enterprises
(iii) Education
(iv) Housing
(v) Export Credit
(vi) Others

Loans to individuals for educational purposes including vocational courses upto `10 lakh for studies in India and `20 lakh for studies abroad are included under priority sector.

Loans to individuals up to `25 lakh in metropolitan centres with population above ten lakh and `15 lakh in other centres for purchase/construction of a dwelling unit per family excluding loans sanctioned to bank’s own employees.

Asian Clearing Union(ACU)

Asian Clearing Union (ACU) is the simplest form of payment arrangements whereby the participants settle payments for intra-regional transactions among the participating central banks on a multilateral basis. The main objectives of a clearing union are to facilitate payments among member countries for eligible transactions, thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade among the participating countries. The ACU is a clearing houses/payments arrangements operating in various regions of the world. 

Head Quarters : Tehran,Iran.

Member economies : 9

ACU chairman : Bhutan 

 Members 

State	Central Bank	Year
Bangladesh	Bangladesh Bank	1974
Bhutan	Royal Monetary Authority of Bhutan	1999
India	Reserve Bank of India	1974
Iran	Central Bank of the Islamic Republic of Iran	1974
Maldives	Maldives Monetary Authority	2009
Myanmar	Central Bank of Myanmar	1977
Nepal	Nepal Rastra Bank	1974
Pakistan	State Bank of Pakistan	1974
Sri Lanka	Central Bank of Sri Lanka	1974

All Time Bank Exam Questions

• Muhammad Yunus (bangladesh) is considered the originator of Microfinance

• Teaser loans are offered by banks for Home loans

• National insurance company limited is the oldest insurance company was incorporated in 1906.

• First bank to introduce ATM in India was HSBC in 1987,Mumbai

• Central Bank Of India was the first public bank to introduce credit card

• Bengal Bank, established in 1784, was the first bank to introduce cheque system

• Savings account system in India was started by Presidency Bank,1933

• The first time banks were nationalized in India was on 19 july ,1969.

• The first bank in India with an ISO certification is Canara Bank.

• The oldest existing Public sector Bank in India is Allahabad bank.

• The first bank established in India was Bank of Hindusthan,which was started in 1770.

• A loan that is provided by group of banks is called syndicate loan.

• SDR is an international reserve asset created by IMF in 1969.

• Finance Commission distributes taxes between center and states.

• Market Stabilisation scheme(MSS) introduced by government in 2004.
• Prathama Bank Headquarter  Moradabad(UP)
• World Investment report published by UNCTAD
•