SMUASSIGNMENT

SEMESTER – 4MA0043

SUBMITTED BY:

DEVESH NIDARIA (MBA)ROLLNO:-581125616

Q 1. Write a detailed note on evolution of corporate banking.

Ans: Evolution of Corporate Banking

As mentioned above, corporate banking units supply capital to business ventures on a long term basis. It encompasses the various products and services that a commercial bank provides to its corporate customers.

Traditionally, banks focused on retail segments while wholesale/corporate banks were in separate existence. They focused primarily on large and medium sized businesses because the average dollar/rupee value of transactions in these segments was high. However due to competitive pressures the role that such banks play has undergone a vast change. While they continue to be involved in commercial loans, corporate banking entities are no longer just credit providers, but a fee-based service intermediary, for large, medium and small corporates.

Further, all commercial banks now have their own corporate banking segments thus creating a one-stop shop for all categories of customers. While there is such progress in the concept of universal banking on one hand, there is a huge challenge of competition to be faced on the other; the challenge being large product bouquets being brought about by each bank. This has created fierce competition in this segment, spurring major competitors to grow ever larger and making the position of corporate treasurers even more difficult to satisfy. Further, the cost of these conflicting demands and competitive pressures has created the need to find new sources of revenue. Technology-aided services, customer-centricity, innovative tailor made product brochures and hard core relationship management have become the prime differentiators. In this scenario, corporate bankers have two basic choices – either ensure their current position at peak efficiency so as to effectively meet its customers’ needs, or develop alternative strategies outside their current operations environment.

Corporate Banking has evolved through time and some significant changes. Corporate customers are now altering the nature of the relationship, which was previously dictated by banks, selecting business and imposing charges at will. Most corporates are looking at reducing their dependence on banks and assuming greater control over their finances. Treasury activities are being consolidated thereby reducing transaction costs and all financial processes are being integrated. Corporates have begun to set up their finance departments as ‘in-house banks’ to provide cash pooling services etc normally supplied by external banks. This allows them to centralize their liquidity effectively. Many set up ‘payment centers’ or ‘shared service centers’ to rationalise the payment settlement process, enabling them to profit from cash reserves to an unprecedented extent.

All of these changes have occurred against the backdrop of corporate world’s relentless balance-sheet leveraging, continued deregulation of key industries such as energy and telecommunications, and the ongoing globalisation of investment sources, trading partners, and operations.

Q 2. What are the key features of recovery management?

Ans: Recovery Management – an Overview

In continuation to the tasks of credit deployment and monitoring, follow-up and recovery management are the most significant activities. A very important document in this regard is the loan agreement. The loan agreement will have all issues related to the repayment of the loan in a clear manner, apart from the interest rate, collaterals etc. The loan agreement will also comment on the repayment schedule. The repayment schedule will be drawn by considering the cash flows of the borrower which in turn depends on the Debt Service Coverage Ratio (DSCR). DSCR is preferred to be greater than 1.5. In addition to this the repayment usually starts after a moratorium period.

Recovery management involves understanding all the terms in the loan agreement, studying the credit risk involved and identifying the problem loans. Since timely identification and prompt remedial steps are required to be taken for ‘problem loans’, it becomes imperative to classify all loans into different groups based on their quality. In India, RBI has issued guidelines on income recognition and asset classification which you will be seeing in the upcoming section.

Considering the threat ‘problem loans’ pose to the health of a bank, it becomes vital to monitor loans at various stages. With continuous monitoring, the bank is enabled to assess the financial position of the client company and thereby take timely action before such loans get converted into NPAs, which can possibly turn into loss assets thereafter.

All banks have a Recovery Policy that lays down the guidelines to the Bank employees on how to go about recovery management. These are formulated on the lines of guidelines issued by the RBI’s prudential norms for income recognition, asset classification and provisioning for credit portfolio of Banks, which we will be looking at in the next section.

Objectives of a Loan Recovery Policy:

a) Minimise the accretion of fresh NPAs: It is more prudent to avoid the slippage so as to save time, labour and cost.

b) Reduce the level of NPAs through recovery by adopting various legal and other measures.

c) Close follow up of sticky/ irregular accounts including sick units, suit filed and decreed accounts and the cases referred to Debt Recovery Tribunals for speedy recovery of the dues.

d) Upgrade the existing NPAs by improving the quality of assets by recovering the overdue accounts and by restructuring the accounts wherever possible.

e) Prevent deterioration of the quality of assets through regular inspection of securities and compliance to all other terms and conditions of loan sanction.

Q 3 What are supply bills? What is the procedure to be followed by a bank in making advances against such bills?

Ans: Supply Bills

Bills drawn on government or semi-government departments or bodies or Public sector undertakings, for the supply of goods and other materials or for the performance of certain contracts as per the accepted tenders are referred to as ‘Supply Bills’.

A party or contactor whose tender is accepted by the concerned authority of the government may draw the bill on supply of goods or performance of contract, which may be partial or whole as permitted under the terms of the tender. Once the goods supplied are found to be in conformance with the tender/contract, or the contract work, in part or whole, is found to be completed in accordance with the terms of the contract, an acceptance/ inspection note is issued by the authorised representative of the concerned entity. Payment of bills by such government or PSU entities is made only when the bills are accompanied by such inspection/ acceptance note. Payments are not generally forthcoming promptly from such agencies on account of procedural delays involved in checking and passing of the bills. Therefore, suppliers approach banks for advance against such bills as security for uninterrupted conduct of their business.

Procedure to be followed

· Supplier sends the goods and then produces documents like railway receipt or bill of lading as evidence of dispatch of goods.

· Goods are inspected by an appropriate authority and an acceptance/ inspection note is issued. In case of work contracts, an engineer’s certificate with regard to the work done is issued to the supplier.

· Supplier/ contractor prepares bill for payment. The inspection/ acceptance note or the engineer’s certificate has to accompany the bill.

· The bill along with such documents as above is submitted to the concerned entity through a banker. Supplier/ contractor requests the banker for an advance against such bills.

· In case of railway receipts, the receipt if directly sent to the department concerned, but the number and other particulars of the receipt are entered in the supply bill.

· The assignment of the supply bill is made on the bill itself. The bill is endorsed for payment to the bank and is receipted on a revenue stamp.

It is to be noted that supply bills are not bills of exchange and do not enjoy the status of being a negotiable instrument. They are in the nature of debts which can be assigned in favour of the banker for payment, after affixing a revenue stamp for having received the amount. The banker

should also obtain a letter from the supplier or contractor requesting the appropriate department to make the payment directly to the banker.

Advances made against supply bills are considered to be clean advances as the bank holds no charge on any security. Further, in certain cases it may take quite a long time before the advance is realised because of administrative and other procedural issues. Bank may also not get full payment, because of the possibility of counter claim or right of set-off by the government agency, as the charge is only by way of an assignment. Sometimes, the government may not pass the bill for full amount on account of dissatisfaction with the goods delivered or the work done. Due to this reason, banks, to safeguard their interest, have to ensure that such advances are made to very integral parties only.

Precautions to be taken by the banker

· Advance should be made only to those parties who have sufficient experience in government / PSU business and relevant regulations.

· The contract between the supplier and the government agency should be scrutinized by the banker so as to know the nature of dealings, volume of transactions, period of supply, rates agreed upon and other terms and conditions.

· Banker should obtain an irrevocable power of attorney from the supplier favouring the banker to receive the money. This should be registered with the concerned government agency.

· Banker should ensure that no adverse remarks are made on the inspection note or engineer’s certificate accompanying the bills.

· There are two types of bills that are usually given by the suppliers. (i) Interim bills against which the government pays 80-85 percent of the amount. (ii) Final bill for the balance 15-20 percent that will be paid after the complete verification of the goods. Because of the delay involved in the settlement of the final bill, banks should preferably advance against the interim bills. And undertake the final bill for collection.

Q 4. How is the Cash Flow Statement different from the Funds Flow Statements?

Ans: Many people think that both cash and fund are same, however they both are different and so is the case with cash flow statement and funds flow statement. Let’s look at some of the differences between cash flow and funds flow statement –

1. While funds flow statement reveals the change in the working capital of a company between two balance sheet dates while cash flow statement reveals the change in the cash position of the company between two balance sheet dates.

2. As funds flow statement shows the change in working capital it deals with all the components of working capital while cash flow statement deals only with cash and cash equivalents.

3. In case of funds flow statement schedule of changes in working capital is prepared while in case of cash flow statement no such schedule is prepared.

4. While cash flow statement there is classification of cash flows as cash flow from operating activities, cash flow from investment activities and cash flow from financing activities, but as far as funds flow statement is concerned there is no such classification.

5. As cash flow statement is only concerned with cash related transactions it is can be easily understood by a person who does not have accounting knowledge which is not the case with funds flow statement.

New Approach

1. The fund flow statement is based on the concept of working capital, whereas the cash flow statement is based on cash which is only one of the elements of working capital.2. The fund flow statement provides the details of funds movements, whereas cash flow statement provides the details of cash movements.3. Fund flow statement considers the movement of the funds as defined in terms of net working capital, whereas the cash flow statement considers only the actual movement of funds.4. In fund flow statement, net increase or decrease in working capital is recorded while in cash flow statement; individual item involving cash is taken into account.

5. Funds flow statement is started with the opening cash balance and closed with the closing cash balance records only cash transactions, whereas cash flow statement is started with the opening cash balance and closed with ht closing cash balance while there a no opening or closing balances in Funds Flow Statement.

Q 5 How is CVP analysis relevant to a lending banker?

Ans: Cost, Volume and Profit (CVP) Analysis & Profit / Volume (PV Ratio Analysis)

CVP is the technique to study the relationship between cost, volume and profit. These elements are inter-related and are dependent on one another. While profits depend on sales, the selling price is largely determined among others, by the cost, which in turn depends on volume of production. This concept helps a business unit to examine the profitability of the operations as it reveals the effect on profit of changes in the volume.

CVP helps to determine:

· the volume of sales to avoid losses,

· the volume of sales to achieve a desired profit level,

· effect of change in prices, costs and volume on profits,

· products or product mix that is profitable or whether the business should manufacture or buy etc.

PV Ratio expresses the relationship of contribution to the sales and is expressed as shown below:

PV Ratio = Contribution / Sales (or)

PV Ratio = (Sales – Variable cost) / Sales (or)

PV Ratio = (Fixed Cost + Profit) / Sales (or)

PV Ratio = Change in profit or contribution / Change in sales

As a general rule, higher the PV Ratio, the more profitable it would be and vice versa. Hence managements will aim at increasing their PV Ratio, as it can be increased by increasing the contribution, which in turn can be effected either by increasing the selling price or reducing the variable or marginal cost or changing the sale mix and selling more profitable products having higher PV Ratio.

What the changes in ratios mean:

· If a firm realises book debts in cash – No change in current assets, quick ratio, current ratio or net working capital.

· If a firm realises old assets or non-current assets in cash or sell fixed assets in cash – current assets, quick ratio, current ratio or net working capital will improve.

· If a firm issues bonus shares – There is no change in any ratios.

· If a firm issues rights shares – current ratio, quick ratio, net working capital, debt equity ratio, net worth will improve.

· If a firm revalues its fixed assets and creates revaluation reserve – net worth and tangible networth increase. Debt equity ratio declines/ improves. There is no effect on current assets or quick assets or current ratio and quick ratio.

· If increase in long term sources is more (say 125%) than increase in long term uses during a year – liquid asset would increase, liquidity would improve.

· If increase in long term is uses more (say 125%) than increase in long term sources during a year – liquid asset would decrease, liquidity would decline.

· Lower and higher break-even point – a firm with lower break-even point has better chances for earning profits. A firm with higher break-even earns lower profits.

· If break-even point of a firm goes up – it is an indication of decline in profits.

· If break-even point goes down – it is an indication of increase in profits.

· If debtor turnover ratio increases – it shows efficiency in recovery.

· If stock turnover ratio increases – it indicates better use of stocks

· If current ratio increases and quick ratio remains constant – it shows higher percentage of stocks in or lower percentage of receivables in total current assets.

· If current ratio is constant and quick ratio increases – it shows lower percentage of stocks or higher percentage in receivables in total current assets.

Q 6. Why is it important to stamp a document? Explain.

Ans: The next aspect in documentation is stamping. As mentioned earlier in the Unit, a document shall be stamped in accordance with the Indian Stamp Act as amended by the concerned State Governments. A document executed in India shall be stamped before or at the time of execution. Section 12 of Indian Stamp Act provides for cancellation of adhesive stamp so that the same cannot be used again. Any instrument bearing an adhesive stamp which has not been cancelled, so that it cannot be used again, shall be deemed to be unstamped.

Stamping of Loan documents

As discussed earlier, stamping of documents is a very important activity in the documentation process. It needs to be done before the documents are signed by the executants.

The Stamp Act extends to whole of India except Jammu & Kashmir. In all, there are 65 documents requiring stamping. All documents chargeable with duty and executed by any person in India should be properly and duly stamped as per provisions of Indian Stamp Act 1899.

In respect of 10 instruments namely Demand Promissory note, bill of exchange payable otherwise than on demand, cheque, bill of lading, letter of credit, share transfer form, debenture, proxy, insurance policies and money receipts, the duty will remain same throughout India. This is as per Union List issued by the Central Government. The State government is authorised to amend the Act or enact a new Act and prescribe the rate of stamp duty for instruments other than those mentioned in the Union List.

Different kinds of stamps: There are three kinds of stamps, i.e., Judicial (used as per Court Fees Act for filing of suits etc.), non-judicial (used as per provision of Indian Stamp Act for commercial transactions) and postal stamps.

Non-judicial stamps are used in bank documents, which are of three types, namely adhesive, special adhesive, embossed or impressed stamps. Adhesive stamps (such as revenue stamps, share transfer stamp, notary stamp etc.) are affixed on money receipts, demand promissory note, balance confirmation letter etc. Special adhesive stamps (substitute for non-judicial stamp papers) are affixed on all types of agreement such as hypothecation and pledge agreements and the guarantee letters etc. These documents are presented to the stamp office/treasury in the State to the stamped with special adhesive stamps of requisite amount. Embossed or impressed stamps refer to non-judicial paper having embossed or impressed stamps. These can also be used in place of special adhesive stamps.

Time of stamping: The documents must bear the current stamp and must be stamped before or the time of execution.

Value of stamp duty: Where clarity with regard to proper value of stamp duty payable is not there, Collector of the stamp duty will decide on the required value.

Effect of non-stamping or understamping: Promissory note, usance bill of exchange and acknowledgement of debt, are documents which if unstamped or inadequately stamped cannot be validated even after payment of duty and for all practical purposes, nullified. In case of other documents like a cash credit pledge or hypothecation agreement, before filing suit the duty should be paid so that they may be admitted in evidence on payment of duty including deficit, with a penalty.

Cancellation of stamps: The adhesive stamps affixed on a document or instrument should be cancelled by the executants by writing on or across the stamp his name or initials or in any other effectual manner, so that the stamp cannot be used again. Non-judicial stamp papers need not be cancelled, as these cannot be used again.

Effect of non-cancellation: Any instrument bearing adhesive stamps which have not been effectively cancelled shall be deemed to be unstamped. Special adhesive stamps or embossed or impressed stamps should not be cancelled while executing documents. Nothing should be written across these stamps.

Double signatures of the borrowers, once across the stamp and other without stamp, should be obtained on the pronote or any other document requiring adhesive stamps.

When any document is executed outside India and stamped at the time of execution with proper Indian Stamps is subsequently brought into the country, it will have to be stamped again by the first holder within three months of such arrival in India. In case of negotiable instruments, it should be done before negotiation by the first holder.

Bills of exchange where banks are a party to the documents: Stamp duty has been waived on usance bills which are payable not more than 3 months after date or sight and are endorsed in favour of a commercial/ co-operative bank and arise out of bonafide trade transaction.

Penalty: It may be minimum Rs.5 and maximum up to ten times of such duty or deficient portion. Further, any person executing a document which is not duly stamped is committing an offence which is punishable with fine which may extend to Rs.500.