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  2. 2. Q 1. Write a detailed note on evolution of corporate banking.Ans: Evolution of Corporate BankingAs mentioned above, corporate banking units supply capital to business ventures ona long term basis. It encompasses the various products and services that acommercial bank provides to its corporate customers.Traditionally, banks focused on retail segments while wholesale/corporate bankswere in separate existence. They focused primarily on large and medium sizedbusinesses because the average dollar/rupee value of transactions in thesesegments was high. However due to competitive pressures the role that such banksplay has undergone a vast change. While they continue to be involved in commercialloans, corporate banking entities are no longer just credit providers, but a fee-basedservice intermediary, for large, medium and small corporates.Further, all commercial banks now have their own corporate banking segments thuscreating a one-stop shop for all categories of customers. While there is suchprogress in the concept of universal banking on one hand, there is a huge challengeof competition to be faced on the other; the challenge being large product bouquetsbeing brought about by each bank. This has created fierce competition in thissegment, spurring major competitors to grow ever larger and making the position ofcorporate treasurers even more difficult to satisfy. Further, the cost of theseconflicting demands and competitive pressures has created the need to find newsources of revenue. Technology-aided services, customer-centricity, innovative tailormade product brochures and hard core relationship management have become theprime differentiators. In this scenario, corporate bankers have two basic choices –either ensure their current position at peak efficiency so as to effectively meet itscustomers’ needs, or develop alternative strategies outside their current operationsenvironment.Corporate Banking has evolved through time and some significant changes.Corporate customers are now altering the nature of the relationship, which waspreviously dictated by banks, selecting business and imposing charges at will. Most
  3. 3. corporates are looking at reducing their dependence on banks and assuming greatercontrol over their finances. Treasury activities are being consolidated therebyreducing transaction costs and all financial processes are being integrated.Corporates have begun to set up their finance departments as ‘in-house banks’ toprovide cash pooling services etc normally supplied by external banks. This allowsthem to centralize their liquidity effectively. Many set up ‘payment centers’ or ‘sharedservice centers’ to rationalise the payment settlement process, enabling them toprofit from cash reserves to an unprecedented extent.All of these changes have occurred against the backdrop of corporate world’srelentless balance-sheet leveraging, continued deregulation of key industries suchas energy and telecommunications, and the ongoing globalisation of investmentsources, trading partners, and operations.
  4. 4. Q 2. What are the key features of recovery management?Ans: Recovery Management – an OverviewIn continuation to the tasks of credit deployment and monitoring, follow-up andrecovery management are the most significant activities. A very important documentin this regard is the loan agreement. The loan agreement will have all issues relatedto 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 borrowerwhich in turn depends on the Debt Service Coverage Ratio (DSCR). DSCR ispreferred to be greater than 1.5. In addition to this the repayment usually starts aftera moratorium period.Recovery management involves understanding all the terms in the loan agreement,studying the credit risk involved and identifying the problem loans. Since timelyidentification 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 classificationwhich you will be seeing in the upcoming section.Considering the threat ‘problem loans’ pose to the health of a bank, it becomes vitalto monitor loans at various stages. With continuous monitoring, the bank is enabledto assess the financial position of the client company and thereby take timely actionbefore such loans get converted into NPAs, which can possibly turn into loss assetsthereafter.All banks have a Recovery Policy that lays down the guidelines to the Bankemployees on how to go about recovery management. These are formulated on thelines of guidelines issued by the RBI’s prudential norms for income recognition, assetclassification and provisioning for credit portfolio of Banks, which we will be lookingat in the next section.Objectives of a Loan Recovery Policy:
  5. 5. a) Minimise the accretion of fresh NPAs: It is more prudent to avoid the slippage soas to save time, labour and cost.b) Reduce the level of NPAs through recovery by adopting various legal and othermeasures.c) Close follow up of sticky/ irregular accounts including sick units, suit filed anddecreed accounts and the cases referred to Debt Recovery Tribunals for speedyrecovery of the dues.d) Upgrade the existing NPAs by improving the quality of assets by recovering theoverdue accounts and by restructuring the accounts wherever possible.e) Prevent deterioration of the quality of assets through regular inspection ofsecurities and compliance to all other terms and conditions of loan sanction.
  6. 6. Q 3 What are supply bills? What is the procedure to be followed bya bank in making advances against such bills?Ans: Supply BillsBills drawn on government or semi-government departments or bodies or Publicsector undertakings, for the supply of goods and other materials or for theperformance 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 thegovernment may draw the bill on supply of goods or performance of contract, whichmay be partial or whole as permitted under the terms of the tender. Once the goodssupplied are found to be in conformance with the tender/contract, or the contractwork, in part or whole, is found to be completed in accordance with the terms of thecontract, an acceptance/ inspection note is issued by the authorised representativeof the concerned entity. Payment of bills by such government or PSU entities ismade only when the bills are accompanied by such inspection/ acceptance note.Payments are not generally forthcoming promptly from such agencies on account ofprocedural delays involved in checking and passing of the bills. Therefore, suppliersapproach banks for advance against such bills as security for uninterrupted conductof their business.Procedure to be followed· Supplier sends the goods and then produces documents like railway receipt or billof lading as evidence of dispatch of goods.· Goods are inspected by an appropriate authority and an acceptance/ inspectionnote is issued. In case of work contracts, an engineer’s certificate with regard to thework done is issued to the supplier.· Supplier/ contractor prepares bill for payment. The inspection/ acceptance note orthe engineer’s certificate has to accompany the bill.
  7. 7. · The bill along with such documents as above is submitted to the concerned entitythrough a banker. Supplier/ contractor requests the banker for an advance againstsuch 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 forpayment 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 statusof being a negotiable instrument. They are in the nature of debts which can beassigned in favour of the banker for payment, after affixing a revenue stamp forhaving received the amount. The banker should also obtain a letter from the supplieror contractor requesting the appropriate department to make the payment directly tothe banker.Advances made against supply bills are considered to be clean advances as thebank holds no charge on any security. Further, in certain cases it may take quite along time before the advance is realised because of administrative and otherprocedural issues. Bank may also not get full payment, because of the possibility ofcounter claim or right of set-off by the government agency, as the charge is only byway of an assignment. Sometimes, the government may not pass the bill for fullamount on account of dissatisfaction with the goods delivered or the work done. Dueto this reason, banks, to safeguard their interest, have to ensure that such advancesare 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 ingovernment / PSU business and relevant regulations.· The contract between the supplier and the government agency should bescrutinized by the banker so as to know the nature of dealings, volume oftransactions, period of supply, rates agreed upon and other terms and conditions.
  8. 8. · Banker should obtain an irrevocable power of attorney from the supplier favouringthe banker to receive the money. This should be registered with the concernedgovernment agency.· Banker should ensure that no adverse remarks are made on the inspection note orengineer’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 verificationof the goods. Because of the delay involved in the settlement of the final bill, banksshould preferably advance against the interim bills. And undertake the final bill forcollection.
  9. 9. Q 4. How is the Cash Flow Statement different from the FundsFlow Statements?Ans: Many people think that both cash and fund are same, however they both aredifferent and so is the case with cash flow statement and funds flow statement. Let’s lookat 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 companybetween two balance sheet dates while cash flow statement reveals the change in the cashposition of the company between two balance sheet dates.2. As funds flow statement shows the change in working capital it deals with all thecomponents of working capital while cash flow statement deals only with cash and cashequivalents.3. In case of funds flow statement schedule of changes in working capital is preparedwhile 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 fromoperating activities, cash flow from investment activities and cash flow from financingactivities, 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 beeasily understood by a person who does not have accounting knowledge which is not thecase with funds flow statement.New Approach1. The fund flow statement is based on the concept of working capital, whereas the cash flowstatement 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 flowstatement provides the details of cash movements.3. Fund flow statement considers the movement of the funds as defined in terms of networking capital, whereas the cash flow statement considers only the actual movement offunds.4. In fund flow statement, net increase or decrease in working capital is recorded while incash 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 closingcash balance records only cash transactions, whereas cash flow statement is started with theopening cash balance and closed with ht closing cash balance while there a no opening orclosing balances in Funds Flow Statement.
  10. 10. Q 5 How is CVP analysis relevant to a lending banker?Ans: Cost, Volume and Profit (CVP) Analysis & Profit / Volume (PV RatioAnalysis)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 profitsdepend 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 unitto examine the profitability of the operations as it reveals the effect on profit ofchanges 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 shouldmanufacture or buy etc.PV Ratio expresses the relationship of contribution to the sales and is expressed asshown 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 salesAs a general rule, higher the PV Ratio, the more profitable it would be and viceversa. Hence managements will aim at increasing their PV Ratio, as it can beincreased by increasing the contribution, which in turn can be effected either byincreasing the selling price or reducing the variable or marginal cost or changing thesale mix and selling more profitable products having higher PV Ratio.
  11. 11. 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, debtequity ratio, net worth will improve.· If a firm revalues its fixed assets and creates revaluation reserve – net worth andtangible networth increase. Debt equity ratio declines/ improves. There is no effecton 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 usesduring a year – liquid asset would increase, liquidity would improve.· If increase in long term is uses more (say 125%) than increase in long term sourcesduring a year – liquid asset would decrease, liquidity would decline.· Lower and higher break-even point – a firm with lower break-even point has betterchances 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 higherpercentage 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 ofstocks or higher percentage in receivables in total current assets.
  12. 12. 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 amendedby the concerned State Governments. A document executed in India shall bestamped before or at the time of execution. Section 12 of Indian Stamp Act providesfor cancellation of adhesive stamp so that the same cannot be used again. Anyinstrument bearing an adhesive stamp which has not been cancelled, so that itcannot be used again, shall be deemed to be unstamped.Stamping of Loan documentsAs discussed earlier, stamping of documents is a very important activity in thedocumentation process. It needs to be done before the documents are signed by theexecutants.The Stamp Act extends to whole of India except Jammu & Kashmir. In all, there are65 documents requiring stamping. All documents chargeable with duty and executedby any person in India should be properly and duly stamped as per provisions ofIndian Stamp Act 1899.In respect of 10 instruments namely Demand Promissory note, bill of exchangepayable otherwise than on demand, cheque, bill of lading, letter of credit, sharetransfer form, debenture, proxy, insurance policies and money receipts, the duty willremain same throughout India. This is as per Union List issued by the CentralGovernment. The State government is authorised to amend the Act or enact a newAct and prescribe the rate of stamp duty for instruments other than those mentionedin the Union List.Different kinds of stamps: There are three kinds of stamps, i.e., Judicial (used as perCourt Fees Act for filing of suits etc.), non-judicial (used as per provision of IndianStamp Act for commercial transactions) and postal stamps.
  13. 13. Non-judicial stamps are used in bank documents, which are of three types, namelyadhesive, special adhesive, embossed or impressed stamps. Adhesive stamps (suchas revenue stamps, share transfer stamp, notary stamp etc.) are affixed on moneyreceipts, demand promissory note, balance confirmation letter etc. Special adhesivestamps (substitute for non-judicial stamp papers) are affixed on all types ofagreement such as hypothecation and pledge agreements and the guarantee lettersetc. These documents are presented to the stamp office/treasury in the State to thestamped with special adhesive stamps of requisite amount. Embossed or impressedstamps refer to non-judicial paper having embossed or impressed stamps. Thesecan also be used in place of special adhesive stamps.Time of stamping: The documents must bear the current stamp and must bestamped before or the time of execution.Value of stamp duty: Where clarity with regard to proper value of stamp duty payableis not there, Collector of the stamp duty will decide on the required value.Effect of non-stamping or understamping: Promissory note, usance bill of exchangeand acknowledgement of debt, are documents which if unstamped or inadequatelystamped cannot be validated even after payment of duty and for all practicalpurposes, nullified. In case of other documents like a cash credit pledge orhypothecation agreement, before filing suit the duty should be paid so that they maybe admitted in evidence on payment of duty including deficit, with a penalty.Cancellation of stamps: The adhesive stamps affixed on a document or instrumentshould be cancelled by the executants by writing on or across the stamp his name orinitials 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 notbeen effectively cancelled shall be deemed to be unstamped. Special adhesivestamps or embossed or impressed stamps should not be cancelled while executingdocuments. Nothing should be written across these stamps.
  14. 14. Double signatures of the borrowers, once across the stamp and other without stamp,should be obtained on the pronote or any other document requiring adhesivestamps.When any document is executed outside India and stamped at the time of executionwith proper Indian Stamps is subsequently brought into the country, it will have to bestamped again by the first holder within three months of such arrival in India. In caseof 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 beenwaived on usance bills which are payable not more than 3 months after date or sightand are endorsed in favour of a commercial/ co-operative bank and arise out ofbonafide trade transaction.Penalty: It may be minimum Rs.5 and maximum up to ten times of such duty ordeficient portion. Further, any person executing a document which is not dulystamped is committing an offence which is punishable with fine which may extend toRs.500.