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Income 4 banking


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Income 4 banking

  1. 1. Income source for bank Sagar's The income of scheduled commercial banks is broadly classifiable into interest and non-interest income. The interest earned on loans and advances, besides income from investments are interest income. Non-interest income comprises fees, income from trading, and foreign exchange operations. It also includes miscellaneous income. In the current soft interest regime, growth of bank income has witnessed a slowdown. In 2003-04, rate of growth of income of scheduled commercial banks was 6.6 per cent, compared to 14 per cent, the previous year. The total income in absolute terms increased from Rs 1,72,345.02 crore in 2002-03 to Rs 1,83,767.24 crore in 2003-04. Interest accounts for 78 per cent of the income of scheduled commercial banks. Under this head, income from loans and advances grew, in the same period, from Rs 68,570.10 crore to Rs 70,050.92 crore — a 2.33 per cent. Meanwhile, income from investments increased The changing constitution of banks' income is the result of sharp variation in their asset pattern. Published data reveal that between 1997 and 2003, investments recorded a compounded annual growth rate of 20.7 per cent, while interest-earning advances increased only at a 18 per cent. Over the years, investment of scheduled commercial banks in government securities has increased massively. It went up from Rs 2,30,and 687 crore in 1999 to Rs 5,02,498 crore in 2003; the percentage of investment in government securities to total investments increased from 69 per cent to 76 per cent. The Reserve Bank of India has conceded in the report on Trend and Progress of Banking in India, 2002-03 that "the fall in the interest income has been to a large extent compensated by the rise in income from investments". The writing on the wall is clear: Banks prefer to invest money in government securities than undertake lending per se. Another **1**
  2. 2. Income source for bank Sagar's issue to be examined is the composition of the non-interest income. Fee-income, trading income from sale and purchase of securities, fore-income and miscellaneous income account for roughly 30 per cent, 49 per cent, 9 per cent and 12 per cent respectively. Income from fees and commissions, which was 70-90 per cent of non-interest income in 1991-92 declined to 25-30 per cent during 2003-04. Data show that the fee-based income of scheduled commercial banks increased from Rs 10,594.54 crore in 2002-03 to Rs 11,825.01 crore in 2003-04, that is, by 11.6 per cent. But trading income went up But trading income went up from Rs 13,211crore to Rs19, 532 crore — 48 per cent — during the same period. Analysts say that by keeping large chunk of their resources in government securities, banks have indirectly and silently become a conduit in raising public debt. They also warn that "reckless" investment in government securities can result in complacency among banks because it is a risk-free operation and involves no appraisal or supervision after investment (post-credit supervision), as in the case of advances. In the long run, they add, this might result in erosion of appraising ability and supervising acumen in banks. Prima facie, this view may sound a little far-fetched; nevertheless, the warning needs to be heeded to and the decline in the growth rate of fee-based income arrested on a priority basis. Simultaneously, strategies to boost fee-based income should be urgently devised. More so, because of the near perfect competition in the interest rate scenario, which makes it difficult for banks to earn more by charging higher interest on loans. Interest on government securities has also come down over the years. The correlation between fee-based income and quality **2**
  3. 3. Income source for bank Sagar's of customer service is quite high. Unmistakably, banks have to concentrate more on providing better, faster and more efficient customer service. Any service provided by banks has to earn the satisfaction of the customer — the ultimate judge of quality. Nevertheless, the close relationship between service and customer is more relevant in the case of services, which reach the larger cross-section of public. In this context, fee-based income assumes greater significance because the clientele is broader. Better and faster customer service will entail more cost to banks and, under the current dispensation, their capacity to absorb additional cost is quite limited. It would, therefore, be in the fitness of things to permit banks to charge higher rates for better and faster service. Various strategies can be thought of to boost fee-based income. Perhaps, the ideal situation will be one where for every service in a bank there can be two different channels; the faster and guaranteed one, which can be at a higher cost, and the ordinary one, where no extra cost is involved. Guarantee is important because many instances have to come to light when people were made to run from pillar to post when money was sent but did not reach the destination. Banks could consider taking instructions on telephone or e-mail for issue of drafts and have them delivered to the customer. People who want such quality services will be ready to pay more. If this view is accepted, it may not be necessary for the Indian Banks Association to prescribe service charges. Competition and quality of service will take care of the pricing mechanism. It may not be possible for banks to provide two service channels everywhere, but a beginning can be made. Bank marketing has to go beyond loans and deposits. Banks should seriously consider launching aggressive marketing of specially priced services. For example, people who purchase a large number of drafts in a month and frequently make remittances can be given concessions. This approach can be considered for **3**
  4. 4. Income source for bank Sagar's other channels of services also. There is, however, a rider to focusing on non-interest income. The RBI has quoted international studies that caution against over-dependence on non-interest income because of its volatility. It would be reasonable to assume that the risk of volatility applies more to trading and treasury income. This is because trading income derived from buying and selling of securities and treasury income earned mainly from lending in the call money market, is subject to unpredictable variations. On the other hand, as the economy grows, the demand for fee-based services of banks services is certain to go up. Hence, initiating well-thought-out steps to enhance fee-based income may not be fraught with risk. (The author is a former chief general manager, Reserve Bank of India.) **4**
  5. 5. Income source for bank Sagar's A) Advancing of Loans The commercial banks provide loans and advances in various forms. They are given below. 1. Overdraft: This facility is given to holders of current accounts only. This is an arrangement with the bankers thereby the customer is allowed to draw money over and above the balance in his/ her account. It is a short-term temporary fund facility from bank and the bank will charge interest over the amount overdrawn. This facility is generally available to business firms and companies. 2. Cash Credit : Cash credit is a form of working capital credit given to the business firms. Under this arrangement, the customer opens an account and the sanctioned amount is credited with the account. The customer can operate that account within the sanctioned limit as and when required. It is made against security of goods, personal security etc. One advantage under his method is that bank charges interested only on the amount utilized and not on total amount sanctioned and credited to the account. Reserve Bank discourages this type of facility to business firms as it imposes an uncertainty on money supply hence this method of lending is slowly phased out from banks and replaced by loan accounts 3. Discounting of Bills : Discounting of bills may be another form of bank credit. The bank may purchase inland and foreign bills before these are due for payment by the drawee **5**
  6. 6. Income source for bank Sagar's debtors, at discounted values,i.e., values a little lower than the face values. The banker’s discount is generally the interest on the full amount for the unexpired period of the bill. The banks reserve the right of debiting the accounts of the customers in case of the bills is ultimately not paid,i.e., dishonored. 4. Loans and Advances : It includes both demand and term loans, direct loans and advances given to all type of customers mainly to businessmen and investors against personal security or goods of movable or immovable in nature. The loan amount is paid in cash or by credit to customer account, which the customer can draw at any time. The interest is charged for the full amount whether he withdraws the money from his account or not. Short-term loans are granted to meet the working capital requirements whereas long-term loans are granted to meet capital expenditure. Previously interest on loan was also regulated by RBI. Currently, banks can determine the rate themselves. Each bank is, however required to fix a minimum rate known as Prime Lending Rate (PLR). 5. Housing Finance: Nowadays commercial banks are competing among themselves in providing housing finance facilities their customers. It is mainly to increase the housing facilities in the country. State Bank of India, Indian Bank, Canara Bank, Punjab National Bank, has formed housing subsidiaries to provide housing finance. The other banks are also providing housing finances to the public. Government of India also encourages banks to provide adequate housing finance. Borrowers of housing finance get tax exemption benefits on interest paid. Further housing finance unto Rs.5 lakh is treated as priority sector advances for banks. The limit has been raised to Rs. 10 lakhs per borrower in cities. 6. Educational Loan Scheme: The Reserve Bank of India, from August, 1999 introduced a new Educational Loan Scheme for students of full time graduate/ post-graduate professional courses in private professional’s colleges. Under the scheme all public sector banks have been directed to provide **6**
  7. 7. Income source for bank Sagar's educational loan unto Rs. 15,000 for free seat and Rs. 50,000 for payment seat student at interest not more than 12 per cent per annum. This loan is on clean basis i.e., without calling for security. This loan is available only for students whose annual family income does not exceed Rs. 1, 00,000. The loan has to be repaid together with interest with interest within five years from the date of completion of the course. Studies in respect of the following subjects/ areas are covered under the scheme. a) Medical and dental course. b) Engineering course. c) Chemical Technology. d) Management courses like MBA. e) Law studies. f) Computer Science and Applications. This apart, some of the banks have other educational loan schemes against security etc., one can check up the details with the banks. 7. Loans against Shares/ Securities: Commercial banks provide loans against the security of shares/ debentures of reputed companies. Loans are usually given only unto 50% value (Market Value) of the shares subject to a maximum amount permissible as per RBI directives. Presently one can obtain a loan unto Rs. 10 lakhs against the physical shares and unto Rs. 20 lakhs against dematerialized shares. 8. Loans Against Savings Certificates :Banks are also providing loans unto certain value of savings certificates like National Savings Certificate, Fixed deposit receipt Indira Vikas Patra , etc. the loan may be obtained for personal or business purposes 9. consumer loans and advances: one of the important areas for bank financing in recent years is towards purchase of consumers durables like TV sets, Washing Machines, Micro Oven, etc. banks also provide liberal Car finance these days banks are competing with one another to lend money for these purposes as default of payment is not high in these areas as the borrowers are usually salaried persons having regular income. Further, bank’s interest rate is also higher. **7**
  8. 8. Income source for bank Sagar's Hence, banks improve their profit through such profitable loans. 10.Securitization of Loans: Banks are recently trying to securities a part of their part of loan portfolio and sell it to another investor. Under this method, banks will convert their business loan into a security or a document and sell it to some Investment or Fund Manager for cash to enhance their liquidity position. It is a process of transferring credit risk from the banker to the buyer of securitized loans. It involves a cost to the banker but it helps the bank to ensure proper recovery of loan. Accordingly, securitization is the process of changing an illiquid asset into a liquid asset. 11.Others: Commercial banks provide other types of advances such as venture capital advances, jewel loans, etc. **8**
  9. 9. Income source for bank Sagar's A) Agency Function:- Agency Functions include the following: 1) Collection of cheques, dividends, Interest: As an agent the bank collect cheques, drafts, Promissory Notes, interest, dividend etc. on behalf of its customers and credit the amount to their accounts. Customer may furnish their bank details to corporate where investment is made in shares, debentures etc. As and when dividend, interest, is due the companies directly send the warrant/cheques to the banks for credit to customer account. 2) Payment of rent, insurance premiums: The banks make the payment such as a rent, insurance premium, subscriptions, on standing instruction until further notice. Till the order is revoked, the bank will continue to make such payment regularly by debiting customer accounts. 3) Dealing in foreign Exchange: As an agent the commercial banks purchase and sell foreign exchange as well for customer as per RBI Exchange Control Regulation. 4) Purchase and sale of securities: Commercial Banks undertakes the purchase and sale of different securities such as a share, debenture, bonds etc. on behalf of their customer. They run separate 'portfolio Management Scheme for their big customer. 5) Act as a trustee, executor, attorney etc: The Banks act as executors of will, trustee and attorney. It is safe to appoint a bank as a trustee than to appoint an individual. Acting as an attorney of their customers, they receive payment and sign transfer deeds of the properties of their customers. **9**
  10. 10. Income source for bank Sagar's 6) Act as a correspondent: The commercial banks acts as a correspondent of their customer small banks even get travel tickets, book vehicles, receive letter etc. on behalf of customers. 7) Preparation of Income Tax returns: They prepare income tax return and provide advice on tax matter for their customer. For this purpose, they employ tax experts and make their service available to their customers. B) General Utility Service:- The General Utility Service includes the following: 1) Safety Locker Facility: Safekeeping old important document, valuable like jeweler is one o f the oldest service provided by commercial banks. 'Locker" is small receptacles which are fitted in steel racks and kept inside strong room called as Vaults. These lockers are available half yearly or annual rental basis. The banks merely provide lockers and the keys but the valuable are always under the control of its users. Any customer cannot have access to vault. Only customer of safety locker after entering into a register his named account number and time can enter into the vault. Because the vaults is holding important valuables of customers in lockers, it is also called known as a 'Strong Room' 2) Payment Mechanism or Money Transfer: Transfer of funds is one of the important functioned performed by commercial banks. Cheques and credit cards are two important payment mechanisms through the banks, Despite an increase in financial transaction, banks are managing the transfer of the funds process very efficiently.Cheques are also cleared through the banking system. Correspondent banking is another method of transferring fund over long distance, usually from one country to another. 3) Travelers Cheques: Travellers cheques are used by domestic travelers as well as by internationals traveler. However the use of traveler cheques is more common by **10**
  11. 11. Income source for bank Sagar's internationals traveler because of their safety and convenience. These can be also termed as a modified formed of traveler letter of credit. A bank is issuing traveler cheques usually have banking arrangement with many of the foreign banks abroad, known as correspondent banks. The purchase of traveler cheques cans encase the cheques from the all-overseas bank with whom the issuing bank has such as arrangement. Thus traveler cheques are not drawn on specific abroad. The cheques are issued in foreign currency and in convenient denominations of ten, twenty, fifty, one hundred dollar etc. The signature of the buyer/traveler is written on the face of cheques at the time of their purchase. The cheques also provide blank space for the signature of the traveler to be signed at the time of encashment of each cheque. A traveler has to sign in the blank space at the time of drawing money and in the presence of the paying bankers. The paying banker will pay the money only when the signature of the traveler tallies with the signature already available on the cheques. A traveler should never sign the cheques except in the presence of the paying banker and only when the traveler desire to encash the cheques. Otherwise it may be misused. Hotel, restaurants, shopping mall, and airline companies also accept the cheques for respectable persons. Encashment of traveler cheques abroad is tantamount to a foreign exchange transaction as it involves conversion of domestic currency into a foreign currency. When a traveler cheques is lost and stolen, the buyer of the cheques has to given a notice to the issuing banks so that stop order can be issued against such lost/stolen cheques to the banks where they are permitted to be encashed.It is also difficult to the finder of the cheques to drawn cash against it since the encasher has to sign the cheques in the presence of the paying banker. Unused traveler cheques can be surrender to the issuing banks and balance of cash obtained. 4) Circular Notes or Circular Letter of credit: Under the circular letter of credit the Customer/traveler negotiates the drafts with any of the various with any various branches to which **11**
  12. 12. Income source for bank Sagar's they are addressed. Thus the traveler can be obtained fund from the many of branches of bank instead only from a particular branch. Circular letter of credit is thereof a more useful method for obtaining fund while traveling to many countries. 5) Letter of Credit: Letter of credit is payment document provided by the buyer banker in favor of seller. This document guaranteed payment to the seller upon production of document mentioned in the letter of Credit evidence dispatch of goods to the buyer. The letter of credit is an assurance of payment upon fulfilling 6) Acting as Referee: The bank act as a referee and supply information about the business transaction and financial standing of their customer on enquiries made by third parties. This is done on the acceptance of the customer and helps to increase the business activity in general. 7) Provide Trade Information: The commercial banks collect information on the business and financial conditions etc., and it available to their customer to help plan their strategy. Trade information service is very useful for those customers going for cross-border business. It will help trader to know the exact business conditions payment rules and buyer financial status in other countries. 8) ATM Facilities: The banks today have ATM facilities under this system the customer can withdraw their money easily and quickly and 24 hour a day. This is also known as Any Time Money. Customer under this system can withdrawals fund i.e. currency notes with a help of certain magnetic card issued by the banks and similarly deposit cash/cheques for credit to account. 9) Credit cards Bank has introduced credit card system: Credit card unable a customer to purchase goods and services from a certain specific retail and service establishment up to a limit without making immediate **12**
  13. 13. Income source for bank Sagar's payment. In other words purchase ca be made credit basis on the strength of the credit cards. The establishment likes hotel, shops, Airline companies, Railways etc. that sell the goods and services on credit forward a monthly or fortnightly statement to the banks. The amount is to be paid to this establishment by the banks the banks subsequently collect dues from the customer by debit to their account. 10) Gift Cheques: The commercial banks offer Gift Cheques facilities to the general public these cheques are received a wider acceptance in India. Under this system by paying equivalent amount one can buy gift cheques for presentation on occasion like Wedding Birthday. 11) Accepting the Bills: On behalf of the customer the bank accept bills drawn by third parties on its customer. This resembled the letter of credit. While banks accept bills they provide better securities for payment to seller o goods or drawer of bills. 12) Merchant Banking: The commercial Banks provide valuable service through their merchant banking divisions or through their subsidiaries to the trader. This is the function of underwriting of securities. They underwrite a portioned of public issue of share, debenture and bonds pf Joint stock Company. Such underwriting ensures the expected minimum subscription and also conveys to the investing public about the quality of the company issuing the securities. Currently, this type of service can be provided only by separate subsidiaries known as a merchant banker as per SEBI regulations. 13) Advice on Financial Matters: The commercial banks also give advice to their customer on financial matter particularly on investment decisions such as expansion diversification new ventures rising of funds etc. 14) Factoring Service: Today the commercial bank provide factoring service to their customer. It is very much helpful in the development of trade and industry as **13**
  14. 14. Income source for bank Sagar's immediate cash flow and administration of debtors account are taken care of by factor. This service is again provided only by separate subsidiaries as per RBI regulations. C) Remittance facilities: Banks are financial intermediaries. Apart from mobilizing deposits from savers and lending them to needy borrowers, banks help the savers and borrowers to transfer funds from one place to another in a secured way without physically moving the funds. Usually the following methods are adopted by banks for transfer of funds. 1. Mail transfer 2. Telegraphic transfer 3. Demand drafts 4. Pay orders 5. Electronic funds transfer Demand drafts: Drafts are basically bill of exchange. As in the case of bill of exchange, a draft is drawn by one party on another party and made payable to the drawer himself or some on else. DD are drafts drawn by a bank on its own branches at different places and made payable to third parties or purchaser of the draft. Eg.Supposing you as a student desires to remit certain fees for taking up a competitive examination conducted by the service board, usually the board asks the all the candidates to remit the examination fees by demand drafts issued by banks. In such a case, you may pay the requisite sum to a bank along with the prescribed challan detailing the name of the payee, purchaser or remitter, amount, place, where it should be remitted, etc. the bank on receipt of the amount will issue a draft which has to be sent by the candidates to the board along with the application. For obtaining money or credit to the account, the payee (in the present case the board) has top present the draft to the paying bank. Since these drafts are payable immediately on presentation by the payee, they are called demand drafts. The draft can be crossed “account payee” to restrict its transfer. **14**
  15. 15. Income source for bank Sagar's DD can be defined as cheques issued by a bank on its own branches or on other banks under corresponding arrangement. Pay order: Pay orders are drafts issued by an office/ branch of a bank on itself. In other words the issuing branch/ office and paying branch/ office are on and the same. Pay orders are issued by bank only against receipt of funds first. Suppose a candidate desires to remit certain examination/ admission fees to a particular educational authority. In case both the candidate and the educational authority happen to maintain accounts with the same branch, then the candidate may remit the fees by obtaining a pay order instead of a demand draft. If the fees can be paid to any branches of the bank, then a demand draft can be obtained draft is that where as a demand draft is issued by a bank on any of its branches, a pay order is issued on it self. In both the case the bank will issue the instruments only after receipt of funds first. Electronic funds transfer: Normally remittance or transfer of funds between banks gets originated by a paper instrument. For e.g. under mail transfer, the remitter has fill up necessary challan and give it to the bank along with a cheque or cash for transfer of funds. Under electronic funds transfer the transaction of funds transfer is initiated through an electronic equipment and system or telephone or computer devices, etc. In India, the RBI has introduce EFT scheme to assist banks in providing their customers fund transfer facility from one account to another either with the same bank or with different banks. Under this system a customer desiring to remit certain amount to another place fills in the prescribed EFT application form together with the details like, beneficiary’s name, bank account number, name of the bank and branch, location of the branch, etc. and hands over the form and a cheque drawn on his account. The remitting bank through one of its designated branches for this purpose transmits the details of transfer to the RBI. The reserve bank at the transaction originating centers consolidates all such transfer advice and transmits information of transfer to its various **15**
  16. 16. Income source for bank Sagar's centers for advising the concerned banks for providing the requisite credit to the beneficiaries. Thus, it acts as an intermediary between the remitting bank and receiving bank and affects the transfer. The RBI allows up to Rs.2.00 crore per transaction to be transfer in this way. Further it charges Rs.5.00 per transaction to banks. The banks will charge separately fees on their customers for availing of this facility. However, fees charged by banks for transfer of fund under EFT system will be smaller as compared to remittance facilities under MT, TT, and DD. This system of funds transfer is available with all the public sector banks and many of the private sector and state co-operative banks. Fund transfer under EFT is possible from any branch-to-branch with the same bank or with other banks. D) Other Fee based Services: These services can be identified as: 1. Issue of Guarantees 2. Locker Facilities 3. Issue of Credit Cards 4. Portfolio Management Services ( PMS ) 5. Tax Advice 6. Investment Guidance 7. Acting as Agents for Selling Financial Products 8. Sale of Insurance Products 9. Project consultancy 10.( Demat ) Dematerialized Accounts 11.Issue of Letter of Credits 12.Custodial Services 13.Loans from Overseas Market for customers 14.Other Fee Based Services 1. Issue of Guarantees: Issue of guarantees on behalf of customers is one of the important revenue earning services provided by banks. In the course of commercial business the customer may be required to **16**
  17. 17. Income source for bank Sagar's provide with a bank guarantee under different circumstances. Guarantees manly serve the purpose of assuring that the work awarded to person will be performed / executed in terms of a contract. If not, the guarantor will step into pay any compensation stipulated under the contract. This service brings in sizeable income to the banks. The guarantees as well as the customer- banker relationship. 2. Locker Facilities: Bankers make available Safety Locker Facilities to customers for keeping their valuables. In return, the bank Levis half-yearly or annually charges which may depend upon the size of the lockers. The lockers may be used to hold valuables like ornaments, jewellery, Share / Bond Certificates and other important documents. These items are held only at the risk of the customers. Banks will not be held liable if the customers misuse the locker facility. 3. Issue of Credit Cards: Banks issue their own as well as Cards of other reputed agencies under arrangement to customer. Banks collect charges for this facility from card holders depending upon the type of card, value limit, etc. The fess may be charged on annual basis with certain specified one time entry fees also. 4. PMS Services: Under Portfolio Management Services, the banks accept large sums of money from wealthy customers for investment purposes with permission of Reserve Bank of India. The guide- lines governing PMS services are issued by Reserve Bank. Banks are expected to maintain separate account for this purpose and they are not permitted mix up these funds with their own funds. The cannot guarantee fixed income to customers under this scheme. Banks are basically expected to utilize the funds for investment and income generated out of such activity will be credited to customers account. Banks, are however, and permitted to levy fess / charges for such services. Funds accepted under the Schemes should normally be that of the customers and not that of the bank. **17**
  18. 18. Income source for bank Sagar's 5. Tax Advice: Most of the banks have their own departments. Although these departments normally engage themselves to protect the interest of the institution from legal disputes, the departments also have experts to provide legal counseling to customers. Such advice may pertain to personal taxation, capital gain tax and other tax issues. 6. Investment Guidance: These days a number of financial saving products are available for investors. Some of them are money market instruments like, Treasury Bills, Commercial Paper, Certificate of Deposits, etc. Some of them are Capital Market instruments like Shares, Bonds, and Government Securities with long term horizon. Banks offer their expertise to customers in choosing the right type of investment depending upon the amount, duration, risk appetite, expected return, etc., of customers. Banks charge fees for providing such services, this type of service is different from that of PMS services mentioned above. Under PMS, the banks accept large sum of money from a customer and utilize the funds for various investment in consulting with the customer and at his own risk. However, banks will provide investment advice and guidance for any customers and actual investment decision and employment of funds and maintenance of accounts there to will be done by the customers. 7. Agents for selling financial products: Under arrangement with other agencies engaged in financial services, banks sell their products like Credit / Debit Cards, ATM Services etc., to customers. Although the bank may obtain a share of fees from other agencies, banks may also levy certain charges for these additional facilities. **18**
  19. 19. Income source for bank Sagar's 8. Sale of Insurance Products: Recently, banks in India are permitted to sell insurance products to their customers under arrangement with Insurance Companies. These products may be life insurance policies, accident insurance policies, Pension Policies and other general insurance policies. Banks which have wide network of branches are expected to earn sizeable income / fees from these additional facilities. 9. Project Consultancy Services: Many first-time entrepreneurs need expert advice for crystallizing their investment ideas into workable projects. Unplanned schemes may run into cost escalation and delayed execution. Persons intending to put up small scale industries normally overlook many aspects of the project requirements like environment clearance, legal issues, etc. Banks will be in a better position to provide all round advice in such cases for certain fees. 10. Demate account: Under SEBI guide lines, the issue and transfer of security of many corporate are now required to be transact in demate forms .under demate, physical securities are converted in to electronic form and held in account with bank and other institutions permitted to maintain this type of accounts bank may usually levy charges for marinating such account although such account in many cases such services may be provided free of charges. 11. Letter of credit (LOC): Bank issue letter of credit on behalf of t6heir customer particularly in international trade. The issue of letter of credit may be a non fund based services if bank are not providing their own funds to honors the bills drawn under letter of credit. Bank charges fees for issue of letter of credit which may depend upon the value of credit, tenor of credit and customer relationship. **19**
  20. 20. Income source for bank Sagar's 12.Custodial services: Apart from offering safety locker facility ,bank also provide custodial services for holding valuable financial instruments, important legal deeds and deed and documents of customer against payment of periodic fees. The bank will be earning certain fees from the company for this purpose. 13.Arraigning foreign currency loans from overseas market. Presently government permits Indian corporate to raise foreign currency loans from overseas market under certain conditions .since they may not be well conversant with overseas market and the risk associated with it, the corporate take the assistance of bank for raising the loan at minimum cost .the bank collects fees like management fees,etc for such services .they may also arrange loan syndication against specifics fees .charge in such case will relate to the total fund raised ,the duration of loan management of loan account and other services expected of the bank under arrangement with the customers. 14. Other fee based services: Bank tends to innovate new type of services to suit the personal requirement of various customers as well as that of corporate-client. As such these services will be different from bank to bank .in the establish overseas market, bank may also provide the following specialized services to corporate clients: (1)Factoring service, (2)Forfating services, (3)Bank acceptances ,etc Factors are basically institutions financing the receivables corporate on recourse or non-recourse other word the account receivable directly from debtors. It is beneficial to the corporate since they are able to realize funds on the bills immediately from the factor. The factor deducts commission or **20**
  21. 21. Income source for bank Sagar's other charges plus inters components from the value of bill before making payments to customer. Forfating is another method of purchasing receivable of purchasing the receivable of customer on non-recourses basis. However forfating is more common in international trade while factoring is common practice adopted in domestic trade. Since forfating is always done under non-recourses basis, the discounted value is higher as compared to the discount under factoring. A banker acceptances refer to bills which have been accepted by bank .this acceptance enhances the safety aspect of the bill and becomes a good instrument for value to discount house. Further bankers acceptance strike a better realization with lower discount. **21**
  22. 22. Income source for bank Sagar's SCHEDULED TO BALANCE SHEET AND PROFIT AND LOSS ACOUNT SCHEDULED NO 6.CASH AND BALANCE WITH RBI this include the cash in foreign currency and in rupee -cash in hand -balance with RBI SCHEDULED N0 8. INVESTMENT It include the following I. investment in India in >government securities >approved securities >share >debenture & bonds >subsidiary & joint venture >other II investment outside India >government securities >other investment SECTION 9.ADVANCES it include the following A.(I)Bills purchased and discount (ii)cash credit ,overdrafts and loans repayable on demand (iii)term loan B.(I)secured by tangible assets (ii) cover by bank govt.gurantees (iii)unsecured C.1.advances in India >priority sector >public sector >bank >other 2.Advances outside India >dues from bank >dues from other (a)bill purchased and discounted (b) syndicated loan (c ) other **22**
  23. 23. Income source for bank Sagar's SCHEDULED 13. INTEREST EARNED 1.interesdiscount on advances 2.income on investment 3.interest on balance with reserve bank of India and other inter bank funds 4. other SCHEDULED NO 14. OTHER INCOME 1. commission exchange & brokreage 2. profit on sale of investment 3. profit on revaluation of investment 4. profit on sale of landbuilding and other assets 5. profit on exchange trancation 6. miscellaneous income **23**
  24. 24. Income source for bank Sagar's INSURANCE TO FORM 13RD OF BANKS FEE-BASED INCOME. Insurance activity is expected to form one third part of bank’s total strong fee-based in near feature, revealed GC Chaturvedi-joint secretary (banking & insurance),ministry of finance. The “Emerging Bancassurance” that bancassurance is one of the potential growth areas. life insurance industry has growth at a phenomenal growth rate of 46% this year even the life insurance corporation has growth around 35%.the bancassurance contributes just 2%, however within span of next five year it is expected to grow around 13% in life insurance and 5% in non life insurance business from banassurance the bank as well as insurance players to focus on the future growth opportunities and find out the challenge. The insurance player should consider public sector bank (PSBs) for distributing their product. INSURANCE PENETRATION FORMS 2.9% OF GDP Source-The Financial Express-18th January, 2006 **24**
  25. 25. Income source for bank Sagar's RBI in talks with banks to boost volumes in ADVANCE PAYMENT SYSTEM products In a bid to increase the volume of business in advances payment system product the reserve bank of India has initiate discuss with the bankers. the RBI has chalked out the step which would help the bank to push the volume in advances payment system. The RBI found there is a lot of potential in this area. the bank to push the business volumes in this systems .they should try to create innovative delivery channels with suitable product .the products could available through ATM’s, Websites, bank branches and other routes. the bank are suggested to target the corporate ,small and medium enterprises sector, small scale units and individual with suitable product through appropriate delivery channels. The RBI is planning to extend Real Time Gross Settlement (RTGS)mechanisms to commodities and stock exchange and government securities. Source-The Financial Express-18th January, 2006 **25**
  26. 26. Income source for bank Sagar's USE OF INTERNET IN BANKING COMPELLING An internet transaction costs ICICI bank only 0.45 paisa as compared to 145-150 Rs if a customer visits bank branches. “That is how compelling is the need for increase the usage of the internet as a medium for banking transaction”- ICICI BANK GENERAL MANAGER (RETAIL ASSETS PRODUCT GROUP) - MAHIVANAM B said. “About 2 year ago, 94% of transactions used to be via our branches. At present, it is down to 30% after the introduction of ATM’s. They can achieve the same cost reduction with mobile devices and with the internet,”- but this can only be achieved with true broadband connectivity and personal computer (PC) and mobile devices are able to penetrate to each consumer. “THE INTERNET HAS ALREADY BECOME AN INEVITABLE PART OF THE BANKING INDUSTRY” Source-The Financial Express-18th January, 2006 **26**