COMMERCE AND BUSINESS for BANK INTERVIEWS

 COMMERCE AND BUSINESS

In the earlier pages questions on computer subjects were given.  A few points relating to Banking are given here and they may be of use for personnel appearing for interviews in Banks, insurance and other financial sector companies.

BANKING

1.             The Reserve Bank is constituted under Section 3 of the Reserve Bank of India Act, 1934 for taking over the management of currency from the Central government and Carrying on the business of banking in accordance with the provisions of the Act. Originally, under the RBI Act, the Bank had the responsibility of;

(i)                 regulating the issue of bank notes.

(ii)               Keeping of reserves for ensuring monetary stability, and

(iii)             generally to operate the currency and credit system of the country to its advantage.

2.            The major powers of the Reserve Bank in different roles as Regulator and Supervisor can be summed up as under:

(i)       Power to licence

(ii)     Power of appointment and removal of banking Boards/personnel;

(iii)   Power to regulate the business of banks;

(iv)    Power to give directions;

(v)      Power to inspect and supervise banks;

(vi)    Power regarding audit of banks;

(vii)  Power to collect and furnish credit information;

(viii)                      Powers relating to moratorium, amalgamation and winding up; and

(ix)    Power to impose penalties.

3.            (A) Banking means acceptance of deposits of money from the public for lending or investment. Such deposits may be repayable on demand or may be for a period of time as agreed to by the banker and the customer and may be repayable by cheque, draft or otherwise. Apart from banking, banks are authorized to carry on other business as specified in Section 6 of the Banking Regulation Act. Banks are, however, prohibited from undertaking any trading activities.

B.    Banks fare constituted as companies registered under the Companies Act, 1956, statutory corporations constituted under Special or cooperative societies registered under the Cooperative Societies Act. The extent of applicability of the regulatory provisions under the Banking Regulation Act and the Reserve Bank of India Act to a bank depends on the constitution of the bank.

C.    Reserve Bank of India is the central bank of the country and the primary regulator for the banking sector. The government has direct and indirect control over banks. It can exercise controls through the Reserve Bank of India, in appeals arising from decisions of the Reserve Bank  and also directly under the various provisions of the Banking Regulation Act. Public Sector banks like State Bank of India and its subsidiaries, nationalized banks and Regional Rural Banks are owned by the Central Government. Central Government has substantial control over the management of these banks. Only certain provisions of the BR Act are applicable to these banks as indicated in that Act. Cooperative banks Societies Act and subject to the control of the State Government and also the Reserve Bank. In the case of non-banking business of the banks, they are subject to controls by other regulatory agencies.

4.            (A)          Organizations of banks are controlled mainly by Reserve Bank of India under the powers granted under the provisions of the Banking Regulation Act 1949.

(B)  The main concerns of the Reserve Bank of India in this regard are protection of the depositors and stability of the banking system.

©Stringent requirements of minimum capital adequacy ratio, maximum voting rights, eligibility for appointment of whole-time and part-time directors are made by the Reserve Bank of India.

(D)The Banking Regulation Act lays down stipulations regarding the composition of Boards of Directors of Banks to ensure the Boards have required experience, knowledge and expertise for the financial stability of the banks and also that all important sectors of the economy are represented.

(E)  The Reserve Bank of India has the authority to remove the directors in case it is not satisfied with the performance of the banks. It can direct the banking company to elect or appoint other suitable / eligible person/s as director/s or appoint person/s of its choice to fill the vacancies so created. 

5.    (A)Securitization is the process of purchasing or acquiring the secured loans or advances, classified as non-performing asset in the books of originating bank or financial institutions at a negotiable price.

(B)The secured creditor can either:

Ø  Take up the management of the borrower, or

Ø  Sale or lease the business of the borrower, or

Ø  Reschedule the payment of debt, or

Ø  Enforce security interest, or

Ø  Settle the dues payable, or

Ø  Take possession of the secured assets, under the Act.

©All NPA are transferred to SCRC by bonds or debentures repayable in maximum period of 6 years with interest thereon @ 1.5% (min) over prevalent bank rate.

(D)The Provisions of SARFAESI Act do not apply when the amount of secured loan does not exceed 1 lakh rupees and unsecured dues 10 lakh rupees.

(E) Demand notice of a period of 60 days is served to the company for taking over possession and management of the secured assets and also to appoint manager to manage the affairs of the company.

(F) Secured creditors have right against the guarantors also.

(G)  Penalties are imposed for any default in compliance of regulations.

6.            Bancaassurance is a packaged service of banking and insurance offered to customer at one place under one roof at one time. Banks take up Bancassurance to earn fee income while for insurance industry; banks are source of ready distribution and sales network thus helping them to increase the market penetration.

But his is full of challenges for both insurance companies and banks due to wide spread bank employee discontent against insurance products; few surprises are thrown by IRDA itself, viz., insurance sellers have to undergo mandatory insurance training and clear the certification examination conducted by IRDA thus imposing additional burden on bank employees to undergo the same thus creating additional pressure on bank employees.

The other issue is that PSU banks need to figure out ways and means to address the anomalies in the remuneration structure.

7.            The growth of technology has enhanced the  banking business world over during the past two decades and the intense competition has forced banks to rethink the way they operated the business. Technology in the form of electronic banking has med it possible to find alternate banking practices at lower costs and more and more people are using electronic banking products at lower costs and meet their banking needs. The digital revolution is currently transforming the society, trade and commerce into an electronic world and e-commerce is emerging as a global reality that will have a significant impact on banking. E-Com has been made possible by internet and World Wide Web and offers enormous opportunities in every sphere of business. It allows trade at low costs worldwide and offers enterprise and banks a chance to enter global market at the right time.

The bank’s first use of computers was strictly a back office affair but rapid improvements in electronic technology and availability of higher computer power and faster communication technology has virtually transformed brick and mortar banking to Electronic Banking wherein customers need not necessarily visit banks to carry out their banking transactions and delivery of banks’ services to a customer at his office or home by using Electronic Technology is made available by banks.

Principle types of financial services rendered by banks in the electronic form include Electronic Payments (systems Branch Teller Machines, Automatic Teller Machine, Cash dispenser etc). While in Branch Teller Machine presence of employees of bank is required, the Automatic Teller Machine can operate without intervention of bank’s staff. An ATM consists of a processor, a consumer interface panel, card reader, printer, dispenser and depositor and have various inbuilt security system to check unauthorized use of the same, ATMs offer a lot of advantage to the customers, ,which include 24 hours, 7 days a week quick and efficient services with privacy in transaction. ATMs also provide opportunities to banks to offer extended services to customers without crowding at bank counters and to have greater penetration in the market.

KEYWORDS: 1

1. Property means immovable property, movable property, any debt or any right to receive payment of money – whether secured or unsecured, receivables – whether existing or future, intangible assets (know-how, patent, trade mark, licence, franchise or any other business or commercial right of similar nature).
2. Hypothecation means a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance, and includes floating charge and crystallization into fixed charge on movable property.
3. Security Interest means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor.
4. Secured debt means a debt which is secured by ant security interest.
5. A secured creditor means any bank or financial institution or any consortium or groups of banks or financial institutions and includes:

(i)                 Debenture trustee appointed by bank or financial institution

(ii)               Securitization company and reconstruction company

(iii)             Any other trustee holding securities in whose favour security interest is created for due repayment by any borrower of any financial assistance. 

6. Non-performing asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI.
7. Qualified Institutional buyer means a financial institution , insurance company, bank, state financial corporation, state industrial development corporation, trustee or any other asset management company; making investment on behalf of mutual fund / provident fund / gratuity fund / pension fund / a foreign institutional investor registered under the Securities & Exchange Board of India (SEBI) Act, 1992 or regulations made there under or any other corporate body as may be specified by the board.

KEYWORDS: 2

Bond: A debt security in the form of a loan. The bondholders receive interest at a fixed rate for a fixed period.

Closed-end fund: A type of investment Company that does not continuously offer its shares for sale but instead sells affixed number of shares at one time (in the initial public offering) which then typically trade on a secondary market.

Expense Ratio: The fund’s total annual operating expenses including management fees, distribution fees (and other expenses) expressed as a percentage of average net assets.

Front-end load: An upfront sales charge investors pay when they purchase fund shares, generally used by the fund to compensate brokers. A front-end load reduces the amount available to purchase fund shares.

Bank-end load: A sales charge )also known as a ‘deferred sales charge’) investors pay when they redeem (or sell) mutual fund shares, generally used by the fund to compensate brokers.

Market index: A measurement of the performance of a specific ‘basket of stocks’ considered representing a particular market or sector of the stock or the economy.

Net Asset Value (NAV): The vale of the fund’s assets minus its liabilities. SEC rules require funds to calculate the NAV at least once daily. To calculate the NAV per share, simply subtract the fund’s liabilities from its assets and then divide the result by the number of shares outstanding.

Portfolio: An individual’s or entity’s combined holdings of stocks, bonds, or other securities and assets.

Prospectus: Describes the mutual fund to prospective investors. Every mutual fund has a prospectus. The prospectus contains information about the mutual fund’s costs, investment objectives, risks, and performance. You can get a prospectus from the mutual fund company through its website (or by phone or mail). Your financial professional or broker can also provide you with a copy.

Redemption fee: A shareholder fee that some funds charge when investors redeem or sell mutual fund shares. Redemption fees which must be paid to the fund are not the same (as and may be in addition to) a back-end load which is typically paid to a broker).

Hedging: Hedging is a process of protecting mutual fund assets from foreign currency fluctuations

KEYWORDS:

World Wide Web/Online Catalogue/E-money/Net based shopping/Cyber laws/Brick and Mortar Banking /SPNS/ Branch Teller Machine/ATM/Virtual Banking

BENEFITS OF E-BANKING TO THE CUSTOMER:

(i)           Anywhere banking: No matter wherever the customer is in the world, he can transact business through e-banking. E-banking ‘Customers’ can make some of the permitted business transactions from his home or while traveling through mobile phone. Generates greater customer satisfaction by offering unlimited access to the bank, not limited by the walls of the branch.

(ii)         By connecting all the branches through Wide Area Network WAN) any branch banking can be provided to the customers.

(iii)       Anytime banking: Managing funds in real time and importantly e-banking provides 24 hours a day, 365 days a year services to the customers of the bank.

(iv)        It inculcates a sense of financial discipline by recording each and every transaction.

(v)          Convenience acts as a tremendous psychological benefit all the time. It makes utility payments easier

(vi)        Cash/cards free banking through PC banking. E-banking expands the domain of access to the banking services. Lowers the risk and generates higher security to the customers as they can avoid traveling with cash. Cash withdrawal from any branch/ATM.

(vii)      Bring down ‘cost of banking’ to the customer over a period of time.

(viii)    On-line purchase of goods and services including on-line payment for the same benefits to the bank

(ix)        Innovative, secured, addresses competitive advantage to the bank and helps in establishing better customer. Any ATM on the relationship and retaining and attracting customer.

(x)          E-banking provides unlimited network to the bank and is not limited to the number of branches. Any PC connected to modem and telephone having internet connection can provide banking facility to the customer.

(xi)        By connecting ATMs and point of sale terminals online, risk of overdraw can be eliminated in case of ATM, credit and debit cards. ATM can be better monitored and planned by establishing a centralized data warehouse and using latest data mining tools.

(xii)      E-banking reduces customer visits to the branches and thereby human intervention and the establishment costs for the bank.

(xiii)    Inter branch reconciliation becomes easy thereby the chances of frauds and misappropriation.

(xiv)    On-line banking: an effective medium of promotion of various schemes of the bank and acts as a marketing tool.

(xv)      Establishing centralized database can considerably reduce loan on branches. Integrated customer data paves way for individualized and customized services.

(xvi)    Scope and potential of better profitability increases.

BOTTLENECKS IN DEVELOPMENT OF E-BANKING:

With so many benefits from electronic banking, let us see what are the bottlenecks? Some of them are discussed hereunder:

1.       Adoption of technology. Old established banks with vast network of branches and existing work culture/legacy make it difficult for banks to adopt technology and banks are required to make strenuous efforts for providing e-banking services to their customers.

2.       Customer’s acceptance: The level of acceptance of e-banking channels by average customers remains low due to certain psychological factors and fear of technology.

3.       Cost of technology: The cost of acquiring a PC , internet connection and other equipment is also limiting factor in development of e-banking facility as such facilities remain out of reach of the middle class or even the upper middle class customers.

4.       Lack of preparedness on the part of banks and blissful unawareness of changes in banking is also one of the bottlenecks.

5.       Security issues and cyber laws: Security is one of the major issues required to be addressed before implementing e-banking solutions. The security threat may come from unauthorized access/loss or damage of data by hackers, loss or damage of data by virus, unauthorized access within network. Banks need to address the threats to reduce the risk of implanting new and advanced technology. Enactment of proper cyber laws is also required to take care of cyber crimes in the area of e-banking.

E-COMMERCE IN BANKING: ISSUES AND CONCERNS FOR BANKERS:

There are three issues and concerns to be addressed in implementing e-commerce in banking, viz., security, legal issues, and skill development.

Security:

The risk of loss of security is present when an organization makes use of the internet for putting through an e-commerce transaction. For banks, the breach of security in e-commerce related application could result in the siphoning off of large sums of money by perpetrators. Banks, therefore, need to put in place computer security related hardware and software such as fire walls, encryption programmes and virus protection programmes. These have to be checked and updated regularly so as to reinforce controls in the computer environment. Following are the important security issues:

1.       Confidentiality: Information should be available only to the authorized user.

2.       Integrity: Information received should be exactly as the information sent or stored.

3.       Availability: Information sent/stored over communications network should be available whenever required.

4.       Authenticity: system should be able to verify about sender of the message, to the person directed in the message and should be able to prevent any individual from showing as another individual

5.       Non-repudiability: the sender/receiver should not be able to deny having sent/received the message.

6.       Auditability: Recording of data with confidentially for the purpose of audit.

Legal Issues:

Another area of concern for bank is legal issues and availability of laws to take care of cyber crimes. In the current Indian scenario legal issues arising, for example, on account of siphoning off cash electronically by computer criminals, will pose a major challenge to Indian banks entering the e-commerce arena. Cyber laws are, therefore, required to take care of all issues related to Cyber crime/transactions. Information Technology Law passed by the government of India seeks to introduce cyber laws that will provide requisite security and legal framework for E-commerce transactions. The government and enforcement agencies need to recognize the fct in future, we cannot go by paper based transactions. Laws recognize and certifying new methods of payment, electronic signature-based transactions, etc. would be required. The IT task force set up by the government is doing a good job in this direction.

Skill Development:

Development of human resources capable of meeting the requirements of e-commerce is another area of concern for banks in India and therefore, an important step that will have to be taken by banks in India is the building up a pool of software application developers and database administration who can handle their e-commerce business under proper supervision.