In course of banks lending involves a number of risks. In addition to the risks related to creditworthiness of the counterparty, the banks are also exposed to interest rate, Forex and country risks. Unlike market risks, where the measurement, monitoring, control etc. are to a great extent centralized. Credit risks management is a decentralized function or activity. This is to say that credit risk taking activity is spread across the length and breadth of the network of branches, as lending is a decentralized function. Proper a sufficient care has to be taken for appropriate management of credit risk. Credit risk or default risk involves inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, hedging, settlement and other financial transactions. The objective of credit risk management is to minimize the risk and maximize banks risk adjusted rate of return by assuming and maintaining credit Continue reading
Indian Financial System
All About Call Money Market in India
The call money market refers to the market for extremely short period loans; say one day to fourteen days. These loans are repayable on demand at the option of either the lender or the borrower. The money that is lent for one day in this market is known as “Call Money”, and if it exceeds one day (but less than 15 days) it is referred to as “Notice Money”. Term Money refers to Money lent for 15 days or more in the Inter Bank Market. These loans are given to brokers and dealers in stock exchange. Similarly, banks with ‘surplus’ lend to other banks with ‘deficit funds’ in the call money market. Thus, it provides an equilibrating mechanism for evening out short term surpluses and deficits. Moreover, commercial banks can quickly borrow from the call market to meet their statutory liquidity requirements. They can also maximize their profits easily by Continue reading
Regulatory Provisions in FEMA with Respect to Current Account & Capital Account
Current Account Transactions Current Account Transactions as defined in Section 2 (j) of FEMA, means a transaction other than a capital account transaction and without prejudice to the generality of the other provisions shall include: payments due in connection with foreign trade, other account current business, services and short term banking and credit facilities in tire ordinary course of business; payments due as interest on loans and as net income from the investments; remittances for living expenses of parents, spouse and children resid ing abroad; expenses in connection with foreign travel, education and medical care of parents, spouse and children. Provisions to Section 5 of FEMA empowers the Central Government in public interest and in consultation with the Reserve Bank to impose such reasonable restrictions for current account transactions in exercise of the powers conferred and in consultation with the Reserve Bank the Central Government issued Foreign Exchange Management (Current Continue reading
Organization of Foreign Exchange Department
The Foreign Exchange department, which is also being called as the International Banking Division, is one of the important departments of the banks operating in international market. In India also all scheduled commercial banks, both in the nationalized or non-nationalized sectors, do have Foreign Exchange departments, both at their principal offices as well as offices, in metropolitan centers. This department functions independently under the overall change of some senior executive or a senior officer well-versed in foreign exchange operations as well as in the rules and regulations in force from time to time pertaining to foreign exchange transactions advised by various government agencies. The principal function of a Foreign exchange department is to handle foreign inward remittances as well as outward remittances; buying and selling of foreign currencies, handling and forwarding of import and export documents and giving the consultancy services to the exporters and importers. Besides this, the department Continue reading
Commercial Bill – Meaning, Characteristics and Types
Bills of exchange are negotiable instruments, drawn by the seller (drawer) of the goods on the buyer (drawee) of the goods for the value of the goods delivered. These bills are known as trade bills. Trade bills are called commercial bills when they are accepted by commercial banks. If the bill is payable at a future date and the seller needs money during the currency of the bill, he may approach his bank to discount the bill. The maturity proceeds or face value of a discounted bill from the drawee is received by the bank. If the bank needs funds during the currency of bill, it can rediscount the bill that has been already discounted by it in the commercial bill rediscount market at the available market discount rate. The RBI introduced the Bills Market scheme (BMS) in 1952 and the scheme was later modified into the New Bills Market Continue reading
Concepts and Process of Book Building
Book building is a method of price discovery. In this method, offer price of securities is determined on the basis of real demand for the shares at various price levels in the market. As defined by SEBI guidelines, 1995, “book building is a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda of offer document.” In book building method, the final issue price is not known in advance. Only a price band is determined and made public before opening of the bidding process. The spread of price between floor price and cap in the price band should not be more than 20%. It means that the Continue reading