BC / BF - 2 , Banking Fundamentals to Know for Students.

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Financial Inclusion Programme was launched by the Government of India as more  than 40% of the country's population did not have any access to Banking services.  There was growing concern regarding the link between financial exclusion and  poverty.  Financial inclusion is the delivery of banking services at an affordable cost  ('no frills' accounts,)  to the vast sections of disadvantaged and low income group. What is the BCBF Model?  With the objective of ensuring greater financial inclusion and increasing the outreach  of the banking sector, in Jan 2006 based on the recommendations of Khan  Commission,  the Reserve Bank of India issued a new set of guidelines  allowing banks to employ  two  categories of intermediaries - Business  Correspondents (BCs) and  Business Facilitators (BFs)  - to expand their business. According to the guidelines scheduled commercial banks  including Regional Rural Banks (RRBs) and Local Area Banks (LABs) have been  permitted to use the services of intermediaries in providing financial and banking  services throughout the country and even in remote areas. In this model BCs are permitted to carry out transactions on behalf of the bank as  agents, the BFs can refer clients, pursue the clients' proposal and facilitate the  bank to carry out its transactions, but cannot transact on behalf of the bank.  Recently Reserve Bank of India (RBI) has permitted all Business Correspondents  (BCs) working for one particular bank;  perform business for other banks too. Guidelines for engaging Business Correspondents (BCs)  Banks may formulate a policy for engaging Business Correspondents (BCs) with the  approval  of their Board of Directors. Due diligence may be carried out on the  individuals/entities to be engaged as BCs prior to their engagement. The due  diligence exercise may, inter alia, cover  aspects such as (i) Reputation/market standing (ii) Financial soundness (iii) Management and corporate governance (iv) Cash handling ability (v) Ability to implement technology solutions in rendering financial services. The Role and Responsibilities of the BCs  (a) Enrollment of customers, including a collection of biometric and other details, provide   card  ID Card, Debit Card, Credit Card), PIN. (b) Provide transaction facility. (I) Deposit of money in an account with any bank (ii) Withdrawal of money from an account with any bank (iii) Remittances from an account with a bank to an account with the same or any other  bank. (iv) Balance Enquiry and issue Receipts/ Statement of Accounts. (c) Disbursal of credit facilities to borrowers involving small amounts strictly as per the  instructions of the Bank. (d) Other activities: i. Identification of borrowers and classification of activities as per their requirements. ii. Collection and prima facie scrutiny of loan applications including verification of primary data. iii. Creating awareness about savings and other products offered by the Bank and education  and advice on managing money & debt counseling. iv. Preliminary scrutiny of data and submission of applications to the Bank for its review. v. Promotion, nurturing, monitoring and handholding of Self Help Groups and/or Joint Liability  Groups and/or Credit Groups and others. vi. Facilitating the repayment of dues owed to the bank by its customers. vii. Marketing of third party financial products. Products offered by Business Correspondents:  The following products are to be offered by the CSPs to their clients. a. No Frills Savings Bank accounts b. Recurring Deposit Accounts c. Remittances d. Fixed Deposit e. Overdraft/Retail loans f. KCC/GCC (Kisan Credit Card/ General Credit Card) g. Third-party financial products Who is Eligible for Business Facilitator (BFs) Under the "Business Facilitator" model, banks may use the services of intermediaries  such as: 1.    NGOs/SHGs 2.    Farmers Clubs 3.    Cooperatives 4.    Community-based organizations 5.    IT-enabled rural outlets of corporate entities 6.    Post Offices 7.    Insurance agents 8.    Well functioning Panchayats 9.    Village Knowledge Centres 10.  Agri Clinics 11.  Agri Business Centers 12.  Krishi Vigyan Kendras 13.  KVIC/KVIB units

BC / BF - 1 , Banking Fundamentals to Know for Students.

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Benefits of using BCS  Some of the advantages of using BCs as listed below:  A better alternative for bank branches: Generally, a rural bank branch can serve  5,000 to 10,000 families in 15 to 20 villages within a radius of 15kms. A Public  Sector Bank branch may require more than 5  years to serve unbanked areas in  India, while a private sector &  foreign bank with IT connectivity may require about  5 times more time. Further, obtaining permission to open a branch is a  long and protracted process. The BC option potentially enables banks to reach out much faster and at a much lower cost.  Reaching the unreached: The model enables banks to extend financial services to the unreached clients beyond their branch network as beneficiaries of the BCs are mostly located in unbanked and underbanked areas.  Better loan performance: Since local stakeholders like NGOs, post  offices, etc., are involved in the process, they know the customers  at a personal level. The personal connection enhances the customers'   accountability to the BC, which in turn improves loan performance and repayment rates.  Doorstep banking: Disbursement and loan recovery at the doorsteps of the beneficiary.  Quick expansion: Scaling up of this model is possible within a  short span of time.  Who is Eligible for BC? 1.    NGOs/ MFIs set up under Indian Societies/ Trust Acts. (Care: excluding NBFC) 2.    Societies registered under mutually aided co-op. societies (MACs) Act or the  Coop. Acts of States. 3.    Section 25 companies. 4.    Post Offices. 5.    Retired Bank employees 6.    Ex-Servicemen. 7.    Retired Govt. Employees. 8.    Individual Kirana/ medical/fair price shop owners. 9.    Individual Public Call Office (PCO) operators. 10.  Agents of small savings schemes of the Government of India/ Insurance Companies. 11.  Individual who own petrol pumps. 12.  Retired teachers. 13.  Authorized functionaries of well-run Self Help Groups (SHGs) linked to banks. 14.  Individual member of Farmer's Clubs. 15.  Individual operators of Rural Multipurpose kiosks/ Village Knowledge Centres 16.  Individuals/ proprietors/ owners who manage Agri Clinics/ Agri Business Centres. 17.  Retired Post Masters. 18.  Individuals such as auto dealers, tractor dealers and FMCG stockiest. 19.  Insurance agents including of private insurance companies (IRDA certified) and  postal agents. 20.  Individuals operating Common Services Centres (CSCs) established by  Service Centre Agencies (SCAs) under the National e-Governance Plan (NeGP). 21.  For-profit companies 22.  Any other individual considered suitable by the selection committee. Who is Eligible for Business Facilitator (BFs)  Under the "Business Facilitator" model, banks may use the services of intermediaries  such as: 1.    NGOs/SHGs 2.    Farmers Clubs 3.    Cooperatives 4.    Community-based organizations 5.    IT-enabled rural outlets of corporate entities 6.    Post Offices 7.    Insurance agents 8.    Well functioning Panchayats 9.    Village Knowledge Centres 10.  Agri Clinics 11.  Agri Business Centers 12.  Krishi Vigyan Kendras 13.  KVIC/KVIB units

Bank Frauds , Banking Fundamentals to Know for Students.

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Bank Frauds:

 Basics and Investigation

 Banks are an essential part of the Indian economy.  While the primary responsibility for preventing fraud lies with banks themselves.  Banks dealing with the public's money: due care and diligence.  The RBI advisory to banks for the prevention of fraud.

 i. Fraud can loosely be defined as “any behavior by which one person intends to gain a dishonest advantage over another“ fraud, under section 17 of the Indian contract act, 1872, 

ii.RBI has defined the term “fraud” in its guidelines on frauds which reads as under.  “A deliberate act of omission or commission by any person, carried out in the course of a banking transaction or in the books of accounts maintained manually or under computer system in banks, resulting into wrongful gain to any person for A temporary period or otherwise, with or without any monetary loss to the bank”.    Iii.Account opening fraud: this involves a deposit and cashing of fraudulent cheques.  Cheque kiting: is a method whereby a depositor utilizes the time required for cheques to dear to obtain an unauthorized loan without any interest charge.  Cheque fraud: The most common causes of this kind of fraud are} through stolen cheques and forged signatures.  Counterfeit securities: documents, securities, bonds and} certificate could be forged, duplicated, adjusted or altered and presented for loan collection.

 iv.Computer fraud: hacking, tampering with a diskette} to gain access to unauthorized areas and give credit to an account for which the funds were not originally intended.  Loan fraud: when funds are lent to a non-borrowing} customer or a borrowing customer that has exceeded his credit limit.  Money laundering fraud: this is a means to conceal} the existence, source or use of illegally obtained money by converting the cash into untraceable transactions in banks.

v.Letters of Credit: Most common in international} trading, these are instruments used across borders ads can be forged, altered, adjusted and take longer to identify. 

vi.lAdvanced Fees Fraud: Popularly known as „419‟,} advanced fees fraud may involve agents with an offer of a business proposition which would lead to access often for the long term.

vii.Frauds in banks’ advances portfolio: Frauds related to the advances portfolio accounts for the largest share of the total amount involved in frauds in the banking sector.

viii. Another point that public sector banks account for a substantial chunk of the total amount involved in such cases. 

ix.Declaration of fraud by various banks in cases of consortium multiple financing we have on occasions observed more than 12– 15 months lag in declaration.  The large value advance related frauds, which pose a significant challenge to all stakeholders, are mainly concentrated in the public sector banks.

 x.Majority of the credit related frauds are on account of deficient appraisal system, poor post disbursement supervision and inadequate.

 xi. Reserve Bank has also advised banks to audit periodically so that cases of multiple financing may be detected in the initial stages itself.

The Risk , Banking Fundamentals to Know for Students.

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RISK
Banks Perspective:

Banks are exposed to the following six types of financial risks:  a. Interest risk b. Liquidity risk c. Credit risk d. Currency risk e. Capital risk f. Contingent risk

*Interest rate risk is a type of Market risk.

*The risk that arises due to worsening of credit quality is Credit Spread Risk.

*The uncertainty of interest rate movements gave rise to interest rate risk, thereby causing Banks to look for processes to manage their risk.

*In the wake of Interest rate risk came liquidity risk and credit risk as inherent components of risk of Banks.

*Net Interest Income is the difference between interest earned and interest paid.

General Perspective

What are the 3 types of risk?

Three types of risks :

a) Personal risk describes the loss of life or loss of income because of a sickness,

 b) disability 

c) old age, or unemployment.

The Main Types of Business Risk

·         Strategic Risk.

·         Compliance Risk.

·         Operational Risk.

·         Financial Risk.

·         Reputational Risk.

Types of investment risk

·         Market risk. The risk of investments declining in value because of economic developments or other events that affect the entire market.

·         Liquidity risk.

·         Concentration risk.

·         Credit risk.

·         Reinvestment risk.

·         Inflation risk.

·         Horizon risk.

·         Longevity risk.

Four main types of operational risk

A popular way is to use one of four main categories, namely

a) operational risk,

b) financial risk,

c) environmental risk 

 d) reputational risk.

What is the risk management process?

In business, risk management is defined as the process of identifying, monitoring and managing potential risks in order to minimize the negative impact they may have on an organization. Examples of potential risks include security breaches, data loss, cyber-attacks, system failures, and natural disasters.

What are the five steps in the risk management process?

Together these 5 risk management process steps combine to deliver a simple and effective risk management process.

·         Step 1: Identify the Risk.

·         Step 2: Analyze the risk.

·         Step 3: Evaluate or Rank the Risk.

·         Step 4: Treat the Risk.

·         Step 5: Monitor and Review the risk.

Microfinance , Banking Fundamentals to Know for Students.

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Microfinance

Traditionally, low-income people around the world in the rural and urban area used to borrow and save with individuals and groups outside the formal financial system. The Concept     of” Microfinance “got the attention  of the world around 1970 when Mohammed Younus, founder of Grameen Bank of  Bangladesh took the initiative to provide small loans to poor people without any security. In 2006, Mohammed Younus got the Nobel Peace Prize for his successful efforts to change his vision of reducing poverty into actual reality. In India, Microfinance evolved from the informal finance in the eighteenth century in the form of micro-lending by chit fund companies, local money lenders, merchant bankers and traders. After Nationalization of banks in 1969, the government initiated the Microfinance movement through branch expansion in rural areas, mandating priority sector lending and lending through various village development schemes like Integrated Rural Development Programme (IRDP), National Rural Employment Programme (NREP), etc. But somehow these formal mainstream banking programmes were way beyond the reach of the poor people due to conditionality attached to loans. At the beginning of the 1980s, the need for alternate policies and procedures to meet the financial requirements of the poor was recommended by NABARD. At that time-poor people were resorting to the unorganised sector for their borrowing needs, as the existing system were not flexible to accommodate their needs.

Thus, Microfinance in the banking sector was introduced to safeguard the interests of poor people from the exploitation of local moneylenders. “Microfinance is the provision of thrift, credit and other financial services and products of very small amounts to the poor for enabling them to raise their income levels and improve their living standards.  Financial services include loans, deposits, payments transfer, insurance, etc. In 1992, NABARD (National bank for agriculture and rural development) started a pilot project of the self-help group (SHG)-Bank linkage Program (SBLP), which was very successful and gave a tremendous boost to the Microfinance movement. In India, Microfinance are offered by Small  Industries Bank of India(SIDBI), National Bank for Agricultural and Rural Development(NABARD), Non-Banking Financial Companies(NBFC’s), Rashtriya Mahila Kosh, Regional Rural Banks, Commercial Banks and Co-Operatives  Banks. The delivery models in India are 1. SBLP (Self-help group-bank linkage programme):

 The model I: SHGs promoted, guided and financed by banks.

 Model II: SHGs promoted by NGOs/ Government agencies and financed by banks.

 Model III: SHGs promoted by NGOs and financed by banks using NGOs/formal agencies as financial intermediaries.

2. Microfinance Institution Approach:

i. Bank Partnership model

ii. Banking correspondents

MICROFINANCE  GROWTH  AND DEVELOPMENT IN INDIA

Formal credit institutions rarely lend to the poor. That is why it is necessary for special institutional arrangements to be made to extend credit to the poor who do not have security to offer. Microfinance provides small loans and savings facilities to the people who have been excluded financially. Thus in this way, it is a key strategy for reducing poverty. Microfinance is the financial service that is provided to low-income clients or solidarity lending groups which include consumers and self-employed people as they lack access to banking and related services. Microfinance goes beyond providing microcredit to the poor. It is an economic development tool which helps the poor to overcome poverty. Microfinance provides a wide range of services like credit, savings, insurance and remittance and also non-financial services like training, counselling etc.

The salient features of Microfinance is as follows:

I.           The borrowers belong to the low-income group.

II. The loans provided are of small amounts, they are microloans.

III. The loans are of short duration.

IV. The loans are provided without any collateral.

V.      There is a high frequency of repayment of loans.

 The loans are borrowed for the purpose of income generation. Microcredit can be referred to as ‘programmes that provide credit for self-employment and other financial and business services to varied persons’. It thus refers to a wide range of financial services like savings, insurance and remittances.

1. State whether the following statements are true or false.

a. Formal credit institutions always lend money to the poor.

b. Microfinance is a key strategy for reducing poverty.

c. Microfinance does not provide small loans and savings facilities to the peopled. Microfinance provides small loans and saving facilities.

e. Loans are provided in Microfinance with collateral.

1.a. False b. True c. False d. true e. false