Bank

July 16th, 2009 at 02:52pm Under Banking Law

A banker or bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money.

The first modern bank was founded in Italy in Genoa in 1406, its name was Banco di San Giorgio .Many other financial activities were added over time. For example banks are important players in financial markets and offer financial services such as investment funds. In some countries such as Germany, banks are the primary owners of industrial corporations while in other countries such as the United States banks are prohibited from owning non-financial companies. In Japan, banks are usually the nexus of cross share holding entity known as zaibatsu. In France “Bancassurance” is highly present, as most banks offer insurance services (and now real estate services) to their clients. http://banks-banking.blogspot.com

Banks have influenced economies and politics for centuries. Historically, the primary purpose of a bank was to provide loans to trading companies. Banks provided funds to allow businesses to purchase inventory, and collected those funds back with interest when the goods were sold. For centuries, the banking industry only dealt with businesses, not consumers. Banking services have expanded to include services directed at individuals, and risk in these much smaller transactions are pooled. http://banks-banking.blogspot.com

Origin of the word

The name bank derives from the Italian word banco “desk/bench”, used during the Renaissance by Florentines bankers, who used to make their transactions above a desk covered by a green tablecloth. However, there are traces of banking activity even in ancient times. In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived. As a moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome—that of the Imperial Mint.

Traditional banking activities

Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers’ current accounts. Banks also enable customer payments via other payment methods such as telegraphic transfer, EFTPOS, and ATM. http://banks-banking.blogspot.com

Banks borrow money by accepting funds deposited on current account, accepting term deposits and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current account, by making installment loans, and by investing in marketable debt securities and other forms of money lending.

Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank account. Banks borrow most funds from households and non-financial businesses, and lend most funds to households and non-financial businesses, but non-bank lenders provide a significant and in many cases adequate substitute for bank loans, and money market funds, cash management trusts and other non-bank financial institutions in many cases provide an adequate substitute to banks for lending savings to http://banks-banking.blogspot.com

Definition

Cathay Bank in Boston’s ChinatownThe definition of a bank varies from country to country.

Under English common law, a banker is defined as a person who carries on the business of banking, which is specified as:

conducting current accounts for his customers

paying cheques drawn on him, and

collecting cheques for his customers.

In most English common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including cheques, and this Act contains a statutory definition of the term banker: banker includes a body of persons, whether incorporated or not, who carry on the business of banking’ (Section 2, Interpretation). Although this definition seems circular, it is actually functional, because it ensures that the legal basis for bank transactions such as cheques do not depend on how the bank is organised or regulated. The business of banking is in many English common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business. When looking at these definitions it is important to keep in mind that they are defining the business of banking for the purposes of the legislation, and not necessarily in general. In particular, most of the definitions are from legislation that has the purposes of entry regulating and supervising banks rather than regulating the actual business of banking. However, in many cases the statutory definition closely mirrors the common law one. Examples of statutory definitions: “banking business” means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).

“banking business” means the business of either or both of the following:

receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than [3 months] … or with a period of call or notice of less than that period; paying or collecting cheques drawn by or paid in by customers

Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking, the cheque has lost its primacy in most banking systems as a payment instrument. This has lead legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect cheques.

Accounting for bank accounts

Bank statements are accounting records produced by banks under the various accounting standards of the world. Under GAAP and IFRES there are two kinds of accounts: debit and credit. Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are Assets and Expenses. This means you credit credit accounts to increase their balances and you debit debit accounts to increase their balances. This also means you debit your savings account everytime you deposit money into it (and the account is normally in deficit) and you credit your credit card account everytime you spend money from it (and the account is normally in credit).

However, if you read your bank statement, it will say the opposite- that you have credited your account when you deposit money, and you debit when you withdraw it. If you have cash in your account you have a positive or credit balance and if you are overdrawn it will say you have a negative or a deficit balance. The reason for this is because the bank, and not you, has produced the bank statement. Your savings might be your assets, but it is the bank’s liability, so your savings account is a liability account which is a credit account and should have a positive credit balance. Your loans are your liabilities but the bank’s assets so they are debit accounts which should have a negative balance. Below where bank transactions, balances, credits and debits are discussed, they are done so from the viewpoint of the account holder which is traditionally what most people are used to seeing.

If you have cash in your account you have a positive or credit balance and if you are overdrawn it will say you have a negative or a deficit balance. The reason for this is because the bank, and not you, has produced the bank statement. Your savings might be your assets, but it is the bank’s liability, so your savings account is a liability account which is a credit account and should have a positive credit balance. Your loans are your liabilities but the bank’s assets so they are debit accounts which should have a negative balance. Below where bank transactions, balances, credits and debits are discussed, they are done so from the viewpoint of the account holder which is traditionally what most people are used to see in http://banks-banking.blogspot.com

A Study the Strategies Issue in Indian Banking Sector

July 16th, 2009 at 08:53am Under Banking Law

1.0 INDIAN BANKING SYSTEM

A banking company in India has been defined in the banking companiesact,1949.as one “which transacts the business of banking which means the accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise.” Most of the activities a Bank performs are derived from the above definition. In addition, Banks are allowed to perform certain activities which are ancillary to this business of accepting deposits and lending. A bank’s relationship with the public, therefore, revolves around accepting deposits and lending money. Another activity which is assuming increasing importance is transfer of money – both domestic and foreign – from one place to another. This activity is generally known as “remittance business” in banking parlance. The so called forex (foreign exchange) business is largely a part of remittance albeit it involves buying and selling of foreign currencies.

Functioning of a Bank is among the more complicated of corporate operations. Since Banking involves dealing directly with money, governments in most countries regulate this sector rather stringently. In India, the regulation traditionally has been very strict and in the opinion of certain quarters, responsible for the present condition of banks, where NPAs are of a very high order. The process of financial reforms, which started in 1991, has cleared the cobwebs somewhat but a lot remains to be done. The multiplicity of policy and regulations that a Bank has to work with makes its operations even more complicated, sometimes bordering on illogical. This section, which is also intended for banking professional, attempts to give an overview of the functions in as simple manner as possible. Banking Regulation Act of India, 1949 defines Banking as “accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheques, draft, and order or otherwise.”

KINDS OF BANKS

Financial requirements in a modern economy are of a diverse nature, distinctive variety and large magnitude. Hence, different types of banks have been instituted to cater to the varying needs of the community.  Banks in the organized sector can be classified in to the following

1.      COMMERCIAL BANKS:-

Commercial banks are joint stock companies dealing in money and credit. In India, however there is a mixed banking system, prior to July 1969, all the commercial   banks-73 scheduled and 26 non-scheduled banks, except the state bank of India and its subsidiaries-were under the control of private sector. On July 19, 1969, however, 14mejor commercial banks with deposits of over 50 Corers were nationalized. In April 1980, another six commercial banks of high standing were taken over by the government.

2.      CO-OPERATIVE BANKS:-

Co-operative banks are a group of financial institutions organized under the provisions of the Co-operative societies Act of the states. The main objective of co-operative banks is to provide cheap credits to their members. They are based on the principle of self-reliance and mutual co-operation. Co-operative banking system in India has the shape of a pyramid a three tier structure, constituted by:

3.      SPECIALIZED BANKS:-

There are specialized forms of banks catering to some special needs with this unique nature of activities. Foreign exchange banks, Industrial banks, Development banks, Land development banks, Exim bank     are important.

4. CENTRAL BANK:-

A central bank is the apex financial institution in the banking and financial system

of a country. It is regarded as the highest monetary authority in the country. It acts as the leader of the money market. It supervises, control and regulates the activities of the commercial banks. It is a service oriented financial institution.  India’s central bank is the reserve bank of India established in 1935.and it was nationalized in 1949.It is free from parliamentary control.

ROLE OF BANKS IN A DEVELOPING ECONOMY

Banks play a very important and dynamic role in the economic life of every modern state. A study of the economic history of western country shows that without the evolution of commercial banks in the 18th and 19th centuries, the industrial revolution would not have taken place in Europe. The economic importance of commercial banks to the developing countries may be viewed thus:

1.     PROMOTING CAPITAL FORMATION:-

A developing economy needs a high rate of capital formation to accelerate the tempo of economic development, but the rate of capital formation depends upon the rate of saving. Unfortunately, in underdeveloped countries, saving is very low. Banks afford facilities for saving and, thus encourage the habits of thrift and industry in the community. They mobilize the ideal and dormant capital of the country and make it available for productive purposes.

2.     ENCOURAGING INNOVATION:-

Innovation is another factor responsible for economic development. The entrepreneur in innovation is largely dependent on the manner in which bank credit is allocated and utilized in the process of economic growth. Bank credit enables entrepreneurs to innovate and invest, and thus uplift economic activity and progress.

3.     MONETSATION:-

Banks are the manufactures of money and they allow many to play its role freely in the economy. Banks monetize debts and also assist the backward subsistence sector of the rural economy by extending their branches in to the rural areas. They must be replaced by the modern commercial bank’s branches.

4.     INFLUENCE ECONOMIC ACTIVITY

Banks are in a position to influence economic activity in a country by their influence on the rate interest. They can influence the rate of interest in the money market through its supply of funds. Banks may follow a cheap money policy with low interest rates which will tend to stimulate economic activity.

5.      FACILITATOR OF MONETARY POLICY

Thus monetary policy of a country should be conductive to economic development. But a well-developed banking system is on essential pre-condition to the effective implementation of monetary policy. Under-developed countries cannot afford to ignore this fact.

 PRINCIPLES OF BANK LENDING POLICIES

The main business of banking company is to grant loans and advances to traders

as well as commercial and industrial institutes. The most important use of banks money is lending. Yet, there are risks in lending. So the banks follow certain principles to minimize the risk:

1.      SAFETY

Normally the banker uses the money of depositors in granting loans and advances. So first of all initially the banker while granting loans should think first of the safety of depositor’s money. The purpose behind the safety is to see the financial position of the borrower whether he can pay the debt as well as interest easily.

2.      LIQUIDITY

It is a legal duty of a banker to pay on demand the total deposited money to the depositor. So the banker has to keep certain percent cash of the total deposits on hand. Moreover the bank grants loan. It is also for the addition of short term or productive capital. Such type of lending is recovered on demand.

3.     PROFITABILITY

Commercial banking is profit earning institutes. Nationalized banks are also not an exception. They should have planning of deposits in a profitability way pay more interest to the depositors and more salary to the employees. Moreover the banker can also incur business cost and can give more benefits to customer.

4.      PURPOSE OF LOAN

Banks never lend or advance for any type of purpose. The banks grant loans and advances for the safety of its wealth, and certainty of recovery of loan and the bank lends only for productive purposes. For example, the bank gives such loan for the requirement for unproductive purposes.

5.     PRINCIPLE OF DIVERSIFICATION OF RISKS

While lending loans or advances the banks normally keep such securities and assets as a supports so that lending may be safe and secured. Suppose, any particular state is hit by disasters but the bank shall get benefits from the lending to another states units. Thus, he effect on the entire business of banking is reduced.

 OBJECTIVES OF THE STUDY

The following are the main objective of the studies.

1. To study the problem in financial crisis and money related query.

2. To evaluate banking is one of the most regulated businesses in the India.

3. To Analysis the role developing economy for the nation.

4. To study dynamic role in delivery and purchase of consumer durables.

 Scope of the Study

All persons need money for personal and commercial purposes. Banks are the oldest lending institutions in Indian scenario. They are providing all facilities to all citizens for their own purposes by their terms. To survive in this modern market every bank implements so many new innovative ideas, strategies, and advanced technologies. For that they give each and every minute detail about their institution and projects to Public. They are providing ample facilities to satisfy their customers i.e. Net Banking, Mobile Banking, Door to Door facility, Instant facility, Investment facility, Demat facility, Credit Card facility, Loans and Advances, Account facility etc. And such banks get success to create their own image in public and corporate world. These banks always accept innovative notions in Indian banking scenario like Credit Cards, ATM machines, Risk Management etc. So, as a student business economics I take keen interest in Indian economy and for that banks are the main source of development.

So this must be the first choice for me to select this topic. At this stage every person must know about new innovation, technology of procedure new schemes and new ventures.

 METHODOLGY

Theoretical study conducted on the basis of secondary data, collected from books, journal and annual reports.

2. BANK PROFILE:

Indian Bank

Name of the Branch               : Karaikal. [0090]

Date of Opening                     : 1971

District/Port Open                : Karaikal/Port Town.

Category/Size                         : Large.

Population                              : Urban.

Computerisation          : CBS.

Name of the Branch Head      : R.Muralitharan,(Senior Branch                                                                                 

                                                                            Manager)

Staff Strength                         Officers                : 06

                                                Award Staff : 06

                                                Sub Staff               : 03

Productivity                           : Rs. 281.39 Lacs.

Branch Classification            : Profit Centre.

Location of the Branch      : No. 96-98 Bharathiyar Road,

                                                  Karaikal-609607

Competition in the area        : Almost All Banks are functioning.

Potential Available                : Situated in a Commercial Area with a number of shops around Scope for trade finance. Branch has to tap more trade finance.

Computerised                         : ATM/CBS.

Commercial Activity             : Being a union territory, large commercial Industrial activities are on.

TARGETS vis-à-vis ACHIEVEMENTS

Rupees in Lacs

Particulars

31-03-2007

31-03-2008

30-06-2008

targets

target

actual

target

actual

target

actual

30-09-08

31-03-09

S.B

2900

2914

3343

2778

3400

3062

3557

4200

C.D

1610

1621

1814

924

2365

1700

1915

2200

T.D

4800

5281

5654

5890

6064

6099

5841

6400

TOTAL

9310

9816

10811

9592

11329

10361

11329

12900

ADVANCES

4389

3674

3883

3733

5487

5768

5487

6430

PROFIT

474

520

175

120

156

147

289

411

NPA LEVEL

320

368

379

601

457

604

478

581

SLIPPAGE

118

251

234

268

276

337

CASH REC.

40

62

38.33

13.01

40

18.98

121

200

UPGRADE

20

60

13.33

3.5O

16.65

5.52

26

47

IOB JEEVAN

224

432

385

543

600

HEALTH+

47

80

110

136

200**

** Number of Accounts.                                                * Cumulative Figures.

Source: Computed Balance sheet of Indian Bank

Inspection Report Rating:

Inspection Report dated

Business Growth

Profitability

Credit Mgt.

NPA Mgt.

House keeping

Branch Image

Overall Rating

25.08.2003

B

B

C

C

B

B

B

12.02.2005

A

A

C

B

B

B

B

29.08.2006

B

A

B

A

B

A

A

Source: computed balance sheet.

STRATEGIC ISSUES IN BANKING SERVICES

Strategic Planning is the process of analyzing the organizational external and internal environments; developing the appropriate mission, vision, and overall goals; identifying the general strategies to be pursued; and allocated resources.

• Mission is an organization’s current purpose or reason for existing.

• Vision is an organization’s fundamental aspirations and purpose that usually appeals to its member’s hearts and minds.

• Goals are what an organization is committed to achieving.

• Strategies are the major courses of action that an organization takes to achieves goals.

• Resource Allocation is the earmarking of money, through budgets, for various purposes.

• Downsizing Strategy signals an organization’s intent to rely on fewer resources primarily human-to accomplish its goals.

Tactical Planning is the process of making detailed decisions about what to do, which will do it, and how to do it-with a normal time and horizon of one year or less. The process generally includes:

• Choosing specific goals and the means of implementing the organization’s strategic plan,

• Deciding on courses of action for improving current operations, and

• Developing budgets for each department, division and project.

TOTAL QUALITY MANAGEMENT

While Total Quality Management has proven to be an effective process for improving organizational functioning, its value can only be assured through a comprehensive and well thought out implementation process. TQM is, in fact, a large scale systems change, and guiding principles and considerations regarding this scale of change will be presented. Without attention to contextual factors, well intended changes may not be adequately designed. As another aspect of context, the expectations and perceptions of employees will be assessed, so that the implementation plan can address them. Specifically, sources of resistance to change and ways of dealing with them will be discussed. This is important to allow a change agent to anticipate resistances and design for them, so that the process does not bog down or stall. Next, a model of implementation will be presented, including a discussion of key principles. Visionary leadership will be offered as an overriding perspective for someone instituting TQM. In recent years the literature on change management and leadership has grown steadily, and applications based on research findings will be more likely to succeed. Use of tested principles will also enable the change agent to avoid reinventing the proverbial wheel. Implementation principles will be followed by a review of steps in managing the transition to the new system and ways of helping institutionalize the process as part of the organization’s culture. Finally, some miscellaneous do’s and don’ts will be offered.

Planned change processes often work, if conceptualized and implemented properly; but, unfortunately, every organization is different, and the processes are often adopted “off the shelf” “the ‘appliance model of organizational change’: buy a complete program, like a ‘quality circle package,’ from a dealer, plug it in, and hope that it runs by itself” (Kanter, 1983, 249). Alternatively, especially in the underfunded public and not for profit sectors, partial applications are tried, and in spite of management and employee commitment do not bear fruit. This chapter will focus on ways of preventing some of these disappointments. In summary, the purpose here is to review principles of effective planned change implementation and suggest specific TQM applications. Several assumptions are proposed:

1. TQM is a viable and effective planned change method, when properly installed

2. Not all organizations are appropriate or ready for TQM

3. Preconditions (appropriateness, readiness) for successful TQM can sometimes be created

4. Leadership commitment to a large scale, long term, and cultural change is necessary.

While problems in adapting TQM in government and social service organizations have been identified, TQM can be useful in such organizations if properly modified.

For survival, banks have to make efforts to improve their quality and competitiveness by planning and taking innovative in fall areas:

·     Increase emphasis on customer focused activities

·     Intro a “total quality” program

·     Developing differential value added services

·     Educating employees through involvement programs

·     Increase quality through management and system

·     Increase effectiveness of product development

·     Developing product with lower uses costs

TQM principles

·     Customer satisfaction

·     Plan-do-check-act (PDCA) cycle

·     Management by ‘fact’ – 5Ws (what, why, who, when, and where) + 1H(how) approach

·     Respect for people

TQM elements

·   Total employee involvement (TEI)

·   Total waste elimination (TWE)

·   Total quality control (TQC)

TQM focus areas

·   Customer satisfaction

·   Product quality

·   Plant reliability

·   Waste elimination

Benefits achieved through TQM

·     Increased focus on the customer

·     Mindset of ‘continuous improvement’

·     Better product quality

·     Better systems and procedures

·     Better cross-functional teamwork

·     Increased plant reliability

·     Waste elimination in offices and factories.

KNOWLEDGE MANAGEMENT

                According to Peter Drucker and Daniel Bell, the management Gurus knowledge is the only meaningful economic resource. Knowledge management can be defined as a systematic and integrative process of coordinating organization-wide activities of acquiring, creating, storing, sharing, diffusing, developing and deploying knowledge by individual and groups in the pursuit of major organizational goals. It also involves the creation of an interacting learning environment where organization members transfer and share what they know; and apply knowledge to solve problems, innovate and create new knowledge.

                Knowledge management is as much about people and culture as it is about technology. Knowledge management thrives only when the human communication network operates freely across the shortest path between the knowledge providers and knowledge seekers. There must be a culture that promotes and rewards the pooling together of knowledge resources. Thus organizations must build a culture that motivates people to create, share and use knowledge.

                After the preoccupation with system and procedures to collect data ad translate it into information, its time for firms to focus on the next plane- knowledge. Knowledge management is not a buzzword. Every knowledge management solution, if currently implemented, has definite measurable business benefits.

          Future business success increasingly depends on the retention and the creative use of the knowledge ideas and experiences of an organization and its employees. And in knowledge economy corporations need for workers will be more than the workers need for employer.

INNOVATION IN BANK

          Innovation drives organizations to grow, prosper and transform in sync with the changes in the environment, both internal and external. Banking is no exception to this. In fact, this sector has witnessed radical transformation of late, based on many innovations in products, processes, services, systems, business models, technology, governance and regulation. A liberalized and globalize financial infrastructure has provided an additional impetus to this gigantic effort.

           The pervasive influence of information technology has revolutionaries banking. Transaction costs have crumbled and handling of astronomical number of transactions in no time has become a reality. Internationally, the number brick and mortar structure has been rapidly yielding ground to click and order electronic banking with a plethora of new products. Banking has become boundary less and virtual with a 24 * 7 model. Banks who strongly rely on the merits of relationship banking’ as a time tested way of targeting and serving clients, have readily embraced Customer Relationship Management (CRM), with sharp focus on customer centricity, facilitated by the availability of superior technology. CRM has, therefore, become the new mantra in customer service management, which is both relationship based and information intensive.

          Risk management is no longer a mere regulatory issue.basel-2 has accorded a primacy of place to this fascinating exercise by repositioning it as the core of banking. We now see the evolution of many novel deferral products like credit derivatives, especially the Credit Risk Transfer (CRT) mechanism, as a consequence. CRT, characterized by significant product innovation, is a very useful credit risk management tool that enhances liquidity and market efficiency. Securitization is yet another example in this regard, whose strategic use has been rapidly rising globally. So is outsourcing.

TECHNOLOGY IN BANKING

          Nobel Laureate Robert Solow had once remarked that computers are seen everywhere excepting in productivity statistics. More recent developments have shown how far this state of affairs has changed. Innovation in technology and worldwide revolution in information and communication technology (ICT) have emerged as dynamic sources of productivity growth. The relationship between IT and banking is fundamentally symbiotic. In the banking sector, IT can reduce costs, increase volumes, and facilitate customized products; similarly, IT requires banking and financial services

to facilitate its growth. As far as the banking system is concerned, the payment system is perhaps the most important mechanism through which such interactive dynamics gets manifested. Recognizing the importance of payments and settlement systems in the economy, we have embarked on technology based solutions for the improvement of the payment and settlement system infrastructure, coupled with the introduction of new payment products such as the computerized settlement of clearing transactions, use of Magnetic Ink Character Recognition (MICR) technology for cheque clearing which currently accounts for 65 per cent of the value of cheques processed in the country, the computerization of Government Accounts and Currency Chest transactions, operationalisation of Delivery versus Payment (DvP) for Government securities transactions. Two-way inter-city cheque collection and imaging have been operationalised at the four metros. The coverage of Electronic Clearing Service (Debit and Credit) has been significantly expanded to encourage non-paper based funds movement and develop the provision of a centralized facility for effecting payments. The scheme for Electronic Funds Transfer operated by the Reserve Bank has been significantly augmented and is now available across thirteen major cities. The scheme, which was originally intended for small value transactions, is processing high value (upto Rs.2 crore) from October 1, 2001. The Centralized Funds Management System (CFMS), which would enable banks to obtain consolidated account-wise and centre-wise positions of their balances with all 17 offices of the Deposits Accounts Departments of the Reserve Bank, has begun to be implemented in a phased manner from November 2001.

          A holistic approach has been adopted towards designing and development of a modern, robust, efficient, secure and integrated payment and settlement system taking into account certain aspects relating to potential risks, legal framework and the impact on the operational framework of monetary policy. The approach to the modernization of the

payment and settlement system in India has been three-pronged:                  (a) consolidation, (b) development, and (c) integration. The consolidation of the existing payment systems revolves around strengthening Computerized Cheque clearing, expanding the reach of Electronic Clearing Services and Electronic Funds Transfer by providing for systems with the latest levels of technology. The critical elements in the developmental strategy are the opening of new clearing houses, interconnection of clearing houses through the INFINET; optimizing the deployment of resources by banks through Real Time Gross Settlement System, Centralized Funds Management System (CFMS); Negotiated Dealing System (NDS) and the Structured Financial Messaging Solution (SFMS). While integration of the various payment products with the systems of individual banks is the thrust area, it requires a high degree of standardization within a bank and seamless interfaces across banks.

          The setting up of the apex-level National Payments Council in May 1999 and the operationalisation of the INFINET by the Institute for Development and Research in Banking Technology (IDRBT), Hyderabad have been some important developments in the direction of providing a communication network for the exclusive use of banks and financial institutions. Membership in the INFINET has been opened up to all banks in addition to those in the public sector. At the base of all inter-bank message transfers using the INFINET is the Structured Financial Messaging System (SFMS). It would serve as a secure communication carrier with templates for intra- and inter-bank messages in fixed message formats that will facilitate ‘straight through processing’. All inter-bank transactions would be stored and switched at the central hub at Hyderabad while intra bank messages will be switched and stored by the bank gateway. Security features of the SFMS would match international standards.

          In order to maximize the benefits of such efforts, banks have to take pro-active measures to:

·     further strengthen their infrastructure in respect of standardization, high levels

·     of security and communication and networking;

·     achieve inter-branch connectivity early;

·     popularize the usage of the scheme of electronic funds transfer (EFT); and

·     Institute arrangements for an RTGS environment online with a view to integrating into a secure and consolidated payment system.

Information technology has immense untapped potential in banking. Strengthening of information technology in banks could improve the effectiveness of asset-liability management in banks. Building up of a related data-base on a real time basis would enhance the forecasting of liquidity greatly even at the branch level. This could contribute to enhancing the risk management capabilities of banks.

REGULATIONS AND COMPLIANCE

          Progressive strengthening, deepening and refinement of the regulatory and supervisory system for the financial sector have been important elements of financial sector reforms. In the long run, it is the supervision and regulation function that is critical in safeguarding financial stability. There is also some evidence that proactive and effective supervision contributes to the efficiency of financial intermediation.  Financial sector supervision is expected to become increasingly risk-based and concerned with validating systems rather than setting them. This will entail procedures for sound internal evaluation of risk for banks. As mentioned earlier, bank managements will have to develop internal capital assessment processes in accordance with their risk profile and control environment. These internal processes would then be subjected to review and supervisory intervention if necessary. The emphasis will be on evaluating the quality of risk management and the adequacy of risk containment. In such an environment, credibility assigned by markets to risk disclosures will hold only if they are validated by supervisors. Thus effective and appropriate supervision is critical for the effectiveness of capital requirements and market discipline.

          In certain areas, as for instance, in the urban cooperative banking segment, the regulatory requirements leave considerable scope for regulatory arbitrage and even circumvention. The problem is rendered more complex by the existence of regulatory overlap between the Central Government, the State Governments and the Reserve Bank. Regulatory overlap has impeded the speed of regulatory response to emerging problems. The need for removing multiple regulatory jurisdictions over the cooperative banking sector has been reiterated on several occasions. In this regard, the Reserve Bank has proposed the setting up of an apex supervisory body for urban cooperative banks under the control of a high-level supervisory board consisting of representatives of the Central governments, the State governments, the Reserve Bank and experts. The apex body is expected to ensure compliance with prudential requirements and also supervise on-site inspections and off-site surveillance.

          Recent developments in certain segments of the financial sector have also brought to the fore issues relating to corporate governance in banks. As part of on-going reforms, boards have been given greater autonomy to prescribe internal control guidelines, risk management and procedures for market discipline and accountability. It is extremely important that greater vigilance over adherence to these norms goes hand-in-hand with greater autonomy. Recent evidence of transgression of prudential guidelines by a few banks has raised the issue of the audit and supervisory functions of boards. As we move towards a more deregulated financial regime, these functions have to be transferred from either the Government or the Reserve Bank to bank boards. This imposes a greater responsibility and accountability on the bank management. It is in this context that a consultative group of directors of select banks and other experts has been set up to recommend measures to strengthen the internal supervisory role of boards. The objective is to obtain a feedback on how boards function vis-à-vis compliance with prudential norms, transparency and disclosure, functioning of the audit committee, etc., and to devise effective mechanisms for ensuring management discipline.

          Several other initiatives in improving the supervisory function have been undertaken, including a prudential supervisory reporting system for financial institutions, improvements in procedures for financial inspection, sensitizing the general public for better regulation of the activities of NBFCs and enactment of appropriate legislation to protect depositor interests in some States. Major legal reforms have been initiated in areas

such as security laws, the Negotiable Instruments Act, bank frauds and the regulatory framework of banking. The Reserve Bank has also accepted the principle of transfer of ownership to the Government in respect of some financial institutions in view of the conflict of interest that may arise in the conduct of its supervisory function. It is expected that these initiatives will pave the way for an efficient, and risk-based supervisory environment in India.

          The largest set of consolidated regulations that mandate integrity of data in India are the IT Act and SEBI’s clause 49 for listed companies. These regulations do not currently enforce the kind of security standards that are common in Europe and the US. In a global economy, however, no company is an island and India Inc is adopting US and European compliance procedures and certifications such as Sarbanes Oxley, Safe Harbour, BS, and ISO.

          Compliance, regulatory or otherwise, does not directly concern the IT department. In manufacturing for instance, compliance controls don’t really involve system security, and a large part of the quality control required by authorities cannot be imposed or enforced using IT. Companies that deal with sensitive information, financial services and BPOs, banks, MNC subsidiaries or those with plans to expand beyond Indian shores are all affected. These will continue to make strides towards compliance. For the mediumscale segment (Rs 100-300 crore turnover), security and audits are not a priority. This segment is comfortable with public mail servers, and exchanging information over not very secure connections.

CORPORATE GOVERNANCE – CODE OF CONDUCT

1. Need and objective of the Code

          Clause 49 of the Listing agreement entered into with the Stock Exchanges, requires, as part of Corporate Governance the listed entities to lay down a Code of Conduct for Directors on the Board of an entity and its Senior Management. The term “Senior Management” shall mean personnel of the company who are members of its core management team excluding the Board of Directors. This would also include all members of management, one level below the Executive Directors including all functional heads.

2. Bank’s Belief System

          This Code of Conduct attempts to set forth the guiding principles on which the Bank shall operate and conduct its daily business with its multitudinous stakeholders, government and regulatory agencies, media and anyone else with whom it is connected. It recognizes that the Bank is a trustee and custodian of public money and in order to fulfill fiduciary obligations and responsibilities, it has to maintain and continue to enjoy the trust and confidence of public at large.

          The Bank acknowledges the need to uphold the integrity of every transaction it enters into and believes that honesty and integrity in its internal conduct would be judged by its external behavior. The bank shall be committed in all its actions to the interest of the countries in which it operates. The Bank is conscious of the reputation it carries amongst its customers and public at large and shall endeavor to do all it can to sustain and improve upon the same in its discharge of obligations. The Bank shall continue to initiate policies, which are customer centric and which promote financial prudence.

A. General Standards of conduct

          The Bank expects all Directors and members of the Core Management to exercise good judgment, to ensure the interests, safety and welfare of customers, employees and other stakeholders and to maintain a cooperative, efficient, positive, harmonious and productive work environment and business organization. The Directors and members of the Core Management while discharging duties of their office must act honestly and with due diligence. They are expected to act with that amount of utmost care and prudence, which an ordinary person is expected to take in his/ her own business. These standards need to be applied while working in the premises of the Bank, at offsite locations where business is being conducted whether in India or abroad, at Bank-sponsored business and social events, or at any other place where they act as representatives of the Bank.

B. Conflict of Interest

          A “conflict of interest” occurs when personal interest of any member of the Board of Directors and of the Core management interferes or appears to interfere in any way with the interests of the Bank. Every member of the Board of Directors and Core Management has a responsibility to the Bank, its stakeholders and to each other. Although this duty does not prevent them from engaging in personal transactions and investments, it does demand that they avoid situations where a conflict of interest might occur or appear to occur. They are expected to perform their duties in a way that they do not conflict with the Bank’s interest such as :

· Employment /Outside Employment – The members of the Core Management are expected to devote their total attention to the business interests of the Bank. They are prohibited from engaging in any activity that interferes with their performance or responsibilities to the Bank or otherwise is in conflict with or prejudicial to the Bank.

· Business Interests – If any member of the Board of Directors and Core Management considers investment in securities issued by the Bank’s customer, supplier or competitor, they should ensure that these investments do not compromise their responsibilities to the Bank. Many factors including the size and nature of the investment; their ability to influence the Bank’s decisions, their access to confidential information of the Bank, or of the other entity, and the nature of the relationship between the Bank and the customer, supplier or competitor should be considered in determining whether a conflict exists. Additionally, they should disclose to the Bank any interest that they have which may conflict with the business of the Bank.

C. Applicable Laws

      The Directors of the Bank and Core Management must comply with applicable laws,regulations, rules and regulatory orders. They should report any inadvertent non -compliance, if detected subsequently, to the concerned authorities.

D. Disclosure Standards

      The Bank shall make full, fair, accurate, timely and meaningful disclosures in the periodic reports required to be filed with Government and Regulatory agencies. The members of Core Management of the bank shall initiate all actions deemed necessary for proper dissemination of relevant information to the Board of Directors, Auditors and other Statutory Agencies, as may be required by applicable laws, rules and regulations.

E. Use of Bank’s Assets and Resources

      Each member of the Board of Directors and the Core Management has a duty to the Bank to advance its legitimate interests while dealing with the Bank’s assets and resources. Members of the Board of Directors and Core Management are prohibited from:

·   Using Corporate property, information or position for personal gain,

·   Soliciting, demanding, accepting or agreeing to accept anything of value from any person while dealing with the Bank’s assets and resources,

·  Acting on behalf of the Bank in any transaction in which they or any of their relative(s) have a significant direct or indirect interest.

F. Confidentiality and Fair Dealings

(i) Bank’s confidential Information

·   The Bank’s confidential information is a valuable asset. It includes all

trade related information, trade secrets, confidential and privileged information, customer information, employee related information, strategies, administration, research in connection with the Bank and commercial, legal, scientific, technical data that are either provided to or made available each member of the Board of Directors and the core Management by the Bank either in paper form or electronic media to facilitate their work or that they are able to know or obtain access by virtue of their position with the Bank. All confidential information must be used for Bank’s business purposes only.

·    This information includes the safeguarding, securing and proper disposal of confidential information in accordance with the Bank’s policy on maintaining and managing records. The obligation extends to confidential of third parties, which the Bank has rightfully received under non-disclosure agreements.

·   To further the Bank’s business, confidential information may have to be disclosed to potential business partners. Such disclosures should be made after considering its potential benefits and risks. Care should be taken to divulge the most sensitive information, only after the said potential business partner has signed a confidentiality agreement with the Bank.

·     Any publication or publicly made statement that might be perceived or construed as attributable to the Bank, made outside the scope of any appropriate authority in the Bank, should include a disclaimer that the publication or statement represents the views of the specific author and not the Bank.

(ii) Other Confidential Information

      The bank has many kinds of business relationships with many companies and individuals. Sometimes, they will volunteer confidential information about their products or business plans to induce the Bank to enter into a business relationship. At other times, the Bank may request that a third party provide confidential information to permit the Bank to evaluate a potential business relationship with the party. Therefore, special care must be taken by the Board of Directors and members of the Core Management to handle the confidential information of others responsibly. Such confidential information should be handled in accordance with the agreements with such third parties.

·   The Bank requires that every Director and the member of Core Management, General Managers should be fully compliant with the laws, statutes, rules and regulations that have the objective of preventing unlawful gains of any nature whatsoever.

·   Directors and members of Core Management shall not accept any offer, payment, promise to pay or authorization to pay any money, gift or anything of value from customers, suppliers, shareholders/ stakeholders etc that is perceived as intended, directly or indirectly, to influence any business decision, any act or failure to act, any commission of fraud or opportunity for the commission of any fraud.

4. Good Corporate Governance Practices

      Each member of the Board of Directors and Core Management of the Bank should adhere to the following so as to ensure compliance with good Corporate Governance practices.

(a) Dos

§ Attend Board meetings regularly and participate in the deliberations and discussions effectively.

§  Study the Board papers thoroughly and enquire about follow-up reports on definite time schedule.

§ Involve actively in the matter of formulation of general policies.

·     Be familiar with the broad objectives of the Bank and policies laid down by the Government and the various laws and legislations.

·     Ensure confidentiality of the Bank’s agenda papers, notes and minutes.

(b) Don’ts

·     Do not interfere in the day to day functioning of the Bank.

·     Do not reveal any information relating to any constituent of the Bank to anyone.

·     Do not display the logo / distinctive design of the Bank on their personal visiting cards / letter heads.

·     Do not sponsor any proposal relating to loans, investments, buildings or sites for Bank’s premises, enlistment or empanelment of contractors, architects, auditors, doctors, lawyers and other professionals etc.

·     Do not do anything, which will interfere with and/ or be subversive of maintenance of discipline, good conduct and integrity of the staff.

5. Waivers

·  Any waiver of any provision of this Code of Conduct for a

member of the Bank’s Board of Directors or a member of the Core Management must be approved in writing by the Board of Directors of the Bank.

The matters covered in this Code of Conduct are of the utmost importance to the bank, its stakeholders and its business partners, and are essential to the Bank’s ability to conduct its business in accordance with its value system.

ENTREPRENEURSHIP

      Entrepreneurship is the practice of starting new organizations, particularly new businesses generally in response to identified opportunities. Entrepreneurship is often a difficult undertaking, as a majority of new businesses fail. Entrepreneurial activities are substantially different depending on the type of organization that is being started. Entrepreneurship may involve creating many job opportunities.

      Many “high-profile” entrepreneurial ventures seek venture capital or angel funding in order to raise capital to build the business. Many kinds of organizations now exist to support would-be entrepreneurs, including specialized government agencies, business incubators, science parks, and some NGOs. Schumpeter (1950), an entrepreneur is a person who is willing and able to convert a new idea or invention into a successful innovation. Entrepreneurship forces “creative destruction” across markets and industries, simultaneously creating new products and business models and eliminating others. In this way, creative destruction is largely responsible for the dynamism of industries and long-run economic growth. Despite Schumpeter’s early 20th-century contributions, the traditional microeconomic theory of economics has had little room for entrepreneurs in their theories.

Characteristics of entrepreneurship:-

§   The entrepreneur, who has a vision and the enthusiasm for this vision, is the driving force of an entrepreneurship

§   The vision is usually supported by a set of ideas that have not been aware by the majority of the market/industry

§   The overall blueprint to realize the vision is clear, however details may be incomplete, flexible, and evolving

§    The entrepreneur promotes the vision with an influential passion

§   With a persistent and deterministic mindset, the entrepreneur devises a set of entrepreneurial strategies to thrive for the vision

PERFORMANCE AND BENCHMARKING

• PERFORMANCE MANAGEMENT:-

      Performance management is a systematic approach to improving worker productivity through a year-round, ongoing process of communicating and managing performance expectations. With Performance-based Management, performance improvement becomes the joint responsibility of employees and their managers. Generally there are two things which determine how successful a performance appraisal system is in place in an organization.

      1) The contents/design of the performance appraisal form and

      2) The manner in which Performance Appraisal is conducted.

      While organizations lay great emphasis on the contents/design part, spending much of time, money and energy on designing most suitable, objective, comprehensive formats, it serves no purpose if the appraising process is not conducted properly.

      Performance-based Management measures, evaluates and improves performance on the job. You can expect employee productivity to increase because performance assessments and performance feedback will always be job-related, even if the duties of a particular job expand or change. Furthermore, because this type of performance management focuses on productivity and not personality and since it involves ongoing, open, two-way communication between manager and employee, it greatly reduces many of the stereotypes, problems and anxieties associated with traditional labor-intensive

      A benchmark is a point of reference for a measurement. The term presumably originates from the practice of making dimensional height measurements of an object on a workbench using a graduated scale or similar tool, and using the surface of the workbench as the origin for the measurements.

      Benchmarks are designed to mimic a particular type of workload on a component or system. “Synthetic” benchmarks do this by specially-created programs that impose the workload on the component. “Application” benchmarks, instead, run actual real-world programs on the system. Whilst application benchmarks usually give a much better measure of real-world performance on a given system, synthetic benchmarks still have their use for testing out individual components, like a hard disk or networking device. Computer manufacturers have a long history of trying to set up their systems to give unrealistically high performance on benchmark tests that is not replicated in real usage. For instance, during the 1980s some compilers could detect a specific mathematical operation used in a well-known floating-point benchmark and replace the operation with a mathematically-equivalent operation that was much faster. However, such a transformation was rarely useful outside the benchmark. Manufacturers commonly report only those benchmarks (or aspects of benchmarks) that show their products in the best light. They also have been known to mis-represent the significance of benchmarks, again to show their products in the best possible light. Taken together, these practices are called bench-marketing.

       Users are recommended to take benchmarks, particularly those provided by manufacturers themselves, with ample quantities of salt. If performance is really critical, the only benchmark that matters is the actual workload that the system is to be used for. If that is not possible, benchmarks that resemble real workloads as closely as possible should be used, and even then used with skepticism. It is quite possible for system A to outperform system B when running program “furble” on workload X (the workload in the benchmark), and the order to be reversed with the same program on your own workload.

• BENCHMARKING:-

        Benchmarking (Comparing) is a selective method of finding out how and why some companies can perform tasks much better than other companies. There can be as much as a tenfold difference in the quality, speed and cost-performance of an average company versus a world-class company.

It involves the following seven steps

1) Determine functions to benchmark.

2) Identify the key performance variables to measure.

3) Identify the best-in-class companies.

4) Measure performance of best-in-class companies

5) Measures the company’s performance.

6) Specify programs and actions to close the gap

7) Implement and monitor results

      A company can identify “best practices” companies by asking employees, customers, suppliers and distributors what they rate as doing the best. Major Consulting Firms can also be contacted for this purpose. To keep costs under control, a company should focus primarily on benchmarking those critical tasks that deeply affect customer satisfaction and Cost Management and where substantially better performance is known to exist.

      Benchmarking is a process used in management and particularly strategic management, in which businesses use industry leaders as a model in developing their business practices. This involves determining where you need to improve, finding an organization that is exceptional in this area, then studying the company and applying it’s best practices in your firm. Benchmarking systematically studies the absolute best firms, then uses their best practices as

Panama Offshore Banking & Banking Secrecy Laws

July 15th, 2009 at 08:52pm Under Banking Law

Panama is one of the most popular places for offshore banking. Numbered accounts no longer exist in Panama, instead Panama has what are known as bearer share corporations and those corporations own a bank account.

These corporations are difficult to find out the real owner because when ownership is transfered no records of the sale need to be kept or registered. The person that physically holds the share certificates is the owner of a bearer share corporation and any associated bank accounts which offers a great deal of privacy.

Of course there has to be someone as a signatory on the company bank accounts but within every corporation there can be more than one person with signing authority. Being a signatory on an account is not proof that the corporation funds are your funds.

Technically, the owner of the bank account is the corporation and not the people with signatory privileges. The banking secrecy afforded by law in Panama is what draws foreigners to Panama to set up their corporations and bank accounts.

Lets Take a look at some of those laws:

Article 74 of Decree 238 makes it so the banking commission of Panama can’t conduct an investigation on personal banking clients. Additionally, if it uncovers any information during normal operations they aren’t allowed to reveal that information to any person or authority. They may only do so if they are subpoenaed by a Panama court. Violators of this law are subject to another law which imposes fines or jail time on the guilty party.

Article 65 of Cabinet Decree 238 regulates the manner in which the National Banking Commission can gain access to banking information and documents. The law states that they may only inspect the banks general books and that they may not single out individual bank accounts. That law covers both deposits and securities at the bank, and this to can only be broken by a court order.

Article 170 states that any person with access to confidential banking information through either occupation or activity, that uses this information without the consent of the involved parties, in a way that causes someone damages, they can be punished and possibly imprisoned. That sentence can be anywhere from ten months to two years, it may include monetary fines and they will also be barred from practicing their profession for a two year period.

Regardless of where you bank today there are three reasons that can lead to your banking secrecy being violated. Those three reasons are severe criminal activity such as terrorist funding, money laundering and drug smuggling.

In Panama tax evasion is not considered a serious crime. There is no court in Panama that will allow your banking secrecy to be violated for tax related violations unless a case is brought that can show this money was also involved in a serious crime.

Panama is a member of the mutual legal assistance treaty. In a post 911 world it is now a requirement that all countries that transit funds in and out of the United States must be a part of this treaty. When you analyze this treaty it does not threaten any of the strict secrecy laws set fourth in Panama.

The following are the basics of the treaty. The investigation can only be conducted if the offense that is to be investigated is a crime in both countries. If a country wants information they have to prove they have no other alternative method of obtaining it and they must also show they can not go fourth with legal action without the information. When information is requested it has to be specific. They can’t just be fishing for information.

They must also first file a criminal case in its court system on a national level, which ensures that smaller cases are not covered under the treaty. If another country meets all of the conditions, the request is pushed through diplomatic channels and then Panama must consider the information request.

Panama values its banking secrecy laws and they may ask for more information before they break the laws they hold with such esteem. It is not uncommon for Panama to deny an information request since they need to feel the matter is serious on their end to bring action against a person. They are allowed to deny any request that meets the outlined guidelines.

Panama does not in any way shape or form participate in any tax treaties. They also do not acknowledge tax related investigations as criminal situations. Panama will not divulge a person’s personal information to a foreign entity for tax related issues unless formal litigation is brought before a Panama court and the judge approves the request. This is only granted for serious crimes. Tax evasion is considered a civil matter in Panama. In Panama you must commit a serious crime to risk your financial privacy.

How To Get An Investment Banking Job As A Lawyer

July 15th, 2009 at 02:52pm Under Banking Law

Decided to go to law school, start working at a law firm, and realize you’re actually more interested in finance and investment banking?
You’re not alone.
It’s fairly common for lawyers to switch into finance and investment banking specifically. There are several paths from law to investment banking.
You can get a banking job immediately after finishing law school; you can work as a law firm Associate for several years and then transition over; and you can go to business school after practicing for several years and interview for banking jobs as you complete your MBA.
It sounds appealing to go immediately from law school into investment banking. However, it is difficult to pull off and most banks do not recruit someone immediately out of law school. They would have difficulty placing the candidate and deciding whether to make him an Analyst or Associate.
This method becomes easier if you had finance experience prior to law school, in which case you just need to tell a good story about why you went to law school.
If you haven’t had this experience, it’s better to work for a few years at a law firm and transition over.
Going to business school after law school is only recommended if you’ve practiced in a completely unrelated legal field like Intellectual Property or Environmental Law.
How To Work In Law And Then Switch To Banking
You need to Corporate Law. Don’t even think about Intellectual Property, Litigation, or anything else. Do Corporate Law.
Recruiting is ultimately a numbers game, and you increase your odds greatly if you have Corporate, Securities, or M&A legal experience.
Once you have a few years experience working on transactions, you can consider switching into finance.
Contact all your friends in the industry and ask for referrals to recruiters; contact former clients and ask about setting up informational meetings or discussing opportunities at their firms.
Target industries and clients you have experience with. If you worked with a lot of technology companies, go for technology investment banking firms; if you did Mergers And Acquisitions, go for the M&A departments at banks.
Also, try for boutiques and middle-market firms rather than bulge brackets unless you work at one of the top few law firms – it will be much easier to get into smaller places.
How To Sell Your Story In Interviews
With a Corporate Law background, there are 2 main points you’ll need to prove: 1) that you have quantitative and finance skills and 2) that you really want to make a big career change even if you’re on Partner track at your law firm.
You really need to focus on financial skills in your interview preparations. Know the 3 financial statements cold. Be able to explain models and valuation methods because they will ask you tons of questions here, especially if you were an English or History major and have no finance experience.
This is one of the few cases where getting a CFA might actually help you get into investment banking – it would give you the finance knowledge and show your interest in the field.
Making the case for a career change can actually be easier. You want to emphasize you were always interested in corporate finance and dealmaking, and went into Corporate Law for those reasons. However, you got frustrated with your inability to BE the dealmaker and how you had to just sit on the sidelines, and so now you want to switch into banking and be a player.

Panama Bank Secrecy Laws

July 15th, 2009 at 08:53am Under Banking Law

Today Panama has become the Switzerland of Latin America. There are 150 banks in Panama many of which have their name on a 40 story modern skyscraper. Panama is often touted as having the best banking secrecy laws in the world. This author believes this to be true and we will address the bank secrecy laws of Panama in depth.
The first important point to look at is the existence of any tax treaties that Panama may be in with any other countries. This is an easy topic since Panama has no tax treaties with any other countries. Tax treaties can be privacy invasive for a banking client. Under some treaties the bank must collect a certain percentage of taxes from interest income paid to the clients and this money is turned over to the client’s home country. Other treaties call for an exchange of information so if a requesting country wanted to gather certain facts about a bank account or if a certain constituent of theirs had a bank account the bank would be obligated to provide the information. The European Union Withholding Tax Treaty is a very relevant treaty.
The next type of treaty one must look at is called the Mutual Legal Assistance Treaty, or MLAT. This treaty allows countries to request information from other countries in the treaty. The general way this type of treaty operates is through diplomatic channels. Panama is in such treaties. The requesting country must have a criminal case on file in the national courts of their country. They would then cite this case already in their criminal courts when the request for information is made. The requesting country would a need to show that the requested information about the Panama bank account is absolutely required to successfully prosecute the case and that the requesting country has no other way to obtain such evidence. Then the request is considered by Panama. Panama may ask for more information. Panama could deny the request on whatever grounds they wish to use. Panama could also decide to conduct their own investigation because they feel that some Panama laws may have been broken and delay the MLAT request until after they have concluded their investigation which may be some years. The statue of limitations could expire before Panama completed their investigation. This is not to say that Panama is in the habit of thwarting requests for information but Panama does have a right to investigate crimes that took place in their jurisdiction. As a result of these investigations they could confiscate assets and prosecute individuals under their own laws.
For the MLAT to take effect the violation in question must be a crime in both the requesting country and the country the information is requested from. Various MLAT treaties have all sorts of details and exceptions and should be read individually if you are seriously interested in a particular treaty. Panama not only has no tax treaties with any other nation but all income tax related offenses in Panama are civil offenses only, not criminal offenses. So tax matters are not a crime in Panama. Thus Panama does not participate in requests for information in tax offenses. Panama does cooperate in certain areas freely. If one acts fraudulently while in the capacity of a fiduciary in a financial relationship Panama will cooperate. Panama also cooperates in cases of narcotics trafficking, money laundering, terrorism and child pornography.
The Panama Bank Secrecy laws are contained in a number of different legal statues. We will go through some of the relevant ones:
The Panama National Banking Commission was formed by Cabinet Decree 238 of July 2, 1970.
Article 74 of Decree 238 deals with protecting the privacy of Panama bank clients. It states that the Commission is prevented from conducting or requesting investigations concerning the banking affairs of any bank clients. Any data obtained by the Commission in the course of its normal regulatory functions may not be revealed to any person or authority, except if subpoenaed in accordance with the legal provisions in force (Panama Court Order required). If a violation of this occurred Article 101 of this Cabinet Decree contains provisions for the dealing of such a violation.
Article 101 of Cabinet Decree 238 states that:
“Any person who furnishes information in violation of this Cabinet Decree, or who violates any of the prohibitions established in it, for which no specific punishment is provided for, shall be subject to a monetary fine as determined by the Banking Commission, without prejudice to applicable criminal and civil liabilities.” This is fairly strong language.
Article 65 of Cabinet Decree 238 deals with how the National Banking Commission may gain access to documents relating to the bank’s operation, not individual records of banking clients. The Banking Commission needs to regulate the banks financially and thus inspect their books but this is mandated to be done on a collective basis, thus the books for the bank as a whole are inspected not the records for an individual account holder at the bank. The Banking Commission may not examine or inspect any type of individual deposit accounts, nor the securities held in custody by the bank for clients, nor the safe deposit boxes belonging to clients and their contents, nor the documents associated with receiving credit from the bank, unless there is a Panama Court Order in place that specifically authorizes such inspection or examination according to Article 89 of the Panama Commercial Code.
Panama statues specify that bank secrecy may be lifted by a Panamanian court through Article 89 of the Commercial Code. This is not a commonly invoked procedure but is possible concerning serious criminal activities.
Articles 168 and 170 of the Panamanian Criminal Code contain two sections which enables criminal prosecution for violation the privacy of Panama banking clients:
Article 168. Any person that is in legitimate possession of correspondence, records or documents which are not intended for public knowledge and notwithstanding discloses said correspondence, records or document without proper authorization, even in the event that they were addressed to him, shall be subject to prosecution, whenever such disclosure might inflict damage.
Article 170. Any person that in the course of his occupation, employment, profession or activity obtains knowledge of confidential information that in the event of being made public could inflict damages, and such person discloses that information without the consent of the concerned party; or in the case that disclosure of such information were not necessary to safeguard a higher interest, shall be punishable by imprisonment of 10 months to 2 years or a comparable fine, and the inability to practice his occupation, employment, profession or activity for not more than 2 years. One can readily discern that this would cover Panama Stock Brokers, and Panama Banks including all the employees and officers. This could also be construed to cover Directors of Panama Anonymous Bearer Share Corporations and Council Members of Anonymous Panama Private Interest Foundations.
Panama has done away with numbered bank accounts as have the rest of the offshore tax haven jurisdictions. This is due to pressure from FATF, the Financial Action Task Force. FATF is a private entity that unofficially dictates anti-money laundering statues to the banks worldwide. Numbered accounts are no longer allowed.
Panama through the use of anonymous Bearer Share Corporations accomplishes practically the same privacy as the old numbered bank account. The banks around the world including those in Panama must know who their customers are. This usually means getting identity documents such as passports, driver’s licenses, national identity cards, and letters of reference from banks and businesses. The Panama Bearer Share Corporation is anonymous in that there is no reporting or recording of any stock ownership records in any registry or database thus it is impossible to determine who the natural persons are behind the corporate veil. This means when international wire transfers are sent only the name of the anonymous corporation appears in the wire, the true owner of the account is not revealed for the world to see same as it was when numbered bank accounts were allowed. With regards to writing checks the same applies assuming the signatory signs the check in a hard to read manner. To provide for more privacy Panama only allows an attorney to form a corporation or foundation. This cloaks the formation of the corporation with Panama attorney client privilege further protecting the owners of the corporation or foundation with an additional layer of privacy. In most tax haven jurisdictions the formation of a corporation handled by a corporate agent which does not provide privileged communication to protect the identity of the person owning the corporation.
One can readily see why Panama has become the new Switzerland of Latin America.
For more information, please visit:
http://www.panamalaw.org
email at: panamalegal@hush.com

INNOVATION IN RURAL BANKING

July 15th, 2009 at 02:52am Under Banking Law

INNOVATION IN RURAL BANKING

ABSTRACT

            This study is the innovation in the rural banking.  This paper present the bank sector, new mantras, new innovations, MIS promote functions, poverty alleviation of rural bank.  Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focused upon the agro sector. Today, commercial banks and Regional Rural Banks in India are penetrating every corner of the country are extending a helping hand in the growth process of the rural sector in the country.

INTRODUCTION

            Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focused upon the agro sector. Today, commercial banks and Regional rural banks in India are penetrating every corner of the country are extending a helping hand in the growth process of the rural sector in the country.

            In order to stimulate the development of rural banking and to give sustained support to the development of co-operative banks and other co-operative institution by providing remittances and other facilities, the all India Rural credit survey committee recommended setting up of a public sector bank which would be responsive to the needs of the Rural sector in general and co-operative institutions in particular. The overwhelming majority of poor people in India are concentrated in rural area of the estimated 260 million Indians (or 26%) of the population who live in poverty, same 193 million or 745) live in rural area.

The catalytic role played by credit for accelerating the economic development has been well recognized all over the world.  Since the inception of central economic planning in 1950, the government identified the credit needs of the rural sector and framed polices conducive for the flow of institutional credit.  Finance is one of the most fundamental inputs for economic activity.

Despite having a wide network of rural bank branches in India, Which implemented Specific poverty alleviation programmer that sought creation of self-employment opportunities through bank credit, a large number of unprivileged poor masses still continued to remain outside from the field of formal banking system.

BANKING SECTOR IN RURAL AREA:

            In June 1969, total number of banks branches in India were 89, out of which 73 were scheduled commercial banks and 16 were non-scheduled commercial banks increased to 226, out of which 148 were scheduled commercial banks, 74 Regional rural banks and 5 non-scheduled commercial banks in June 1980.  In 1998, the branches further in creased to 340, out of which state bank and its subsidiaries are 8 in number 19 nationalized banks, 196 Regional Rural Banks 86 scheduled Commercial Banks, 23 Private Banks and 1 Non-scheduled commercial banks.

            Banks have woken up to the potential in the rural sector. Specialised and innovative schemes to improve rural penetration are the new mantra. Rural credit cards and ATMs, a franchisee network, supply chain financing for agriculture; investments in rural infrastructure and cross-selling of products are only some of the schemes directed at the village folk. Building a specialised cadre for rural banking and improving awareness can help reduce default and make these schemes effective.

THE NEW MANTRA FOR BANKS

            The Union Budget for 2006-07 highlighted a number of schemes for rural India including creating opportunities for rural employment and a National Rural Health Mission. It has also asked banks to give farm credit at 7 per cent to bring more farmers under the organised credit net. The finance ministry has proposed to ask banks to increase the level of farm credit to Rs 1,75,000 crore in 2006-07, an increase of about Rs 33,500 crore. In addition, banks are being asked to bring 50 lakh more farmers into the banking fold. The potential, no doubt, is tremendous.

            However, the problem is rural penetration. A recent national sample survey has found that 41 per cent of the country’s adult population does not have access to formal banking facilities. This leaves a huge population outside the ambit of the formal financial structure. Banks are trying to remedy this problem now. Most have taken to rural expansion in a big way.  Take the country’s largest bank, State Bank of India for instance. Its rural branch network has touched a stupendous 6,600 with 972 specialised branches, which have been set up in different parts of the country exclusively for the development of agriculture through credit deployment.

            In addition, rural agricultural business units, education programmes for local farmers and kisan cards. It is no wonder that the bank is a leader in agricultural finance in the country with a portfolio of Rs. 18,000 crore in advances to around 50 lakh farmers.  The bank has brought out innovative and specialized mango and litchi credit cards for orchard owners in Uttaranchal.  Its most recent endeavor in this direction is a tie-up with National Agricultural Cooperative Marketing Federation (NAFED) for cooperation in to finance farmers for production and cultivation of various crops like soyabean, paddy, jute and potato.

            Not far behind is ICICI Bank, the country’s second largest bank. It has decided to adopt an unconventional method to beef up its presence in rural India. Instead of opening branches, the largest private bank has decided to adopt the franchisee model. Besides credit franchisees, the bank’s rural delivery channels may include branches in major agricultural markets, rural Internet kiosks and micro-finance institution partnerships, targeting specific segments of the rural population.

            The bank had disbursed Rs 2,500 crore towards rural sector financing was expecting good rural credit off take in the current year. It has also rolled out `Ashan’ ATMs for the urban and semi-urban markets in India. Clearly, the bank is taking the high-tech route to reach out to the rural population. Canara Bank on the other hand has launched a more grassroots-level plan. It plans on a programme for “100 per cent financial inclusion” in 1400 villages all over India, which is expected to bring 7 lakh families into the bank’s net.

            Under the programme, every adult member of a rural household in the selected villages would be encouraged to open ‘No Frills’ accounts with minimum entry-level formalities. An artisans credit card will help village artisans like blacksmiths, carpenters, leather workers, people engaged in servicing of agricultural implements and household equipment.  Meanwhile, several banks have been pursuing corporate-linked advances where finance could be provided against procurement commitments. Such supply-chain management is had now been introduced to rural lending as well. Farmer loan portfolios are increasingly getting skewed towards investment credit rather than crop loans.

            Investment credit could involve credit for the acquisition of farm equipment like tractors and other farm equipment. Banks are also involved in commodity financing where advances are provided to farmers against their final produce.

            Apart from the rising credit needs, banks can generate substantial amount of fee-based volumes from the rural segment. The agricultural sector offers cross-sell opportunities for products like micro insurance. Banks are also focusing on financing of rural infrastructure.

            An improved rural branch network, building a banking cadre specialised in rural banking, more flexible schemes and most importantly improving awareness among farmers about the advantages of bank credit are working for banks. The rural initiative, though relatively new, has tremendous potential. The coming years will show the extent of its success.

NEW INNOVATION OF RURAL BANKING

            Traditional bank architecture is based on bank branches. The branches ensure the physical security of your savings. You go there to deposit and withdraw money, negotiate loans, and engage in other financial transactions. In the past two decades, the banking architecture has changed. The automated teller machine (ATM) has been a big innovation. Credit and debit cards have created new financial spaces. Some banks have experimented with rural agents. Yet the bank branch has remained the bedrock of the banking system. You need a bank account in a branch before you can use an ATM or credit card that may be about to change. It’s early days still, but technocrats now view cellphones as the new architecture of virtual banks. This has the potential to make bank branches obsolete, or at least non-essential. Cellphone banking looks especially relevant for India, since it can penetrate the countryside cheaply and effectively.             The world over, cellphones are spreading at a phenomenal rate. In many developing countries, more people have cellphones than bank accounts. In India, new cellphone connections are growing at the rate of six million a month, a rate of customer expansion that no bank can dream of.  Till now, rural cellphone towers did not exist to permit services in the deep countryside. But those towers are now coming up rapidly, and cellphone companies expect to get hundreds of millions of rural customers in the next five years. For the first time in history, villagers will have instant connectivity.

E-Account

            The customer can deposit cash into the e-account or withdraw it, using the retail agents of Globe Telecom, who are spread across the country. Customers can use G-cash to pay bills, repay loans, or purchase goods at shops (it’s effectively a debit card). In the Philippines, 1.3 million people now have e-accounts with Global Telecom. In Kenya, a similar service is being offered by Safaricom, a Vodafone affiliate and the leading mobile operator in the country. Safaricom has partnered the Commercial Bank of Africa and a local microfinance institution.  In South Africa, a technology firm, WIZZIT, has become a division of the South African Bank of Athens in order to meet the central bank’s regulatory concerns. WIZZIT offers the usual services — deposit, withdrawal, payments, and airtime purchases — through a variety of access points including cellphones, ATMs post offices and bank branches. So, it combines branchless and branch-based banking, and its link with the post office constitutes a public-private partnership. It has reached poor people that earlier could not dream of opening bank accounts. India needs to learn from all these models. After the NBFC scandal of the 1990s, and subsequent scandals in many cooperative banks, the RBI is ultra-cautious about new architecture that may be vulnerable to abuse. It has allowed commercial banks to use microfinance institutions (MFIs), NGOs and cooperatives as retail agents. ICICI and other banks use MFIs as retail agents for disbursing and collecting loans. However, this architecture has not so far been useful for collecting deposits, paying bills, or undertaking other financial services.              Hence the time is ripe for a new set of rules to facilitate cellphone banking in all rural areas. A problem in the past has been that electricity in rural areas is very intermittent and unreliable. This makes the operation of ATMs a problem. But cellphones need very little electricity, and can be charged at night in every village using batteries based on solar energy. Such solar batteries have long been used by ITC in its e-choupals, and are not a novelty.  Indeed, the e-choupal is suddenly threatened with extinction by the rural cellphone. Till now, the e-choupal has provided electronic information in rural areas having no other source of information. But once rural cellphone towers are built, 3G technology will allow every rural cellphone to connect with the internet. This will enable cell-phones to provide all the information that e–choupals do today. Indeed, to protect its future, ITC needs to immediately become provider of services through cellphones, making them the new architecture of future e-choupals. This will be a first step towards ITC becoming a rural banker too.

            The RBI should probably insist that every provider of virtual banking sets up a joint venture with a commercial bank for providing such services. This will be far simpler than creating an entirely new set of rules for virtual banks. The regulations should liberally permit money transfer by cellphone. This will reduce the cost incurred by poor migrants in sending home remittances, currently done through money orders.

MIS TO PROMOTE RURAL BANKING

            To reach out to millions of unbanked rural customers, Mumbai based technology solutions provider Financial Information Network and Operations Ltd. (FINO) will work jointly with Access Development Services (ADS) to promote management information system (MIS) in the sector.  As a solution provider, FINO will implement MIS solution along with its various delivery channels, including mobiles, smart cards, micro-deposit machines (MDM’s) and credit bureaux services to aid Access Microfinance Alliance (AmFA) partners to scale up their operations.

RURAL BANKING AND POVERTY ALLEVIATION

            Inadequacy of the traditional banking system gave rise to the need of cooperative banks and regional rural banks and Regional Rural Banks combining resource and competence of the commercial banks with the rural orientation democratic approach of the cooperatives as well as low cost of establishment. After tracing the evolution of Regional Rural Banks of India the present work, based upon case studies of the RRBs, seeks to test how far the objectives RRBs had been achieved. The study involved into the working intensive field investigation into the working of regional rural banks of West Bengal.

            The progress of each of the Gramin Banks in respect of items if Capital, deposits, advances, income, expenditure, profit or loss branch expansion, loaning operations and recovery performance was reviewed. The nature of mobilization of rural savings through regional Rural Banks and the causes of their profits or losses were probed. The study in short attempts a critical evaluation to the structure and functioning of regional rural banks West Bengal

NKS: FUNCTIONING FOR THE DEVELOPMENT OF RURAL AREAS

            The area of operation of a majority of the RRBs is limited to a notified area comprising a few districts in a State.SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI are spread in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. Apart from SBI, there are other few banks which functions for the development of the rural areas in India. Few of them are as follows.

CO-OPERATIVE BANKS AND RURAL CREDIT

            The Co-operative bank has a history of almost 100 years. The Co-operative banks are an important constituent of the Indian Financial System, judging by the role assigned to them, the expectations they are supposed to fulfill, their number, and the number of offices they operate. Their role in rural financing continues to be important even today, and their business in the urban areas also has increased phenomenally in recent years mainly due to the sharp increase in the number of primary co-operative banks.

            Co-operative Banks in India are registered under the Co-operative Societies Act. The RBI also regulates the cooperative bank. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

Co-operative banks in India finance rural areas under:

Institutional Arrangements for Rural Credit (Co-operatives)

Short Term Co-operatives|District Central Co-operative Banks| State Co-operative Banks|Primary Agriculture Credit Co-operative Societies|Branches

Long Term Cooperatives|State Agriculture & Rural Development Banks|Primary Agriculture & Rural Development Banks|Branches

Primary Agricultural Credit Societies (PACSs)

An agricultural credit society can be started with 10 or more persons normally belonging to a village or a group of villages. The value of each share is generally nominal so as to enable even the poorest farmer to become a member. The members have unlimited liability, that is each member is fully responsible for the entire loss of the society, in the event of failure. Loans are given for short periods, normally for the harvest season, for carrying on agricultural operation, and the rate of interest is fixed. There are now over 92,000 primary agricultural credit societies in the country with a membership of over 100 million.

            The primary agricultural credit society was expected to attract deposits from among the well –to-do members and non-members of the village and thus promote thrift and self-help. It should give loans and advances to needy members mainly out of these deposits.

Central Co-operative Banks (CCBs)

The central co-operative banks are located at the district headquarters or some prominent town of the district. These banks have a few private individuals also who provide both finance and management. The central co-operative banks have three sources of funds,

            Their main function is to lend to primary credit society apart from that, central coopertive banks have been undertaking normal commercial banking business also, such as attracting deposits from the general public and lending to the needy against proper securities. There are now 367 central co-operative banks.

State Co-operative Banks (SCBs)

            The state Co-operative Banks, now 29 in number, they finance, co-ordinate and control the working of the central Co-operative Banks in each state. They serve as the link between the Reserve bank and the general money market on the one side and the central co-operative and primary societies on the other. They obtain their funds mainly from the general public by way of deposits, loans and advances from the Reserve Bank and they are own share capital and reserves.

COMMERCIAL BANKS AND RURAL CREDIT

            The commercial banks at present provide short term crop loans account for nearly 45 to 47% of the total loans given and disbursed by the commercial banks. Term loans for varying periods are given for purchasing pump sets, tractors and other agricultural machinery, for construction of wells and tube well, for development of fruit and garden crops, for leveling and development of land, for purchase of ploughs, animals, etc. commercial banks also extend loans for allied activities viz., for dairying, poultry, piggery, bee keeping, fisheries and others. These loans come to 15 to 16%.

Commercial Banks and Small Farmers

            The commercial banks identifying the small farmers through Small Farmers Development Agencies (SFDA) set up in various districts and group them into various categories for credit support so as to enable them to become bible cultivators. As regard small cultivators near urban areas and irrigation facilities, commercial banks can help them to go in for vegetable cultivation or combine it with small poultry farming and maintaing of one or two milch cattle.

IRDP and commercial banks

            Since October 1980, the Integrated Rural Development Programme (IRDP) has been extended to all the blocks in the country and the commercial banks have been asked by the government of India to finance IRDP. The lead banks have to prepare banking plans and allocate the responsibility of financing the identified beneficiaries among the participating banks. Commercial banks have been asked to finance all economically backward people identified by government agencies.

Application

Technology adds value to rural banking

            FINO is a smart card based multi-function application solutions provider that is making value-additions to rural banking In the backdrop of constant innovation in the banking sector vis-a-vis technology, Micro Finance Institutions (MFIs) are looking for enhanced services over and above the traditional services that are being offering today. Demand for value added services has propelled the necessity for MFIs to adopt advanced technology. The growing realisation among MFIs and their customers about the numerous ways in which this can be accomplished have resulted in MFIs raising the technological bar.

CORE BANKING FOR RURAL TRADERS

            Currently, many financial institutions in the rural sector are using rudimentary technology systems, which lack efficient MIS reporting, credible transaction trails or alternatively incorporate manual operations. The high cost of independent technology systems such as core banking systems have kept MFIs from investing in them. Inefficient operating modules and manual field operations act as major entry barriers to the growth of MFIs in a country like India. The upshot is that the cost of acquiring and servicing customers remains high.

            Manish Khera, CEO, FINO (Financial Information Network and Operations Ltd) says, “If the organised urban financial sector can somehow connect to its rural counterpart, it can accelerate the growth of the rural financial sector.” Thus there has been a vacuum, which can be bridged with low cost technology as offered by FINO.

            Ramesh Ramanathan, Chairman Janalakshmi Social Service says, “In order to attract the huge portion of the populace that is not served by the banking sector, this technology was needed. Our need for industrial strength technology is as important as that of formal financial institutions, possibly more; we have a large number of customers with large transaction volumes, and small ticket sizes. Our audit and control systems need to match these volumes, and our transaction costs need to be low enough to enable low cost delivery. None of this will be possible without technology.”

            Khera adds, “The idea of biometric smart cards was floated after an in-depth study by our team about MFIs in India. The majority of MFI customers are illiterate and it would be unfair to give them a password to use, so we have introduced a system where we take the customer’s fingerprints and whenever he wants to transact, he need not remember a number, his fingers will suffice at the FINO POT (Point of Transaction).”

            FINO and IBM are set to reach out to unbanked micro-entrepreneurs at the grassroots level. The solution for banking will enable customers of MFIs to participate in the market; smart cards will be provided to enable customers to access the trading floor without carrying cash.

REGIONAL RURAL BANKS AND RURAL CREDIT

            The Narasimham committee on rural credit recommended the establishment of Regional Rural Banks (RRBs) on the ground that they would be much better suited than the commercial banks or co-operative banks in meeting the needs of rural areas. Accepting the recommendations of the Narasimham committee, the government passed the Regional Rural Banks Act, 1976. The main objective of RRBs is to provide credit and other facilities particularly to the small and marginal farmers, agricultural laborers, artisians and small entrepreneurs and develop agriculture, trade, commerce, industry and other productive activities in the rural areas.

            The progress of RRBs in the initial stage was quite rapid. For instance, the Sixth Five-year plan(1980-85) had envisaged the setting up of 170 RRBs covering 270 districts by the end of march 1985.The target was exceeded. There are now 196 RRBs in 23 states of the country with 14,200 branches.

Structure of regional rural bank

            The establishment of the Regional Rural Banks (RRBs) was initiated in 1975 under the provisions of the ordinance promulgated on 26.9.1975 and thereafter Section 3(1) of the RRB Act, 1976. The issued capital of RRBs is shared by Central Government, sponsor bank and the State Government in the proportion of 50%, 35% and 15% respectively.

RRBs established with the explicit objective of:* Bridging the credit gap in rural areas* Check the outflow of rural deposits to urban areas* Reduce regional imbalances and increase rural employment generation

ROLE OF RBI IN RURAL CREDIT

Since it was set up in 1934, RBI has been taking keen interest in expanding credit to the rural sector. After NABARD was set up as the apex bank for agriculture and rural development, RBI has been taking a series of steps for providing timely and adequate credit through NABARD. Scheduled commercial banks excluding foreign banks have been forced to supplement NABARDs efforts-through the stipulation that 40percent of net bank credit should go to the priority sector, out of which at least 18 percent of net bank credit should flow to agriculture. Besides, it is mandatory that any shortfall in fulfilling the 40 percent target or the 18 percent sub-target would have to go to the corpus Rural Infrastructure Development Fund(RIDF).RBI has also taken steps in recent years to strengthen institutional mechanisms such as recapitalisation of Regional Rural Banks (RRBs) and setting up of local area banks(LABs).

Micro-Finance

Micro-finance is a novel approach to “banking with poor”as they attempt to combine lower transaction costs and high degree of repayments.The major thrust of these micro-finance initiatives is through the setting up of  Self Help Groups (SHGs),Non-Governmental organizations(NGOs),Credit Unions etc.

Kisan (Farmers’) Credit Card

Another notable development in recent years is the introduction of Kisan Credit Cards(KCC) in 1998-99.The purpose of the Kisan Credit Cards(KCC) scheme is to facilities short term credit to farmers.The scheme has gained popularity and its implementation has been taken up by 27 commercial banks, 187 RRBs and 334 Central cooperative banks.

Agricultural Insurance

As Agricultural is highly susceptible to risks such as drought, flood, pests etc.It is necessary to protect the farmers from natural calamities and ensure their credit eligibility from the next season. Towards this purpose, the Government of India introduced a comprehensive crop insurance scheme throught the country in 1985 covering major cereal crops, oilseeds and pulses. Among commercial crops, seven crops viz., sugarcane potato, cotton, ginger, onion, turmeric and chillies are presently covered.

MARKETING OF MUTUAL FUND UNITS – RRBS

            With a view to expanding the scope of business of RRBs and considering that marketing of Mutual Fund (MF) units provides a profitable avenue for banks, it has been decided by RBI on 17th May 2006 to allow Regional Rural Banks (RRBs) to undertake marketing of units of Mutual Funds, as agents.

CONCLUSION

            RRBs’ performance in respect of some important indicators was certainly better than that of commercial banks or even cooperatives. RRBs have also performed better in terms of providing loans to small and retail traders and petty non-farm rural activities. In recent years, they have taken a leading role in financing Self-Help Groups (SHGs) and other micro-credit institutions and linking such groups with the formal credit sector.  RRBs should really be strengthened and provided with more resources with which they can undertake more of these important activities. And most certainly they should be kept apart from a profit-oriented corporate motivation that would reduce their capacity to provide much needed financial services to the rural areas, including to agriculture. Ideally, the best use of the resources raised by RRBs through deposits would be through extensive cross-subsidisation. This, in turn, really requires an apex body that would cover and oversee all the RRBs, something like a National Rural Bank of India (NRBI).

            The number of rural branches should be increased rather than reduced; they should be encouraged to develop more sophisticated methods of credit delivery to meet the changing needs of farming; and most of all, there should be greater coordination between district planning authorities, panchayati raj institutions and the banks operating in rural areas. Only then will the RRBs fulfill the promise that is so essential for rural development.

Article By

P. Devika

Mphil Scholar

Karpagam university.

E-mail : sabaridevika@gmail.com

Business Finance Consulting – Avoiding Bad Banks

July 14th, 2009 at 08:53pm Under Banking Law

For small business owners, one of the most perplexing situations is a realization that there are now essentially “good banks” and “bad banks”. To make matters worse, it is rarely easy to distinguish between the good and bad ones. For many commercial borrowers, business finance consulting has emerged as a helpful tool to determine which banks are still effective. But overall, the world of banking has changed dramatically for almost everyone, and many business borrowers are angry and confused by a new commercial banking landscape that does not seem to be working very well.

One of the more difficult aspects associated with the “good bank and bad bank” analogy is that there are so many competing explanations as to what constitutes a “good bank”. One popular analysis has focused on how much banks are really worth in view of the toxic assets that are so complicated to evaluate. In this perspective, “bad banks” are those whose assets are estimated to be worth less than their liabilities and as a result have been referred to as “zombie banks” and “dead banks walking”.

Not surprisingly we have not yet experienced a bank which has openly agreed that their liabilities exceed their assets and therefore they should be considered to be a zombie bank. This would be tantamount to describing themselves as a bankrupt bank. If a bank is truly deserving of the bankrupt status (and there are a number which certainly appear to be in this category), the current banking laws do not permit such a bank to go through the kind of bankruptcy process being considered by General Motors and Chrysler.

Instead the Federal Deposit Insurance Corporation (FDIC) is supposedly required by law to assume the operation of the bankrupt bank until a new management and ownership arrangement can be established. For a number of smaller banks, this has in fact occurred during the past few months. What has been missing so far from this legal bank takeover approach by the FDIC has been the inclusion of larger banks which appear to have problems that are much more serious than the smaller banks which have already been liquidated and transferred to new owners by the FDIC.

The reason that the FDIC has not liquidated larger problematic banks has not been made public. It is certainly possible that the FDIC and key public officials feel that the public failure of a major bank would create a crisis of confidence for all banks regardless of their financial health. An equally strong likelihood is that the FDIC simply does not currently have sufficient assets to cover the failure of a big bank. This viewpoint is supported by the recent announcement that the FDIC is in the process of raising fees paid by banks in order to replenish the FDIC insurance funds.

To realistically protect the future financial health of their own business, small business owners need their own evaluation standards to determine what constitutes either a “good bank” or “bad bank”. Business owners should include an assessment that focuses on results as to which banks can provide the needed help for their specific business circumstances involving working capital financing and commercial loan needs. The banks themselves are not likely to be helpful in providing the needed data to produce a candid evaluation of their financial status, even though such information would go a long way toward establishing a good bank-bad bank distinction.

As noted above, it might be possible that there are several bankrupt banks still functioning normally because they have not rushed to advise the public that they are in serious trouble. While most banks have been publicizing during the past few months that they are making SBA loans and small business loans in a normal fashion, in most cases these banks have actually reduced commercial lending dramatically. Some specialized business lending such as commercial construction financing has been frozen altogether in many areas.

In addition to the critical importance of identifying “good banks”, we have published a related report which describes the delicate issue confronting many business owners who might need to fire their banker. There are “good bankers” and “bad bankers” just as we have noted that there are “good banks” and “bad banks”.

Business finance consulting has emerged as an important tool to help small business owners work their way through a complicated commercial banking maze. One of the common questions asked in the Bernie Madoff fiasco concerns the repeated failure of investment advisors to analyze internal operations prior to placing investor funds with the Ponzi scheme constructed by Madoff over a period of many years.

Our candid final point is that the use of a commercial finance consultant should be at least considered by commercial borrowers in their search for new working capital loans and commercial mortgage financing. Businesses now need to act more aggressively than before in order to protect their own financial interests.

Banks At Stock Market: Expirience Of Civilized Lobbing

July 14th, 2009 at 02:52pm Under Banking Law

Alexander SITOUKHO

Eastern European Asset Protection Center

http://ap-center.net/

A man has three fundamental types of reactions at everything that happened in our life: escape and avoid, endure and adapt, attack and change.

At the same way the relation to any legislative act and whole legal framework form. One can escape making shady business. One can adapt being engaged financial and legal engineering. And one can struggle for own interests and expand his possibilities.

The situation in the field of banking law rather differs from other fields. Stability and reliability are the main criterions which estimate bank’s activity. Bank is under rigorous state surveillance and there is no analog in any other business. So the strategy like avoiding is not used here. The most spread instrument is notably banking law. It is a source of masterly contract shames which often can direct not so much to the increasing profits as to the avoidance of losses and consequently to the fulfillment of standard acts which far from the perfection.

Meanwhile the state is developing and progressively we can hear about working of just as separate banks so their associations which directed to the improvement of the legal framework. And many different methods are used here such as the cancellation of offensive standard acts in the legal form, the development and the promotion of necessary draft laws and subordinate regulatory acts, public discussion of such projects. That activity is named as lobbying in the developed countries. It has uncoordinated character in Ukraine and good coordinated and planned shares are exclusion but not rule.

But awareness of necessity of efforts’ consolidation, combinations of financial and intellectual resources are increasing. Ukrainian lobbying assumes a professional character and a concept infrequently is apprehended as a swearword. Conditions for appearing civilized lobbying are the best in the banking area. The most intellectual and financial potential is concentrated here. Banking business has gradually lost instruments for getting super profits so it is interested in any reducing of the state control.

But let’s return to the origin subject. We told that one of the methods of reaction to the environment is an active influence and changing it by the convenient manner for you. But before you start to influence it is necessary to find out what exactly is not really so, what does not suit? And than you have to define the problems give it another words “make from a diagnosis”.  It gets easier because when the illness was diagnosed it is the half of the treatment. But it is not so easy to define problems as it seemed at first sight. And you know that to understand what exactly is not so it is necessary to know how should it be and what does “so” mean? And usually it is the main origin of the problem. And if you continue the medical analogy the health is not an absent of the disease but the presence of the energy, freedom of acts and ability to get pleasure from the life.

So prior to looking for and analyzing problems including legal problems it is necessary to understand how should be needed the “perfect” conditions of that system which we are going to “treat”. Such formulation gives us not only accurate understandings of the problems but offer a lot of variants of their solving.

Underneath as an example for instance of one of the concrete situation we would like to demonstrate how such problems are unmasked which impede with normal work of commercial banks in certain area. It is a matter of equity market.

Nowadays banks are principal gamblers at this market. Further their role will change. How the analyze of international practice shows the developing of Ukrainian stock market can take after the European model and just banks act the main part there. From principal gambler they will become main players.

In such situation two influential organizations which responsible for the creation of favorable conditions for banking business – Association “First Stock Trade System” (PFTS) and Association of Ukrainian Banks  (AUB) decided to combine their efforts. Mission of shares was substantial improvement of legal conditions for the work of commercial banks at the stock market. In accordance with the described above procedure method these associations decided to expose real problems on the assumption of the bank’s model as a principal element of financial system and universal financial institute. It is necessary to emphasize that using such model was controversial until recently. From the aspect of the equity market the principal question is that the bank can singly go into security trading or it must create detached legal entity for it. Until recently there is a purposeful pressure on the state’s and some of international organizations’ part for benefit of this function. Now this pressure is not felt and banks act how it is profitable for them. Some of them set up a trader, some – independent management separated it by the “Chinese screen”. We have some examples when two systems function in one bank properly the commercial bank which ensures standard functions of crediting, cash service  etc. and investment bank which engages placing securities, speculative operations, servicing strategically investors and corporative management.

But how clarified if operating at the equity market every one of them had the same problems with different complexity and origin. Some of them in results of legislation in past set up by means of theoretical nonsense without any evil design and now they are far in past necessities of the market and some – in results of complicated political game. There are some which appear because of passivity and unorganized of market participants and obviously directed to the creation of maximal favorable conditions for separate state organizations and their public officers.

It doesn’t take much time to expose problems technically. Already in some days extensive list of problems (more than 50 clauses) was formed which interfered normal work of commercial banks at the stock market. People always readily share their complexities especially with such persons who can help to obviate them.

Received problems were analyzed and divided into two groups: conceptual and legislative.

Such high abstract definitions as total immaturity of stock market and impossibility are included in the first group. And in connection with it there is a diversification of bank’s risks, absence of bank’s refinancing mechanisms through stock market instruments including mortgage-related securities and private pension fund shame. Long lists of “paint full points” of present legislation are included in the second group. And at some of them it should be worthwhile to pay attention a little bit more.

Corporate governance. There are plenty of problems with which operators of stock market will come on them sooner or later.  The most substantial was an overstated extends of the controlling bloc of the stock. In that case the controlling bloc of the stock is understood as an interest number of securities of the public company’s legal capital which is necessary to make amendments in the company’s legal capital. Its size is specified in the Act of Economic societies in the territory of Ukraine. The owner tooth and nail attempt to gather and retain this bloc of stock, and odd interests circulate at the market. The main problem which prevents bank activities at the stock market is a prohibition of the corporate bonds issue in the amount of more then 25 % of the legal capital (clause 13 of Securities Exchange Act). We reminded features of European model are showed clearly that at the Ukrainian stock market and it except banking monopoly establishes added to everything else principal rising by issuing debt securities i.e. bonds.

In the capacity of the specific problems of the corporate governance appropriate just of banks are named as follow: necessity to obtain a clearance of National Bank of Ukraine to the taking over of the commercial bank (article 34 of Banking Act); existence of such definitions which are not interpreted uniquely as “untarnished business reputation”; inadequate strict control through the “qualifying shareholding”. Numerous difficulties were noted also which shareholders of non-resident banks undergo (Ukrainian bank system does not welcome coming of foreign colleagues much and among them there are real monsters by our standards which are able to give national banking services a hard time).

Financial instrument. It is the most paint full course. The stock market incurs a heavy deficit of liquid financial instruments, in course of time the situation just grows worse. It is given the impression that public organs take the responsibility for the market regulations and act on the principle of “the less – the better”. And the most graphic example is a bill of exchange. It is possible to write books about the fate of entities. This security and the stock market had no luck. Firstly, the financial or bank bill of exchange – security which issues by banks without trade covering (that naturally considering on what banks cash money) was displeasure with the National Bank of Ukraine, and it was prohibited. Financial bill of exchange quickly got a reputation as an instrument of uncontrolled issuance of money stock and has rested in peace crushed by the precocious Circulation of bill Act. Of course we have to agree that to develop and incalculate the difficult agreed system of the regulation of this effect financial instrument regulation is more difficult then just close it out … But the memory of financial bill of exchange lives in baker’s hearts and its rebirth is one of the priority future tasks. Security and Stock market State Commission maintained the initiate of National Bank of Ukraine. Having mentioned that the bill of exchange – the security exceptionally is documentary (its identity is such in accordance with Circulation of bill Act) and greatly unique furthermore behindhand explained requirements of article 13 of National depositary system and features electrical security exchange in Ukraine Act. And Security and Stock market State Commission prohibited bill of exchange at the organized markets (stock markets and the First Stock Trading System). Bill of exchange problems are not completed just it. Bankers named numerous other less but also hardly pleasant features of legal regulation in this field.

Taxation. Traditionally it is a “dark area” of Ukrainian legislation, in the labyrinth of which not only one entity has disappeared. There are two problems concerning the stock market. Firstly, it is an incomplete citizens’ taxation of income from the securities services (Decree on income tax), that impediment the entrance to the market and involving in the turnover a huge internal investment potential. Secondly, it is a necessity of the reserves’ formation for covering for losses due to banking profit which was provided by the resolution of the NBU # 629 dated 30 of December 1999. The last document generally is one of the main limiter for banking vent to the stock market. Prescribed rules by this document are such that in many cases a bank has invested a substantial sum to the securities has to block the same sum in the reserve. Certainly it is necessary to insure risks but all over again to observe precautions.  And it is the same when a suspicious mother who protect her child from the street dangerous and inclose him at home. It is possible to suppose what can happen when she lets him go out…..

Exchange regulation. System of exchange regulation serves as an interface, a gate which helps to receipt of foreign investors’ funds to the stock market, and well-to-do national investors engage in humble attempts to place their capitals abroad and play the international market. Ukrainian system of exchange regulation is archaic and its base is Decree on exchange regulation and exchange controls. Moreover, learning such document, co-relation its rules with other acts which regulate security market give a ground for the most explanations. We can start from the definition of the currency values which provided at the first paragraph of this Decree. Nowadays the procedure of licensing of the exchange operations which stand in the way of banks to the work with foreign dept of the state (Eurobonds), other securities which nominated in the foreign currency is the main problem in the area of the suppression of the stock market and exchange regulation.

Conditions of professional activities. Security trading is one of the professional activities at the stock market (State Regulation of Ukrainian Security market Law). Before describing the problem with which banks face in this area has secondary character it is necessary to notice about that casus which has been playing hob in the traders’ mind for a long time. Now there is no official explanation in Ukraine who can work with securities and how? There are two polar points of view. First, the capable legal entity or the nature person can free discount the news without restriction. Second, any pidding securities trade has to be done through the intermediary of the professional security broker.  Early there was a special report of the Securities and Stock Market State Commission which established criterions of professional activities: from what amount can every desirous conclude a deal and to what just a security broker? But this report was successfully defeated through the legal proceedings. And the Securities and Stock Market State Commission is not in a hurry to eliminate the misconception.

Plenty of contradictions among Securities and Stock Markets Act and Banking Act; exaggerated reporting which benefit just regularly certified them by auditors; requirements of  bankers’ state certification which refer to the securities operations; draconian licence conditions of professional activities implementation (report of SSMSC # 60 dated on 14 March 2001) refer to other not very pleasure conditions of the professional activity.

Large quantity of problems appropriately needed the next step such as the priority resolution.

It was carried out at the special organized round table of PFTS and AUB in April of last year on the subject “Commercial banks at the stock market: conceptual problems”.  In contrast to many similar arrangements this round table pursued the accurate object such as determine main issues of making combined efforts of PFTS and AUB and also banks which are their members.

Question of making combined efforts and their coordination generally is very important for effective lobbing. Frequently it happens that at the same time several organizations try to solve the same problem spending the resources and wasting time, complicating the situation. Recently the tendency of the coordination of such actions is outlined in the area of legal regulation. It initiated in the result of the establishment of Coordinate Council of self-regulating organizations where entered PFTS, Professional association of registrars and depositaries, Ukrainian association of investing last year. The collaboration of PFTS and AUB (was effected by the collaboration contract) pursues the same object too. Another example is a lately concluded collaboration contract between PFTS and League of insurance organizations of Ukraine as the most lobbing organization which actively struggle for insurers’ interests. 

Let’s return to the subject of the establishing of favourable legal conditions for the commercial banks’ activities at the stock market. “The mainstream of legislation improvement of banks’ activities at the stock market” is a document which became the result of the mentioned round table. It was approved by the governing body of two associations. And it serves the fundament for qualitative and productive works. Not just special actions of the removal of local problems on its ground. This document became the important element of the settable strategy of the development of whole Ukrainian bank system.  

This example shows that nowadays there are some conditions for the real business influence to the state activities in Ukraine. Civilized lobbying is an internal part of legislation process in any developed society gradually become possible in Ukraine too. It is not just an instrument of standing interests but also the most important for lawyers is to establish the surface for the appearance of the qualitative legislation.

There is one more circumstance which made to perceive the formation of the lobbing institute in Ukraine enthusiastically. The law making process gives the opportunity to the layer completely to evince his capabilities, rise to the new phase of the profession skill and the personal growth. Taking part in such projects lead to the formation and strengthening of the active life position. The revival of Ukraine is possible just owing to such people.

Adhering Towards Banking Ethics

July 14th, 2009 at 08:52am Under Banking Law

It is the obligation of banking institutions to educate their customers and help them understand in its simplest way regulations or processes they are following. There are a lot of bank transactions with corresponding guideline that not all bank clients may seem to understand. And most of us use these banking services to manage our money and we trust that they can handle each transaction very well with minimal errors. Understanding the basics of banking law also suggest that it is the right of every bank clients to also know the flaws of these set of laws, we can be charged by our banks simply because we mistakenly ordered a bank draft instead of a cheque, this happened because it was not explained very well to the client.
Dealing with pension funds, mutual funds, hedge funds, and investing the public who put away the products and services of the sell-side in regulating to make best use of their return on investment comprises the “buy side”. Several firms have buy and sell side workings. On behalf of the bank and its clients, the principal purpose of the bank is buying and selling products. Banks takes on hazards all the way through proprietary trading, completed by a distinctive set of traders who do not cross with clients and in the course of Principal Risk. Threats assumed by a dealer after he buys or sells a product to a client and does not evade his total exposure. Banks look for to make the most of productivity for a given quantity of risk on their balance sheet.
Investment banks assist companies and governments put up money by questioning and selling securities in the capital markets which happens to be both equity and balance due. In late 1980s, the United States and Canada uphold a division linking investment banking and commercial banks. Greater part of investment banks present a tactical advisory services for mergers, acquisitions, divestiture or other monetary services for clients, such as the trading of derivatives, fixed income, foreign exchange, product, and equity securities. Trading securities for hard cash or securities, for instance, facilitates transaction, market-making, or the funding of securities such as underwriting, exploration, research, among others is submitted to as the “sell side.”
Bank secrecy or otherwise known as bank privacy is an authorized standard under which banks are permitted to defend private information concerning their customers, through the utilization of numbered bank accounts. Efficient bank secrecy is enhanced and attained in certain countries, such as Switzerland or in tax havens, where offshore banks hold on to intended or legal levels of privacy.
Developed by the Swiss Banking Act of 1934, which directed to the famous Swiss bank, the code of bank secrecy is from time to time measured by major characteristics of personal banking. Advances in monetary cryptography conceive it probable to use unidentified electronic cash and anonymous digital bearer certificates to accomplish financial solitude and anonymous internet banking.
Islamic banking refers to a structure of banking or banking activity that is dependable with Islamic law (Sharia) philosophies and directed by Islamic economics. In particular, Islamic law prohibits usury, the assortment and disbursement of interest, also regularly called riba in Islamic dialogue. In addition, Islamic law forbids spending in businesses that are measured illegal or haraam, for example, businesses that put up for sale of alcohol or pork, or businesses that create media such as scandal columns or pornography, which are opposing to Islamic values. In the late 20th century, a number of Islamic banks were produced, to provide to this precise banking market.

July 14th, 2009 at 02:52am Under Banking Law