Bank Theory

Securitization and Securitization of Assets - Notes, Examples & MCQs Securitization and Securitization of Assets Description Securitization is the financial process of pooling various types of contractual debt such as mortgages, car loans, or credit card debt obligations and selling their related cash flows to third-party investors as securities. These securities are known as Asset-Backed Securities (ABS). It allows financial institutions to remove these assets from their balance sheet, enhance liquidity, and manage risk better. Key Features of Securitization Conversion of illiquid assets into liquid, tradable securities Improves liquidity and capital adequacy for originators Investors receive predictable cash flows from pooled assets Involves a Special Purpose Vehicle (SPV) or entity to handle asset transfer Reduces credit risk for financial institutions 5 Mathematical Examples ...

Credit and Debit Cards - Types, Examples, MCQs Credit and Debit Cards Payment cards are essential financial tools that allow users to make purchases or withdraw money. They are broadly classified into Credit Cards and Debit Cards, along with variants like Charge Cards, Prepaid Cards, Co-branded Cards, and Contactless Cards. Types of Cards Credit Card: A card allowing users to borrow funds up to a preset limit to pay for purchases or withdraw cash, with repayment typically due monthly. Charge Card: Similar to a credit card but requires the entire balance to be paid off every month. No revolving credit. Prepaid Card: A card preloaded with money by the user; it is not linked to a bank account. Debit Card: A card linked directly to a bank account. Funds are debited in real-time during purchases. Co-branded Card: A card issued by a bank in association with a retail partner or brand, offering special rewards or benefi...

Cash Flow and Funds Flow – Notes & MCQs Cash Flow & Funds Flow 1. Introduction Cash Flow and Funds Flow statements are crucial financial tools used to assess the liquidity and financial health of an organization. They provide insights into the inflow and outflow of cash and the movement of working capital, respectively. 2. Cash Flow Statement The Cash Flow Statement shows the changes in cash and cash equivalents during a particular period. It is classified into three activities: Operating Activities: Cash generated from day-to-day operations. Investing Activities: Cash used in or generated from the purchase/sale of assets. Financing Activities: Cash received from or repaid to investors and creditors. Example: ABC Ltd. has the following cash flows in a year: Cash from operations: ₹100,000 Purchase of equipment: ₹40,000 Loan repayment:...

Data Communication Networks and EFT Systems Data Communication Network and EFT Systems Data Communication Networks Data Communication Networks (DCNs) are vital for transferring data between devices, facilitating seamless communication in the banking sector. They enable communication for various financial operations like fund transfers, transactions, and more. Network Scenario in India: Major Networks In India, there are multiple communication networks, such as BSNL, Airtel, and Jio, which enable data transfer for banking and other financial services. These networks ensure secure, real-time communication between financial institutions and customers. Emerging Trends in Communication Networks for Banking With technological advancements, banking networks are shifting towards high-speed fiber optics and 5G connectivity, ensuring greater bandwidth and reduced latency for banking t...

Self-Help Groups (SHGs) - Notes and MCQs Self-Help Groups (SHGs) Definition A Self-Help Group (SHG) is a small, voluntary association of people—typically from the same socio-economic background—who come together to save small amounts regularly, contribute to a common fund, and use the fund to meet emergency needs through mutual help and internal lending. Need for SHGs To promote financial inclusion and reduce dependence on informal money lenders. To empower marginalized communities, especially women, through collective decision-making. To promote savings and build creditworthiness. To enhance access to formal banking systems and livelihood support. Forming SHGs SHGs usually consist of 10-20 members from similar social and economic backgrounds. Members save a fixed amount monthly. The group selects a leader and maintains records of savin...

Government Sponsored Schemes - Banking Notes and MCQs Government Sponsored Schemes 1. Deendayal Antyodaya Yojana – National Rural Livelihoods Mission (DAY-NRLM) Launched in 2011 by the Ministry of Rural Development, DAY-NRLM aims to alleviate rural poverty by organizing poor households into Self Help Groups (SHGs) and providing them access to financial services, skill development, and livelihood opportunities. Key Features: Universal social mobilization and promotion of SHGs Financial inclusion through access to bank credit Training and capacity building Support for livelihood activities Example: A rural woman forms a SHG with 10 members and receives a loan of ₹2,00,000 under DAY-NRLM for starting a dairy business. 2. Deendayal Antyodaya Yojana – National Urban Livelihoods Mission (DAY-NULM) Launched in 2014, DAY-NULM focuses on the urban poor by enhancing their livelihood opportunities through skill tra...

Priority Sector Advances - Bank Theory Priority Sector Advances Applicability Priority Sector Lending (PSL) norms are applicable to all commercial banks (including foreign banks), Regional Rural Banks (RRBs), Small Finance Banks (SFBs), and Urban Cooperative Banks (UCBs). The objective is to ensure that adequate credit is available to the vulnerable sectors of the economy. Targets/Sub-Targets for Priority Sector RBI has set the following overall and sub-targets for PSL: Total PSL: 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure, whichever is higher. Agriculture: 18% of ANBC, out of which 8% for Small and Marginal Farmers. Micro Enterprises: 7.5% of ANBC. Weaker Sections: 12% of ANBC. Mathematical Illustration: If ANBC of a bank is ₹5000 crore, the targets will be: - Total PSL: 40% of 5000 = ₹2000 cr...

Credit Cards and Loans - Bank Theory Credit Cards, Home Loans, Personal Loans, and Consumer Loans Credit Cards A credit card is a financial product that allows the cardholder to borrow funds up to a pre-approved limit to make purchases or withdraw cash. Interest is charged on the outstanding balance if it is not paid within the due date. Example: If a customer has a credit card with a ₹50,000 limit and makes a purchase worth ₹10,000, they will have ₹40,000 of credit remaining. Mathematical Illustration: Outstanding Balance = ₹10,000 Annual Interest Rate = 36% Monthly Interest = 36% / 12 = 3% Interest for 1 month = ₹10,000 × 3% = ₹300 Home Loans Home loans are long-term loans provided by banks or financial institutions to purchase, build, or renovate a home. They are usually secured by the property itself. Exampl...

Letters of Credit and Deferred Payment Guarantee Letters of Credit and Deferred Payment Guarantee 1. Letters of Credit – General Consideration A Letter of Credit (LC) is a financial instrument issued by a bank at the request of a buyer, guaranteeing the seller will receive payment upon the presentation of specified documents. It facilitates international trade by reducing payment risks. 2. Parties to a Letter of Credit Applicant: Buyer who requests the LC. Beneficiary: Seller in whose favor the LC is issued. Issuing Bank: Bank that issues the LC on behalf of the applicant. Advising Bank: Bank that informs the beneficiary about the LC. Confirming Bank (optional): Bank that adds its confirmation to the LC. Negotiating Bank: Bank that negotiates documents under LC. 3. Types of Letters of Credit Revocable LC: Can be amended or canceled without consent of the beneficiary. Irrevocable LC: Cannot b...

Contracts of Guarantee & Bank Guarantee - Notes and MCQs Contracts of Guarantee & Bank Guarantee 1. Parties to the Contract A Contract of Guarantee involves three parties: Creditor – The party to whom the guarantee is given. Principal Debtor – The party on whose behalf the guarantee is given. Surety – The party who gives the guarantee. 2. Basic Principles of Contract A contract of guarantee must satisfy basic principles of a valid contract: offer, acceptance, consideration, capacity, free consent, lawful object. 3. Consideration There must be a lawful consideration between the parties, even if the surety does not directly receive a benefit. Example: If A lends Rs.10,000 to B and C guarantees repayment, the loan itself serves as consideration. 4. Liability of the Surety The surety’s liability is co-extensive with the principal debtor, unless otherwise provided by the contract. If B owes Rs.50,000 to A and C is the sur...

Non-Performing Assets (NPA) - Banking Notes Non-Performing Assets (NPA) and Stressed Assets Definition A Non-Performing Asset (NPA) is a loan or advance where: Interest and/or installment of principal remain overdue for more than 90 days in respect of a term loan. The account remains 'out of order' in respect of an Overdraft/Cash Credit. Income Recognition Income from NPAs is not recognized on an accrual basis. It should be recorded only when it is actually received. Computation of Gross Advances, Gross NPA, Net Advances, and Net NPA Example and Illustration: Given: Total Advances = ₹1,000 crore Gross NPAs = ₹150 crore Provisions on NPAs = ₹60 crore Formulas: Net Advances = Total Advances - Provisions Net NPAs = Gross NPAs - Provisions Gross NPA % = (Gross NPA / Gross Advances) × 100 Net NPA % ...

Banking Theory: Securities, Contracts, and Documentation Banking Theory: Securities, Contracts, and Documentation 1. Different Modes of Charging Securities Securities are assets pledged by a borrower to secure a loan. The main modes of charging securities include: Pledge: Physical transfer of goods to lender (e.g., gold loan). Hypothecation: Possession remains with borrower; lender has a right over it (e.g., car loan). Mortgage: Transfer of interest in immovable property (e.g., home loan). Assignment: Transfer of rights (e.g., insurance policy assigned to a bank). Example: If Mr. A hypothecates his car worth ₹5,00,000 to take a loan of ₹3,00,000, the bank has a charge over the car without possession. 2. Meaning and Essentials of a Contract A contract is an agreement enforceable by law. Essentials include: Offer and Acceptance Intention to Create Legal Obligations Lawful Consideration Capa...

Credit Appraisal and Assessment of Credit Facilities Credit Appraisal and Assessment of Credit Facilities 1. Credit Appraisal Credit appraisal is the process by which a lender assesses the creditworthiness of a borrower before extending credit. This includes evaluating the borrower's financial health, repayment capacity, credit history, and the nature of the proposed project or requirement. Example: If a company applies for a term loan of ₹50 lakh to buy machinery, the bank will evaluate its past financials, repayment ability, and viability of the project before approving the loan. 2. Credit Appraisal Techniques Common techniques include: Financial Statement Analysis: Examining balance sheets, income statements, and cash flow statements. Ratio Analysis: Analyzing liquidity, solvency, profitability, and efficiency ratios. Risk Assessment: Identifying industry, borrower, and external risks. 5 Cs of Credit: Charac...