Banking

Banking — 1 Comment
2
Jul 10

Functions of Central Bank

Central bank is the bank which provides assistance to all other commercial banks of the country and that is why it is called the lender of last resort implying that in case of any difficulty faced by the commercial banks of the country, the central bank will come to their rescue. Given below are the main functions of the central bank of a country –

Functions of Central BankCredit : Flickr

1. Central bank implements the monetary policy of the government through which it tries to maintain a balance between inflation and growth of the economy of the country.

2. It sets down the broad boundaries within which the commercial bank and financial institutions operates. In other words it supervises the whole banking system of a country.

3. It acts as a banker to the government of the country, which implies that it performs merchant banking function for the central and the state governments, also it raises the money for the government by selling government Treasury bill bonds in the money market.

4. It is only central bank which can issue the new currency and coins and also it performs the function of destroying the currency and coins which are not fit for circulation.

5. It also helps in keeping the currency movements by entering and exiting whenever there are large fluctuations in foreign exchange market, by dealing in foreign exchange markets.

Banking — No Comments
19
May 10

What is KYC and How it is Done

KYC is the acronym for know your customer which refers to the due diligence which is taken by the banks and financial institutions so as to check credentials of the customer of the bank. In other words it is carried out in order to establish the identity of the person who has come for opening a new account with the bank.

know your customerCredit : Flickr

Know your customer or KYC procedure should be the key principle for identification of an individual or a corporate while opening an account with the bank. It can be done in 2 ways –

1. Either through an introductory reference from an existing account holder or a person known to the bank.

2. On the basis of the documents provided by the customer and then checking on the documents to see whether they are in accordance with that of the guidelines issued by the central bank of the country.

KYC does not end with the opening of a new bank account; rather it is a continuous process of monitoring of the transactions done by the customer of the bank. Therefore bank should follow know your customer norms carefully so that bank does not have to suffer later on due to non compliance of KYC norms.

Banking — No Comments
18
May 10

Differences between Bill of exchange and Promissory note

Though bill of exchange and promissory notes are negotiable instruments (an unconditional order or promise to pay a certain amount of money) but there are some differences between bill of exchange and promissory note, lets look some of them –

Difference between Bill of exchange and Promissory noteCredit : Flickr

1. Under bill of exchange there are three parties’ that is drawer, drawee and payee, while in case of Promissory note there are only two parties to the contract, one is called maker, other is called payee.

2. In case of bill of exchange the liability of drawer is secondary and that of drawee it is primary but in case of promissory notes liability of a maker of promissory note is primary.

3. In case of bill of exchange both drawer and payee may be the same person (since drawee can order payee to pay himself thus making him payee also) while as far as promissory notes are concerned maker and payee must be different persons.

4. Bill of exchange (which is payable after sight) can be presented for payment only when it is accepted by drawee, while there is no need of acceptance of maker while presenting promissory note for payment.

Banking — No Comments
7
May 10

What is CAMELS Rating Model

CAMELS is an acronym for a rating model through which banks are rated and given rating points on the basis of various parameters. CAMELS evaluates the bank on the following six parameters –

Rating Model 1. Capital Adequacy – Capital adequacy is measured by the ratio of capital to risk weighted assets. A healthy capital adequacy ratio strengthens the confidence of depositors in the bank.

2. Asset Quality – It takes into account the percentage of banks loans which are NPA (non performing assets), higher NPA implies that loans given banks are of lower quality and therefore not a good thing for the bank.

3. Management – It refers to the ratio of non- interest expenditure like done by bank higher percentage of such expenditure implies that bank management is not good at controlling the needless expenses.

4. Earnings – It refers to the net profit that is made by bank after taking into all factors. Higher earning implies bank is doing well but one should look whether this earning is on account of core banking that is interest income or from other incomes.

5. Liquidity – Higher liquidity implies that bank will be able to withstand any unexpected withdrawals by the depositors of the bank and also bank will be able to earn higher interest in call markets if there is liquidity crunch.

6. Systems and Control – It refers to internal control and the risk management system which bank follow.

After evaluating all the six factors bank is given rating which may be range from 1 to 5, 1 indicating bank is in strong position and 5 indicating the bank fundamentals are weak.

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