UCP 600

UCP 600

Why Documentary Credits

• Exchange of goods and services across national boundaries brings greater problems

to both buyer and seller than does domestic business.

• Diversity of customs, standards, currencies, local regulations, languages and legal

systems

• The Documentary Letter of Credit is widely used to reduce the financial risks of

trade.

• Importer wants to ensure performance while exporter wants to secure payment.

• Few of the rules are subject to any national or international law. Provisions of

International Chamber of Commerce & Industry (ICC) important, but not foolproof.

• Generally adopted set of rules for credits known as the Uniform Customs and

Practice for Letters of Credit (UCP) issued by ICC, publication no.600, 2007 (earlier

version no. 500, 1993).

Introduction

• This revision of the Uniform Customs and Practice for Documentary Credits

(commonly called "UCP") is the sixth revision of the rules since they were first

promulgated in 1933.

• The objective of UCP, since attained, was to create a set of contractual rules that

would establish uniformity in that practice, so that practitioners would not have to

cope with a plethora of often conflicting national regulations. The universal

acceptance of the UCP by practitioners in countries with widely divergent economic

and judicial systems is a testament to the rules' success.

• It is important to recall that the UCP represent the work of a private international

organization, not a governmental body.



Important Articles

Article 1 Application of UCP

• The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC

Publication no. 600 ("UCP") are rules that apply to any documentary credit ("credit")

(including, to the extent to which they may be applicable, any standby letter of

credit) when the text of the credit expressly indicates that it is subject to these rules.

They are binding on all parties thereto unless expressly modified or excluded by the

credit.

Article 2: Definitions

• Advising bank means the bank that advises the credit at the request of the issuing

bank.

• Applicant means the party on whose request the credit is issued.

• Beneficiary means the party in whose favour a credit is issued.



Confirmation means a definite undertaking of the confirming bank, in addition to

that of the issuing bank, to honour or negotiate a complying presentation.

Confirming bank means the bank that adds its confirmation to a credit upon the

issuing bank's authorization or request.

• Issuing bank means the bank that issues a credit at the request of an applicant or on

its own behalf.

• Negotiation means the purchase by the nominated bank of drafts (drawn on a bank

other than the nominated bank) and/or documents under a complying presentation,

by advancing or agreeing to advance funds to the beneficiary on or before the

banking day on which reimbursement is due to the nominated bank.

• Nominated bank means the bank with which the credit is available or any bank in

the case of a credit available with any bank.

Article 3: Interpretations

• The expression "on or about" or similar will be interpreted as a stipulation that an

event is to occur during a period of five calendar days before until five calendar days

after the specified date, both start and end dates included.

• The words "to", "until", "till", "from" and "between" when used to determine a

period of shipment include the date or dates mentioned, and the words "before"

and "after" exclude the date mentioned.

• The terms "first half" and "second half" of a month shall be construed respectively as

the 1st to the 15th and the 16th to the last day of the month, all dates inclusive.

• The terms "beginning", "middle" and "end" of a month shall be construed

respectively as the 1st to the 10th, the 11th to the 20th and the 21st to the last day

of the month, all dates inclusive.

Article 4: Credits vs Contracts

• A credit by its nature is a separate transaction from the sale or other contract on

which it may be based. Banks are in no way concerned with or bound by such

contract, even if any reference whatsoever to it is included in the credit.

Article 5: Documents v. Goods, Services or Performance

• Banks deal with documents and not with goods, services or performance to which

the documents may relate.

Article 6 Availability, Expiry Date and Place for Presentation

• A credit must state the bank with which it is available or whether it is available with

any bank. A credit available with a nominated bank is also available with the issuing

bank.

• A credit must state whether it is available by sight payment, deferred payment,

acceptance or negotiation.

• A credit must state an expiry date for presentation.

• The place of the bank with which the credit is available is the place for presentation.





Article 9 Advising of Credits and Amendments

• A credit and any amendment may be advised to a beneficiary through an advising

bank. An advising bank that is not a confirming bank advises the credit and any

amendment without any undertaking to honour or negotiate.

• By advising the credit or amendment, the advising bank signifies that it has satisfied

itself as to the apparent authenticity of the credit or amendment and that the advice

accurately reflects the terms and conditions of the credit or amendment received.

• A bank utilizing the services of an advising bank or second advising bank to advise a

credit must use the same bank to advise any amendment thereto.

Article 10 Amendments

• The terms and conditions of the original credit (or a credit incorporating previously

accepted amendments) will remain in force for the beneficiary until the beneficiary

communicates its acceptance of the amendment to the bank that advised such

amendment. The beneficiary should give notification of acceptance or rejection of an

amendment. If the beneficiary fails to give such notification, a presentation that

complies with the credit and to any not yet accepted amendment will be deemed to

be notification of acceptance by the beneficiary of such amendment. As of that

moment the credit will be amended.

• Partial acceptance of an amendment is not allowed and will be deemed to be

notification of rejection of the amendment.

Article 11 Teletransmitted and Pre-Advised Credits and Amendments

• An authenticated teletransmission of a credit or amendment will be deemed to be

the operative credit or amendment, and any subsequent mail confirmation shall be

disregarded.

• If a teletransmission states "full details to follow" (or words of similar effect), or

states that the mail confirmation is to be the operative credit or amendment, then

the teletransmission will not be deemed to be the operative credit or amendment.

The issuing bank must then issue the operative credit or amendment without delay

in terms not inconsistent with the teletransmission.

Article 13 Bank-to-Bank Reimbursement Arrangements

• An issuing bank must provide a reimbursing bank with a reimbursement

authorization that conforms with the availability stated in the credit. The

reimbursement authorization should not be subject to an expiry date.

• An issuing bank will be responsible for any loss of interest, together with any

expenses incurred, if reimbursement is not provided on first demand by a

reimbursing bank in accordance with the terms and conditions of the credit.

• A reimbursing bank's charges are for the account of the issuing bank.

Article 14 Standard for Examination of Documents

• A nominated bank acting on its nomination, a confirming bank, if any, and the issuing

bank must examine a presentation to determine, on the basis of the documents

alone, whether or not the documents appear on their face to constitute a complying

presentation.



• A nominated bank acting on its nomination, a confirming bank, if any, and the issuing

bank shall each have a maximum of five banking days following the day of

presentation to determine if a presentation is complying. This period is not curtailed

or otherwise affected by the occurrence on or after the date of presentation of any

expiry date or last day for presentation.

• A presentation must be made by or on behalf of the beneficiary not later than 21

calendar days after the date of shipment as described in these rules, but in any event

not later than the expiry date of the credit.

Article 16 Discrepant Documents, Waiver and Notice

• When a nominated bank acting on its nomination, a confirming bank, if any, or the

issuing bank determines that a presentation does not comply, it may refuse to

honour or negotiate.

• When an issuing bank determines that a presentation does not comply, it may in its

sole judgement approach the applicant for a waiver of the discrepancies.

• When a nominated bank acting on its nomination, a confirming bank, if any, or the

issuing bank decides to refuse to honour or negotiate, it must give a single notice to

that effect to the presenter.

• The notice must state:

• i. that the bank is refusing to honour or negotiate; and

• ii. each discrepancy in respect of which the bank refuses to honour or negotiate; and

• iii. a) that the bank is holding the documents pending further instructions from the

presenter; or

• b) that the issuing bank is holding the documents until it receives a waiver from the

applicant and agrees to accept it, or receives further instructions from the presenter

prior to agreeing to accept a waiver; or

• c) that the bank is returning the documents; or

• d) that the bank is acting in accordance with instructions previously received from

the presenter.

• The notice required in sub-article 16 (c) must be given by telecommunication or, if

that is not possible, by other expeditious means no later than the close of the fifth

banking day following the day of presentation.

Article 20 Bill of Lading

• A bill of lading, however named, must appear to:

• i. indicate the name of the carrier and be signed by:

• the carrier or a named agent for or on behalf of the carrier, or

• the master or a named agent for or on behalf of the master.

• ii. indicate that the goods have been shipped on board a named vessel at the port of

loading stated in the credit by:

• pre-printed wording, or

• an on board notation indicating the date on which the goods have been shipped on

board.

• be the sole original bill of lading or, if issued in more than one original, be the full set

as indicated on the bill of lading.





Other Transport Documents

• Non-Negotiable Sea Waybill (Article 21)

• Charter Party Bill of Lading (Article 22)

• Multimodal Transport Document (Article 19)

• Air Transport Document (Article 23)

• Road, Rail or Inland Waterway Transport Documents (Article 24)

• Courier Receipts, Post Receipt or Certificate of Posting (Article 25)

Article 26 "On Deck”

• A transport document must not indicate that the goods are or will be loaded on

deck. A clause on a transport document stating that the goods may be loaded on

deck is acceptable.

Article 27 Clean Transport Document

• A bank will only accept a clean transport document. A clean transport document is

one bearing no clause or notation expressly declaring a defective condition of the

goods or their packaging. The word "clean" need not appear on a transport

document, even if a credit has a requirement for that transport document to be

"clean on board".

Article 28 Insurance Document and Coverage

• Cover notes will not be accepted.

• The date of the insurance document must be no later than the date of shipment,

unless it appears from the insurance document that the cover is effective from a

date not later than the date of shipment.

• The insurance document must indicate the amount of insurance coverage and be in

the same currency as the credit.

• If there is no indication in the credit of the insurance coverage required, the amount

of insurance coverage must be at least 110% of the CIF or CIP value of the goods.

Article 29 Extension of Expiry Date or Last Day for Presentation

• If the expiry date of a credit or the last day for presentation falls on a day when the

bank to which presentation is to be made is closed for reasons other than those

referred to in article 36, the expiry date or the last day for presentation, as the case

may be, will be extended to the first following banking day.

Article 30 Tolerance in Credit Amount, Quantity and Unit Prices

• The words "about" or "approximately" used in connection with the amount of the

credit or the quantity or the unit price stated in the credit are to be construed as

allowing a tolerance not to exceed 10% more or 10% less than the amount, the

quantity or the unit price to which they refer.

• A tolerance not to exceed 5% more or 5% less than the quantity of the goods is

allowed, provided the credit does not state the quantity in terms of a stipulated

number of packing units or individual items and the total amount of the drawings

does not exceed the amount of the credit.





Article 31 Partial Drawings or Shipments

• Partial drawings or shipments are allowed.

Article 34 Disclaimer on Effectiveness of Documents

• A bank assumes no liability or responsibility for the form, sufficiency, accuracy,

genuineness, falsification or legal effect of any document, or for the general or

particular conditions stipulated in a document or superimposed thereon; nor does it

assume any liability or responsibility for the description, quantity, weight, quality,

condition, packing, delivery, value or existence of the goods, services or other

performance represented by any document, or for the good faith or acts or

omissions, solvency, performance or standing of the consignor, the carrier, the

forwarder, the consignee or the insurer of the goods or any other person.

Article 35 Disclaimer on Transmission and Translation

• A bank assumes no liability or responsibility for the consequences arising out of

delay, loss in transit, mutilation or other errors arising in the transmission of any

messages or delivery of letters or documents, when such messages, letters or

documents are transmitted or sent according to the requirements stated in the

credit, or when the bank may have taken the initiative in the choice of the delivery

service in the absence of such instructions in the credit.

• If a nominated bank determines that a presentation is complying and forwards the

documents to the issuing bank or confirming bank, whether or not the nominated

bank has honoured or negotiated, an issuing bank or confirming bank must honour

or negotiate, or reimburse that nominated bank, even when the documents have

been lost in transit between the nominated bank and the issuing bank or confirming

bank, or between the confirming bank and the issuing bank.

• A bank assumes no liability or responsibility for errors in translation or interpretation

of technical terms and may transmit credit terms without translating them.

Article 36 Force Majeure

• A bank assumes no liability or responsibility for the consequences arising out of the

interruption of its business by Acts of God, riots, civil commotions, insurrections,

wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its

control.

• A bank will not, upon resumption of its business, honour or negotiate under a credit

that expired during such interruption of its business.

Article 37 Disclaimer for Acts of an Instructed Party

• A bank utilizing the services of another bank for the purpose of giving effect to the

instructions of the applicant does so for the account and at the risk of the applicant.

• An issuing bank or advising bank assumes no liability or responsibility should the

instructions it transmits to another bank not be carried out, even if it has taken the

initiative in the choice of that other bank.

Article 38 Transferable Credits

• A bank is under no obligation to transfer a credit except to the extent and in the

manner expressly consented to by that bank.



• Transferable credit means a credit that specifically states it is "transferable". A

transferable credit may be made available in whole or in part to another beneficiary

("second beneficiary") at the request of the beneficiary ("first beneficiary").

• Transferring bank means a nominated bank that transfers the credit or, in a credit

available with any bank, a bank that is specifically authorized by the issuing bank to

transfer and that transfers the credit. An issuing bank may be a transferring bank.

Transferred credit means a credit that has been made available by the transferring

bank to a second beneficiary.

• A credit may be transferred in part to more than one second beneficiary provided

partial drawings or shipments are allowed.

• A transferred credit cannot be transferred at the request of a second beneficiary to

any subsequent beneficiary. The first beneficiary is not considered to be a

subsequent beneficiary.

• Any request for transfer must indicate if and under what conditions amendments

may be advised to the second beneficiary. The transferred credit must clearly

indicate those conditions.

• The transferred credit must accurately reflect the terms and conditions of the credit,

including confirmation, if any, with the exception of:

- the amount of the credit,

- any unit price stated therein,

- the expiry date,

- the period for presentation, or

- the latest shipment date or given period for shipment,

any or all of which may be reduced or curtailed.

• The first beneficiary has the right to substitute its own invoice and draft, if any, for

those of a second beneficiary for an amount not in excess of that stipulated in the

credit, and upon such substitution the first beneficiary can draw under the credit for

the difference, if any, between its invoice and the invoice of a second beneficiary.



Summary of Major Issues in LC Transactions

Check List for Issuing/Accepting L/C

• Quality of Issuing Bank

• Method of Payment: Sight or Deferred Basis

• Transport Documents

• Other Documents

• Documents: Banks deal in documents not in goods, services or performance

• Should not refer to underlying contract

• Timing: UCP norm is max. 21 days after shipment date for presentation of

documents

Responsibilities and Obligations of Banks

• Irrevocable unless otherwise mentioned

• Issuing Bank: Prime obligation

• Advising Bank: Only obligation to authenticate the credit and passing it on promptly

to beneficiary



• Confirming Bank: takes over payment responsibilities of the issuing bank as far as the

beneficiary is concerned

• Reimbursing Bank: Responsibility of Issuing Bank to provide proper reimbursement

instructions

• Applicability of Force Majeure clause limiting banks’ liability on account of Acts of

God, riots, etc.

• Banks have five banking days to examine documents after receipt of documents

• Banks will examine documents with reasonable care

• Documents should be consistent with each other and complete

• Documents should conform with the terms of the credit

• Documents should comply with the provisions of UCP

Common Defects in Documentation

Commonly found discrepancies between the letter of credit and supporting documents

include:

• Letter of Credit has expired prior to presentation of draft.

• Bill of Lading evidences delivery prior to or after the date range stated in the credit.

• Stale dated documents.

• Changes included in the invoice not authorized in the credit.

• Inconsistent description of goods.

• Insurance document errors.

• Invoice amount not equal to draft amount.

• Ports of loading and destination not as specified in the credit.

• Description of merchandise is not as stated in credit.

• A document required by the credit is not presented.

• Documents are inconsistent as to general information such as volume, quality, etc.

• Names of documents not exact as described in the credit. Beneficiary information

must be exact.

• Invoice or statement is not signed as stipulated in the letter of credit.

Options for Banks dealing in Discrepant Documents

• Ask beneficiaries to make corrections

• Accept minor discrepancies and pay under reserve

• Obtain indemnity from seller

• Telex/fax details of discrepancies to the issuing bank and request permission to pay

• Send the documents on collection

Marine or Ocean Bill of Lading

• They are documents of title. Should be signed by ship’s master or his named agent

• If stated that goods are on board, then dated

• Load port and disport should be named

• `On Deck’ transport document not allowed

• Clean Transport Document

• Quasi-negotiable: transferable by endorsement and physical delivery, but no

recourse

• Transhipment allowed unless prohibited in L/C



Other Transport Documents

• Some multi-modal transport operators (MTOs) also issue negotiable documents for

transport operations where the goods are carried by several different modes of

transport.

• Today goods often travel faster than the related documents. Rail, road and air

transport documents are issued only in non-negotiable form with the goods

consigned direct to a named consignee. Usually this will be the buyer unless the

goods are consigned to a bank

Non-Transport Documents

• Insurance Documents (Article 28): Same currency as the Credit, Minimum amount to

be CIF or CIP plus 10%,

• Commercial Invoices (Article 18)

• Consular Invoice

• Certificate of Origin

• Weight List

• Packing List

• Inspection or Survey Certificate

• Test Certificates

https://iibfadda.blogspot.com/2018/06/ucp-600-bfm-exam-very-important.html?m=1

Kyc aml principal officer duties

KYC AML:

PRINCIPAL OFFICER DUTIES::

Overall monitoring of the implementation of the Bank‘s KYC/AML/CFT policy

Monitoring and reporting of transactions, and sharing of information, as required under the law

Interaction with MLROs in Business Groups/SBUs for ensuring full compliance with the Policy

Timely submission of Cash Transaction Reports (CTRs), Suspicious Transaction Reports (STRs),Counterfeit Currency Reports (CCRs) and Non Profit Organisation Transaction Report (NTRs) to FIU-IND

Maintaining liaison with the law enforcement agencies, banks and other institutions which are involved in the fight against Money Laundering and Combating Financing of Terrorism

Ensuring submission of periodical reports to the Top Management/Board

Govt schemes

Pradhan Mantri Jan Dhan Yojana (PMJDY)

Hon’ble Prime Minister announced Pradhan Mantri Jan Dhan Yojana as the National Mission on Financial Inclusion in his Independence Day address on 15th August 2014, to ensure comprehensive financial inclusion of all the households in the country by providing universal access to banking facilities with at least one basic bank account to every household, financial literacy, access to credit, insurance and pension facility. Under this, a person not having a savings account can open an account without the requirement of any minimum balance and, in case they self-certify that they do not have any of the officially valid documents required for opening a savings account, they may open a small account. Further, to expand the reach of banking services, all of over 6 lakh villages in the country were mapped into 1.59 lakh Sub Service Areas (SSAs), with each SSA typically comprising of 1,000 to 1,500 households, and in the 1.26 lakh SSAs that did not have a bank branch, Bank Mitras were deployed for branchless banking.

Thus, PMJDY offers unbanked persons easy access to banking services and awareness about financial products through financial literacy programmes. In addition, they receive a RuPay debit card, with inbuilt accident insurance cover of Rs. 1 lakh, and access to overdraft facility upon satisfactory operation of account or credit history of six months. Further, through Prime Minister’s Social Security Schemes, launched by the Hon’ble Prime Minister on 9th May 2015, all eligible account holders can access through their bank accounts personal accident insurance cover under Pradhan Mantri Suraksha Bima Yojana, life insurance cover under Pradhan Mantri Jeevan Jyoti Bima Yojana, and guaranteed minimum pension to subscribers under Atal Pension Yojana.

PMJDY was conceived as a bold, innovative and ambitious mission. Census 2011 estimated that out of 24.67 crore households in the country, 14.48 crore (58.7%) had access to banking services. In the first phase of the scheme, these households were targeted for inclusion through the opening of a bank account within a year of the launch of the scheme. The actual achievement, by 26th January 2015, was 12.55 crore. As on 29.3.2017, the number of accounts has grown to 28.17 crores. Further, in 2011, only 0.33 lakh SSAs had banking facility and through the provision of Bank Mitras in 1.26 lakh branchless SSAs, banking services were extended throughout rural India. The inclusive aspect of this is evident from the fact that 16.87 crores (60%) of PMJDY accounts are in rural areas and 14.49 crore (over 51%) PMJDY account holders are women.

The deposit base of PMJDY accounts has expanded over time. As on 29th March 2017, the deposit balance in PMJDY accounts was Rs. 62,972 crore. The average deposit per account has more than doubled from Rs. 1,064 in March 2015 to Rs. 2,235 in March 2017.

The Bank Mitra network has also gained in strength and usage. The average number of transactions per Bank Mitra, on the Aadhaar Enabled Payment System operated by Bank Mitras, has risen by over eightyfold, from 52 transactions in 2014-15 to 4,291 transactions in 2016-17.

From Jan Dhan to Jan Suraksha-

For creating a universal social security system for all Indians, especially the poor and the under-privileged the Hon’ble Prime Minister launched three Social Security Schemes in the Insurance and Pension sectors on 9th of May 2015.

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)-

The PMJJBY is available to people in the age group of 18 to 50 years having a bank account who give their consent to join /enable auto-debit. Aadhar is the primary KYC for the bank account. The life cover of Rs. 2 lakh is for the one year period stretching from 1st June to 31st May and is renewable. Risk coverage under this scheme is for Rs. 2 lakh in case of death of the insured, due to any reason. The premium is Rs. 330 per annum which is to be auto-debited in one installment from the subscriber’s bank account as per the option given by him on or before 31st May of each annual coverage period under the scheme. The scheme is being offered by the Life Insurance Corporation and all other life insurers who are willing to offer the product on similar terms with necessary approvals and tie up with banks for this purpose. As on 31st March 2017, cumulative gross enrollment reported by banks subject to verification of eligibility, etc. is over 3.10 crore under PMJJBY. A total of 62166 claims were registered under PMJJBY of which 59118 have been disbursed.

Pradhan Mantri Suraksha Bima Yojana (PMSBY)-

The Scheme is available to people in the age group 18 to 70 years with a bank account who give their consent to join/ enable auto-debit on or before 31st May for the coverage period 1st June to 31st May on an annual renewal basis. Aadhar would be the primary KYC for the bank account. The risk coverage under the scheme is Rs. 2 lakh for accidental death and full disability and Rs. 1 lakh for partial disability. The premium of Rs.12 per annum is to be deducted from the account holder’s bank account through ‘auto-debit’ facility in one installment. The scheme is being offered by Public Sector General Insurance Companies or any other General Insurance Company who are willing to offer the product on similar terms with necessary approvals and tie up with banks for this purpose. As on 31st March 2017, cumulative gross enrolment reported by Banks subject to verification of eligibility etc. is over 9.94 crore under PMSBY. A total of 12,534 Claims were registered under PMSBY of which 9,403 have been disbursed.

Atal Pension Yojana (APY)-

APY was launched on 9th May 2015 by the Prime Minister. APY is open to all saving bank/post office saving bank account holders in the age group of 18 to 40 years and the contributions differ, based on pension amount chosen. Subscribers would receive the guaranteed minimum monthly pension of Rs. 1,000 or Rs. 2,000 or Rs. 3,000 or Rs. 4,000 or Rs. 5,000 at the age of 60 years. Under APY, the monthly pension would be available to the subscriber, and after him to his spouse and after their death, the pension corpus, as accumulated at age 60 of the subscriber, would be returned to the nominee of the subscriber. The minimum pension would be guaranteed by the Government, i.e., if the accumulated corpus based on contributions earns a lower than estimated return on investment and is inadequate to provide the minimum guaranteed pension, the Central Government would fund such inadequacy. Alternatively, if the returns on investment are higher, the subscribers would get enhanced pensionary benefits.

In the event of premature death of the subscriber, Government has decided to give an option to the spouse of the subscriber to continue contributing to APY account of the subscriber, for the remaining vesting period, till the original subscriber would have attained the age of 60 years. The spouse of the subscriber shall be entitled to receive the same pension amount as that of the subscriber until the death of the spouse. After the death of both the subscriber and the spouse, the nominee of the subscriber shall be entitled to receive the pension wealth, as accumulated till age 60 of the subscriber. As on 31st March 2017, a total of 48.54 lakh subscribers have been enrolled under APY with a total pension wealth of Rs. 1,756.48 crore.

Pradhan Mantri Mudra Yojana-

The scheme was launched on 8th April 2015. Under the scheme a loan of upto Rs. 50,000 is given under sub-scheme ‘Shishu’; between Rs. 50,000 to 5.0 Lakhs under sub-scheme ‘Kishore’; and between 5.0 Lakhs to 10.0 Lakhs under sub-scheme ‘Tarun’. Loans taken do not require collaterals. These measures are aimed at increasing the confidence of young, educated or skilled workers who would now be able to aspire to become first generation entrepreneurs; existing small businesses, too, will be able to expand theirs activates. As on 31st March 2017, Rs. 1,80,528.54 crores sanctioned (Rs. 85,100.74 cr. - Shishu, Rs. 53,545.14 cr. Kishore and Rs. 41,882.66 cr. - Tarun category), in 3,97,01,047 accounts.

Stand Up India Scheme-

The government of India launched the Stand Up India scheme on 5th April 2016. The Scheme facilitates bank loans between Rs.10 lakh and Rs.1 crore to at least one Scheduled Caste/ Scheduled Tribe borrower and at least one Woman borrower per bank branch for setting up greenfield enterprises. This enterprise may be in manufacturing, services or the trading sector. The scheme which is being implemented through all Scheduled Commercial Banks is to benefit at least 2.5 lakh borrowers. The scheme is operational and the loan is being extended through Scheduled Commercial Banks across the country.

Stand Up India scheme caters to promoting entrepreneurship amongst women, SC & ST category i.e those sections of the population facing significant hurdles due to lack of advice/mentorship as well as inadequate and delayed credit. The scheme intends to leverage the institutional credit structure to reach out to these underserved sectors of the population in starting greenfield enterprises. It caters to both ready and trainee borrowers.

To extend collateral free coverage, Government of India has set up the Credit Guarantee Fund for Stand Up India (CGFSI). Apart from providing credit facility, Stand Up India Scheme also envisages extending hand-holding support to the potential borrowers. It provides for convergence with Central/State Government schemes. Applications under the scheme can also be made online on the dedicated Stand Up India portal (www.standupmitra.in). As on 29.03.2017, Rs. 5,237.29 crore has been sanctioned in 25,435 accounts (20,305 – women, 1,086-ST and 4,044 – SC).

Pradhan Mantri Vaya Vandana Yojana-

Based on the success and popularity of Varishtha Pension Bima Yojana 2003 (VPBY-2003), Varishtha Pension Bima Yojana 2014 (VPBY-2014) schemes, and to protect elderly persons aged 60 years and above against a future fall in their interest income due to the uncertain market conditions, as also to provide social security during old age, it has been decided to launch a simplified scheme of assured pension of 8% called the ‘प्रधानमंत्री वय वन्दना योजना’. This is implemented through Life Insurance Corporation (LIC) of India. As per the scheme, on payment of an initial lump sum amount ranging from a minimum purchase price of Rs. 1,50,000/- for a minimum pension of Rs 1,000/- per month to a maximum purchase price of Rs. 7, 50,000/- for the maximum pension of Rs. 5,000/- per month, subscribers will get an assured pension based on a guaranteed rate of return of 8% per annum, payable monthly.

Different types of LC

Different Type of LC

1. Irrevocable LC. This LC cannot be cancelled or modified without consent of the beneficiary (Seller). This LC reflects absolute liability of the Bank (issuer) to the other party.

2. Revocable LC. This LC type can be cancelled or modified by the Bank (issuer) at the customer's instructions without prior agreement of the beneficiary (Seller). The Bank will not have any liabilities to the beneficiary after revocation of the LC.

3. Stand-by LC. This LC is closer to the bank guarantee and gives more flexible collaboration opportunity to Seller and Buyer. The Bank will honour the LC when the Buyer fails to fulfill payment liabilities to Seller.

4. Confirmed LC. In addition to the Bank guarantee of the LC issuer, this LC type is confirmed by the Seller's bank or any other bank. Irrespective to the payment by the Bank issuing the LC (issuer), the Bank confirming the LC is liable for performance of obligations.

5. Unconfirmed LC. Only the Bank issuing the LC will be liable for payment of this LC.

6. Transferable LC. This LC enables the Seller to assign part of the letter of credit to other party(ies). This LC is especially beneficial in those cases when the Seller is not a sole manufacturer of the goods and purchases some parts from other parties, as it eliminates the necessity of opening several LC's for other parties.

7. Back-to-Back LC. This LC type considers issuing the second LC on the basis of the first letter of credit. LC is opened in favor of intermediary as per the Buyer's instructions and on the basis of this LC and instructions of the intermediary a new LC is opened in favor of Seller of the goods.

8. Payment at Sight LC. According to this LC, payment is made to the seller immediately (maximum within 7 days) after the required documents have been submitted.

9. Deferred Payment LC. According to this LC the payment to the seller is not made when the documents are submitted, but instead at a later period defined in the letter of credit. In most cases the payment in favor of Seller under this LC is made upon receipt of goods by the Buyer.

10. Red Clause LC. The seller can request an advance for an agreed amount of the LC before shipment of goods and submittal of required documents. This red clause is so termed because it is usually printed in red on the document to draw attention to "advance payment" term of the credit.

Caiib ABM strategy

CAIIB ABM Strategy

ABM is one of the compulsory subjects for CAIIB. Most of the people find difficult to clear this paper. Today, I will tell you how to study for ABM subject.

This subject also contains 4 modules

MODULE – A: Economic Analysis

MODULE – B : Business Mathematics

MODULE – C : HRM in banks

MODULE – D : Credit Management

As we are bank employees we get very less time for study, so how to decide which topics to be read, which topics to be skipped?

-As I had told you in my previous blog article that generally paper consists of 60% theoretical & 40% numerical or case studies, so choose the module to be study in deep so as to clear the paper easily depending upon your personal strength and weakness.

If you observed all the modules, you will realize that Module A and Module C are most scoring modules. Do not skip these modules. Module B contains Business Mathematics which many people find difficult to study as the level of mathematics is tough, especially for non-engineering background people. Those who works in Credit/Loan Department will find that Module D easy as well as interesting. Module D is most important not only exam point of view but also for your daily working in Credit Department. So do not skip Module D.

IMPORTANT TOPICS FROM EACH MODULE

Module A- Supply and Demand, Money Supply and Inflation, Business Cycles, GDP Concepts and Union Budget.

No need to read McMillan Book line by line for thise module, short notes will be quite useful for studying this module. Don’t read stats given in these chapters. In GDP Concepts and Union Budget chapters numerical are asked which are quite easy provided you know the components and formula.

Module B-Time Value of Money, Sampling Methods, Simulation, Bond Investment

Don’t go to deep for study this module as mathematical calculations are difficult to understand especially for non engineering background people. Practice the examples given in McMillan. Those who are not good at math can skip this module and focus more on remaining modules.

Module C-Development of Human Resources, Human Implications of Organisations, Performamce Management, HR & IT

You need to read thoroughly all the topics from this module from McMillan. It is quite easy and theoretical only. Repeatedly read MCQs from N.S. Toor book of this module.

Module D-Overview of Credit Management, Analysis of Financial Statement, Working Capital Finance, Credit Control and Monitoring, Rehabilitation and Recovery.

Read this module from McMillan book only. The chapters in this module are not lengthy as compared to other modules. Practice Numerical from Financial statement and balance sheet.

Overall, you have to study at least three modules in detail so as to achieve the 50 score. You can choose the modules to study more depending upon your strength. I would suggest that you can keep module B at last, just read formulas from this module, as this module is quite boring, lengthy and hard to understand.

https://iibfadda.blogspot.com/

Caiib BFM strategy

BFM::;;

The strategy for the study of Bank Financial Management which many people finds difficult to clear. If you study properly, it is easy to clear the BFM. This subject also contains 4 modules, they are;

-International Banking

-Risk Management

-Treasury Management

-Balance Sheet Management

Many people do not correlate the syllabus of the subject with day to day banking activity. So they find it difficult to score and understand this subject. But this not true, this subject is very much important which will increase your knowledge regarding top management & middle management functioning of your bank as well as banking as a whole industry.

All the modules are equally important, but you may clear the paper with three modules study also. Module A & B are relatively easy and scoring as well. Let us discuss strategy for each module.

Module A-International Banking

Important topics are Exchange Rates and Forex Business, Basics for Forex Derivatives, Documentary LC, and Facilities for Exporters & Importers

Rapid reading or bullet point reading is quite useful for this module. Practice numerical again and again.

Many numerical/case studies are asked from this module which are quite easy as compared to Module B & Module D case studies. Refer the case studies from McMillan given at the end of the topic. Also N.S.Toor book has many numerical and case studies. Questions are asked on Exchange rates, Shipment Finance etc.

Module B-Risk Management

All chapters are equally important as they are interlinked to each other. Again focus more on case studies/numericals given in Apendix at the end of chapter. Maximum case studies are asked from this module. Though short notes are useful for this module I would suggest McMillan reading for this module because some questions are twisted type for which you require details of the concept which is hard to get from short notes. RBI website contains FAQs which are quite useful for this modules, you should read them at least once.

Module C- Treasury Management

Important topics are Introduction, Types of treasury products, Treasury Risk Management, Treasury and Asset-Liability Management.

Mostly questions asked on this module are theoretical type, so through reading of McMillan is important. If you don’t get time then you can skip this module or read short notes since the weighted of this module for exam point of view is low according to me as compared to Module A&B. But those who wish to make carrier or work in treasury department, this is the best module to learn.

Module-D Balance Sheet Management

Important chapters are Components of ALM in Bank’s Balance Sheet, Capital and banking Regulation,, Capital Adequacy, Asset Classification and Provisioning Norms, Interest rate Risk management.

Though McMillan book contain sufficient material but I would suggest you to refer RBI website for this module. In this module focus more on Case Studies as compared to theoretical questions. Do not skip this module as it is much important for exam as well as knowledge point of view. No need to read McMillan line by line.

Overall you have to keep balance between theoretical reading as well as case studies/numerical since the paper would contain 40-45% case studies. N.S.Toor book contains good case studies and MCQs. Also there are many resources available on the internet from where you will get case studies for this module. After giving this paper you will realized that BFM is easier as compared to ABM and no need to worry for BFM.

What is the difference between money market and capital market

A money market is a component of financial market where short-term borrowing can be issued. This market includes assets that deal with short-term borrowing, lending, buying and selling. A capital market is a component of a financial market that allows long-term trading of debt and equity-backed securities. Long-term borrowing or lending is done by investors or corporations that have large amounts of wealth at their disposal.

On the other hand, a capital market is a component of a financial market that allows long-term trading of debt and equity-backed securities. Long-term borrowing or lending is done by investors or corporations that have large amounts of wealth at their disposal.

The most popular capital market is the NYSE or the New York Stock Exchange

Huge financial regulators are responsible for overseeing the capital market to ensure that companies do not defraud their investors. Trading can be done by a number of credit instruments such as stocks, shares, equity, debentured, bonds, and securities. Much of the trading is actually done online using a computer. There is no actual cash involved in trading.

Capital markets offer higher-risk investments, while money markets offer safer assets; money market returns are often low but steady, while capital markets offer higher returns. The magnitude of capital market returns often has a direct correlation to the level of risk, but that is not always the case.

Investment funds

Investment funds:

Equity Fund
This fund invests
major portion of the
money in equity and
equity related
instruments.

 Debt Fund
This fund invests major
portion of the money in
Government Bonds,
Corporate Bonds, Fixed
Deposits etc.

Balanced Fund
This fund invests in a
mix of equity and debt
instruments.

Money market fund
This fund invests money
mainly in instruments
such as Treasury Bills,
Certificates of Deposit,
Commercial Paper etc.

Provisioning related numericals

Provisioning related numericals for caiib

Ex. 1

Account with Outstanding of Rs. 10.00 lac became Out of order on 22.1.11 and it became NPA

on 22.4.2011. The Value of Security at later stage is Rs. 7.00 lac. Calculate Provision as on

31.3.12.

Solution

It is a Sub-Standard Asset as on 31.3.2012.

Provision is 1000000*15/100 = 150000/-

Ex. 2

A loan account with outstanding of Rs. 10.00 lac and Value of Security Rs. 6.00 lac was Substandard

as on 30.3.2008. What will be provision as on 31.3.2012?

Solution

The account will be Doubtful (DI) on 30.3.2009, D2 on 30.9.2010, D3 on 30.3.2012. Provision

will as under:

Secured portion = 6.00*100/100 = 6.00 lac

Un-secured portion = 4.00*100/100 = 4.00 lac

Total Provision = 6+4 = 10.00 lac.

Ex. 3

A loan became Doubtful on 12.2.2009. The outstanding is 6.00 lac. What will be provision on

31.3.2012.

Solution

The Account will be categorized as Doubtful (D3) as on 12.2.2012. Provision is 100% of 6.00 lac

= 6.00 lac



lac

97

Ex. 4

D2 category account has outstanding--10.00 lac, DI/SI ----2.00 lac, Value of security ---6.00 lac

Solution

Un- Secured portion = 10-2-6 = 2.00 lac Provision = 2.00 * 100/100 = 2.00 lac

Secured portion = 6.00 * 40/100 = 2.40 lac

Total provision = 2.00 + 2.40 = 4.40 lac

Ex. 5

D2 Category loan is having outstanding 4.00 lac, Value of Security 1.50 lac and ECGC cover

50%. Calculate provision as on 31.3.2012.

Solution

Unsecured portion = 50% of (O/s – VS) = 50% (4.00 – 1.50) = 1.25 lac

Secured portion = 1.50 lac

Provision on Unsecured portion = 1.25*100/100 = 1.25 lac

Provision on Secured portion = 1.50*40/100 = 0.60 lac

Total provision = 1.25 +0.60 = 1.85 lac.

Ex. 6

A D2 category loan is having outstanding Rs. 6.00 lac. The Collateral Security is Rs. 3.00 lac

and Primary Security is Rs. 2.00 lac. There is also Guarantee of Rs. 10.00 lac. Calculate

provision.

Solution

Unsecured portion = O/s – Primary Security – Collateral = 6.00 – 2.00 -3.00 = 1.00 lac

Secured portion = 2.00 + 3.00 = 5.00 lac.

Provision on Unsecured portion = 1.00 *100/100 = 1.00 lac

Provision on Secured portion = 5.00*40/100 = 2.00 lac

Total provision = 1.00 + 2.00 = 3.00 lac.

Ex. 7

Advance portfolio of a bank is as under:

Total advances = 40000 crore, Gross NPAs = 9%, Net NPAs = 2%

Find out 1) Total Provision 2) Provisioning Coverage Ratio

Solution

NPAs = Total Advances *9/100 = 40000*9/100 = 3600 crore

Standard Assets = 40000-3600 = 36400 crore

Provision on Standard Assets = 36400*0.40% = 145.60 crore

Provision on NPAs = 9% - 2% = 7% = 40000*7/100 = 2800 crore

1) Total provision = 145.60 + 2800 = 2945.60 crore

Gross NPAs = 40000*9/100 = 3600 crore

Net NPAs = 40000*2/100 = 800 crore

2) Provision Coverage Ratio = Provision on NPAs / Gross NPAs = 2800/3600 = 77%.

Ex. 7 Account becomes doubtful on 12th Feb 2008. The Balance is Rs. 6 lac. Value of security is

3 lac. What will be the provision on 31.3.2011?

Solution

 It is D3 Type of account.

 Therefore, provision will be 100% i.e. 6 lac = 6.00 lac Ans.



Ex. 8 NPA o/s : Rs. 10 lac including suspended interest/Derecognized interest Rs. 2 lac.

Security value is Rs. 6 lac. It became NPA on 25th Feb 2008. What would be the provision on

31.3.2011.

 It is D2 category account

 4.40 LAC (10-2-6= 2x100%= 2 lac + 40% on 6 lac ie 2.40 lac = 4.40 lac) D2

Ex. 9 A/c became NPA on 2nd January 2008. Balance o/s is 10 lac including Derecognized

interest Rs. 2 lac and ECGC cover of 50%. Value of security is 4 lac. What will be provision on

31.3.2009.

 It is D1 category account.

 10 lac – 2 lac, DI – 4 lac Sec. = 4 lac

 ECGC Cover: 4 lac x 50% = 2 lac

Provision on Unsecured portion

 Unsecured: 4 lac – 2 lac = 2 lac x100% = 2.00 lac

Provision on Secured portion

 Secured: 4 lac x 25% = 1.00 lac

 Total Provision: 2 + 1 = 3.00 lack.

https://iibfadda.blogspot.com/2018/07/provisioning-related-numericcals.html?m=1

Inoperative /Dormant accounts

Inoperative/Dormant Accounts: Savings as well as Current account should be
treated as Inoperative / Dormant if there are no transactions in the account for over
a period of two years. For the purpose of classifying as above, both the type of
transactions (Debit/Credit) induced at the instance of customers as well as third
party should be considered. Charges levied or interest credited should not be treated
as transaction for the said purpose. However, crediting the Fixed Deposit interest,
Dividend and Interest warrants to Current/SB account are to be treated as a
customer induced transaction, and consider the account as operative account only.
Operations in Inoperative/Dormant accounts may be allowed after due diligence i.e.
ensuring genuineness of the transaction, identify verification and signature
verification. Before converting the account in to Inoperative, notice is to be issued to
the depositor. The conversion may be postponed to another one year, in case
depositor requests in writing that he undertakes to route the transactions in to the
account. No charges should be levied for activation of inoperative accounts. Recently,
RBI has instructed banks not to levy penal charges for non-maintenance of minimum
balance in inoperative account.

Treasury products

Treasury Products

Treasury products Treasury refers to the products available in the financial market for raising and deploying funds for (a) investment and (b) trading in foreign exchange and securities market Products available in Forex Market:

The forex is a virtual market without physical boundaries_ The information dissemination is very fast through electronic media such as Reuters, Money Line, Bloomberg etc. The foreign exchange markets, as such, are as near-perfect with an efficient price discovery system_ The products are explained as under:

I. Spot trades

 Forward

 Swap

 Investment of foreign exchange surpluses

 Loans and advances

 Rediscounting of bills

 Spot trade : The spot trading in foreign currencies refers to a situation where the settlement takes place up to T+2 days i.e. maximum on the 3rd day. The settlement may take place on same day (ready rate) or on T 1 day i.e. by the next day (TOM rate). The ready rate and TOM rate are less favourable to the buyer and more favourable to seller_ Example : X sells certain foreign currency to Popular Bank on Feb I I, the settlement will take place on the same day. Bank will make payment by applying ready rate. If the settlement is to take place on Feb 12, the bank will apply TOM rate. If it takes place on Feb 13, Tf rate would be applied_

2_ Forward The forward in foreign currencies refers to a situation where the settlement takes place in future i.e. after T+2 days, on a pre-fixed rate and on a pre-fixed date, which are decided on the date of contract. Forward may be at a discount (where future rate of forex. is lower compared to present/spot rate) or at a premium (where future rate of forex. is higher). Example US $ is quoted at Rs.39.20 on Dec 12 (which is its spot rate). It is quoted at Rs.39.40 for delivery in January (which is forward rate). Here the forward is at a premium_ Had the January rate been lower than Rs.39.20, the forward would have been at a discount.

Forward rates are arrived at on the basis of interest rate differentials of two currencies (which are added or deducted from spot exchange rate). For example, for US S and UK Pound Sterling, the difference between the spot rate and forward rate represents the difference in interest rates in USA and UK. The interest rate differential is added to the spot rate for low-interest yielding currency (representing forward premium) and vice versa.

 Swap : Swap represents a combination of spot and forward transactions. Buying one currency in the spot market and selling the same currency for the same quantity in the forward market, constitutes a swap. Though swap is used for funding of requirements but at times there is some element of arbitrage.

Example XYZ Limited an exporter have with them $ 200000 today but they do not need foreign currency today. However, they will require the same amount of foreign currency at the end of the month from now. If the company sells the currency today in spot and buys the same amount 2 months' forward, today itself, it would be a swap transaction. By doing so, they will be able to hedge forex fluctuation risk.

 Investment in forex surplus : The forex surplus arcing from (a) profits on treasury operations (b) profits from overseas branch operations (c) forex borrowings in overseas market (d) foreign currency convertible rupee deposits, are left at the disposal of the

Treasury.

Banks are allowed to invest these surpluses in global money markets or short term securities.

 Inter bank loans: These loans arc of short term nature up to one year and many times, overnight lending to domestic or global banks.

 Short term investments: Banks invest in Treasury bills or gilt edged securities issued by the foreign govt. and other debt instruments.

 Balance in NOSTRO accounts: Banks also keep balances in these accounts, which do not earn interest. Some correspondent banks, however, offer the facility to invest automatically once the balance exceeds the floor limits.

5. Loans and advances : Though Treasury does not undertake the loan granting function, but consent of Treasury is obtained by the credit appraisal department and disbursement function regarding availability of foreign exchange funds or credit lines, prior to sanction of such loans by the Credit Function.

6. Rediscounting of bills : Rediscounting is an inter-bank advance and Treasury provides refinance for the foreign currency bills purchased or discounted by other banks. These are normally of a short term period ranging from 15 days to one year.




Iibfadda.blogspot.com 

FATF recommendations

THE FATF RECOMMENDATIONS:: Total 40

A – AML/CFT POLICIES AND COORDINATION

1 - Assessing risks & applying a risk-based approach *

2 - National cooperation and coordination

B – MONEY LAUNDERING AND CONFISCATION

3 Money laundering offence *

4 Confiscation and provisional measures *

C – TERRORIST FINANCING AND FINANCING OF PROLIFERATION

5 Terrorist financing offence *

6 Targeted financial sanctions related to terrorism & terrorist financing *

7 Targeted financial sanctions related to proliferation *

8 Non-profit organisations *

D – PREVENTIVE MEASURES

9 Financial institution secrecy laws

Customer due diligence and record keeping

10 Customer due diligence *

11 Record keeping

Additional measures for specific customers and activities

12 Politically exposed persons *

13 Correspondent banking *

14 Money or value transfer services *

15 New technologies

16 Wire transfers *

Reliance, Controls and Financial Groups

17 Reliance on third parties *

18 Internal controls and foreign branches and subsidiaries *

19 Higher-risk countries *

Reporting of suspicious transactions

20 Reporting of suspicious transactions *

21 Tipping-off and confidentiality

Designated non-financial Businesses and Professions (DNFBPs)

22 DNFBPs: Customer due diligence *

23 DNFBPs: Other measures *

THE FATF RECOMMENDATIONS

INTERNATIONAL STANDARDS ON COMBATING MONEY LAUNDERING AND THE FINANCING OF TERRORISM & PROLIFERATION

 2012 OECD/FATF 5

E – TRANSPARENCY AND BENEFICIAL OWNERSHIP

OF LEGAL PERSONS AND ARRANGEMENTS

24 Transparency and beneficial ownership of legal persons *

25 Transparency and beneficial ownership of legal arrangements *

F – POWERS AND RESPONSIBILITIES OF COMPETENT AUTHORITIES

AND OTHER INSTITUTIONAL MEASURES

Regulation and Supervision

26 Regulation and supervision of financial institutions *

27 Powers of supervisors

28 Regulation and supervision of DNFBPs

Operational and Law Enforcement

29 Financial intelligence units *

30 Responsibilities of law enforcement and investigative authorities *

31 Powers of law enforcement and investigative authorities

32 Cash couriers *

General Requirements

33 Statistics

34 Guidance and feedback

Sanctions

35 Sanctions

G – INTERNATIONAL COOPERATION

36 International instruments

37 Mutual legal assistance

38 Mutual legal assistance: freezing and confiscation *

39 Extradition

40 Other forms of international cooperation

Target JAIIB

Target JAIIB and Its strategy

If you have just joined the banking Industry, you must have applied for JAIIB or if not yet, you’ll be applying soon. And one thing everyone wants to know is how to pass JAIIB in first attempt. The obvious reason for clearing JAIIB i.e., Junior Associate of Indian Institute of Bankers is to get an extra increment. So sooner you pass the JAIIB exam, earlier you get an extra increment. If you have joined as Scale – I Officer (P.O.), your initial basic salary would be Rs.23700 and if you clear JAIIB, you get one increment and your basic salary increase by Rs.970. So, if you miss it first time, your increment gets delayed by 6 months. That means loss of Rs.5820+DA. So it becomes important to clear the JAIIB in first attempt itself.

JAIIB exam is held twice a year (June and December) and around 1.50 lacs candidates appear for the exam. Only 22-25% candidates are able to clear the exam each time. So, does it mean that JAIIB is difficult to crack? What should be the strategy to clear the JAIIB in first attempt itself? How one should prepare for JAIIB.

Passing marks for JAIIB are 50% aggregate and 45% in each subject. If aggregate marks are less than 50% or marks in a particular paper are less than 45% but you score 50% or more in any subject, you do not qualify the exam but you need not give that particular paper in next attempt, in which you score 50% or more. The best part of JAIIB exam is that result of each paper is shown to you immediately after you submit your online exam.

Simple steps to prepare for the JAIIB exam

Take off the burden from your mind, you are required to score only 50%, which is not very difficult. And the good thing is that there is no negative marking.

Here is a simple step by step guide which will help the bankers to be prepared for JAIIB.

If you come from finance or commerce background and have studied B.Com, MBA (Finance) etc., it is relatively easy to crack the JAIIB. Because you would have studied atleast 60% of the topics covered in JAIIB. If you are not from commerce or finance background, you need to make little extra efforts

Preparation strategy for JAIIB examination:

JAIIB exam needs some dedicated preparation to crack the exam, especially for the non commerce graduates. Many young bankers prepare for the exam only during the last week; Then they write one paper after getting low marks, they simply give up the attempt. Some take two days leave before the exam and prepare for it eventually they fail because of shortage of four or five marks. These strategies may work for few talent bankers but not for all. After our busy working hours, daily we have to spend some time for preparation of the exam. Since most of us are very new to the banking industry and its concepts, we need regular revisions to familiarise with the concepts.So all it needs a self disciplined and determined mind to prepare for the exam.

Allocation of Study time:

Daily we need to spend at least 1 1/2 to 2 hours a day for preparation of the JAIIB exam. Cramming before the exam night or before two days won’t help for understanding the information. It may help for few direct questions but it won’t be useful for complex questions. Also we wont have enough time to complete the sy1llabus and will lead to anxiety & stress. Sacrificing our sleep before the exam night will also make us counterproductive so it better to study every day.

Importance of Studying daily:

Studying daily and revising regularly helps to familiarise with concepts. It also helps us to understand the information. Having a study routine is not only helpful for exam but also improves our reading habit which every banker needs, as our industry is very dynamic. In our hectic banking hours finding time for continuously 2 hrs a day is very hard. But having small sessions of 30 to 40 minutes thrice in a day is easy to find. In the era of smart phones, we can study anything at anywhere so when you find a spare time please use it.

Study Material:

For preparation, I strictly recommend the three comprehensive courseware developed by IIBF, published by MacMillan for each paper. These books are not only helpful for the exam but also for our Banking career. If you really want to pursue your career as banker then these books are must and fundamental. They act like a reference manual for us. So my humble request to all, please don’t prepare only for clearing the exam; Kindly prepare with the motive of improving knowledge in the banking field. Because the knowledge gathered during our JAIIB exam will also aid us during our day-to-day banking life.

Apart from the MacMillan books, the books and work books prepared by JAIIB coaching centres such as N S Noor, Deewan Banking Academy etc,. are also available in the market. Mostly they are good but not comprehensive and may not have clear explanation for some topics. All the books are about same cost, so I recommend the Macmillan books

They are many free study material is available in the facebook groups and in websites also. If possible get that too for your reference but my best suggestion is to buy Macmillan books. The amount spent is more than worthy, the book will be useful for our banking career.

For Latest developments & Current affairs related to Banking Industry:

Apart from the above syllabus we need to refer the following for full preparation of the JAIIB exam.

1. Current developments in Master Circulars/ Master revisions issued by RBI

2. Websites of RBI, SEBI, BIS, IRDAI, FEDAI for reference and development in concerned subjects

3. IIBF Vision and Bank Quest published by IIBF for the members it is free and sent to email id.

4. Financial newspapers/publication can also be referred for current affairs.

5. New Government Schemes related to banking sector.

Nature of Questions:

Depending upon the complexity of the question, the marks of the question varies.

0.50 mark – Direct question which requires one word answers. Answer this questions with 100% accuracy. Most of these questions are from definitions, types or classification, abbreviation, simple explanations etc,. So at least read and go through all the topics in Macmillan Book twice.

Planning a study schedule:

Now we have allocated our time and purchased & collected the necessary materials for preparation of JAIIB exam. Now, “What is next??;” Having a strategy/plan/routine schedule for preparation of JAIIB Exam. Strategic planning is important for any activity because it provides a sense of direction and evaluation of progress in our efforts towards goal. A goal without a plan is just a wish, so please make a plan and try to stick to it.

We have already seen the JAIIB syllabus here. In order to pass the JAIIB exam all we need to do is to get 50% of marks in each paper within four consecutive attempts. So we don’t need to study all modules deeper and do research on each topic. If we cover 75% of the syllabus for each paper is enough to get more than 50%.

The strategy and study plan I discuss below are just an example for understanding, viewers and readers are instructed to prepare their own schedule based on their level of knowledge and skills in each subjects.

Overlapped Topics:

Some topics of a paper is also a covered in other papers and questions can be asked in any of the paper. For example AML/KYC is also common for Accounting & Finance and Legal & Regulatory aspects of Banking. Since questions can be asked in any of three exams from this topics, prepare for the paper which has most topics & sub-topics in that particular subject. Also revise the same when you need to prepare for the overlapped topic.

Study Plan: Principles & Practices of Banking:

In my view this is the easiest subject to pass when compared to other papers. Because in this paper, all the topic are conceptual and mostly related to our day-to-day banking activities. Hence most of the topics (not all) are already familiar to us.

Module A: Indian Financial System

Read and understand all the topics and sub topics without any omission.

If possible take notes in the form of snippets this will help for revision of the topic. Since we all new to banking terms repeated revisions are required for this module.

We can expect 20 to 25 marks in this unit.

Question from current development is asked from this unit.

Prepare to score all the marks from this module.

Module B: Functions of Banks

This unit is also important and all the topics should be thoroughly studied.

We can expect 20 to 25 marks from this unit.

This unit is also needed repeated revision so taking notes while studying is recommended.

Question from current development is asked from this unit.

This is also the our scoring section, prepare in a way to get all the marks from this module.

Module C: Banking Technology

If your are techie, take full 6 hrs and study thoroughly.

For techies, this unit helps to surpass the minimum marks comfortably.

Others prepare in a way to answer the direct question from this module.

From this unit we can expect 15 to 20 marks.

We can expect question from latest development in Banking related to IT.

Module D: Support Services & Marketing of Banking Services/Products

If you are BBA or MBA and studied marketing related concepts in your graduation then take full 6 hrs and thoroughly study the unit.

Others prepare to answer for direct questions.

We can expect 10 to 15 marks from this unit.

Study Plan: Accounting & Finance for Bankers:

Many bankers treat the Accounting & Finance paper as tough. The main reason is cramming of information won’t work here like other papers. Since here we have to study, understand and apply the concepts, we need to study regularly and practice. So a good study routine is must and here all the modules are important for exam purpose as well as for our knowledge. So there is no skipping of modules in this paper and give importance to all topics.

Module A: Business Mathematics and Finance

This is a must read and must know module for all bankers. So don’t even skip a small topic.

Since these module is mathematical in nature, write down all the formulas and go thorough it daily.

Practice yourself with formulas by assuming different values from the exercise and solved examples.

Don’t ever fail to take notes and snippets for formula’s explanation & applicability.

We can expect 25 or more marks in this unit.

Understanding of calculation and concepts is must so that we can answer confidently if the questions are twisted.

Module B: Principles of Book Keeping and Accountancy

This unit is also important and all the topics should be thoroughly studied because if we are in bank we should know the accountancy.

We can expect 20 to 25 marks from this unit.

Understand the concept is key for this paper. Don’t mug-up; if you cannot understand a topic just ask your B.Com friend. Or ask him to simply explain the basics of accountancy.

This unit is also needed repeated revision so taking notes while studying is highly recommended.

This is also the our scoring section, prepare in a way to get all the marks from this module.

Module C: Final Accounts

This unit is the most important and very useful for our day-to-day activities.

This unit is conceptual as well mathematical.

So take notes for formulas and revise it.

B.Com friend is the best mentor for this module.

From this unit we can expect 20 to 25 marks.

Module D: Banking Operations and Accounting Functions

This unit is comparatively less important but good preparation of this unit will help to score the pass mark.

This unit will have many overlapped topics

Prepare to answer for direct questions.

We can expect 15 to 20 marks from this unit.

Question from latest development can be asked in this module.

Study Plan: Legal & Regulatory Aspects of Banking:

Many people underestimate the legal paper and say this exam is very easy to clear. This is purely a law oriented paper, so many of the legal terms used in the topics are new to us. In order to familiarise and to understand those topics, we have to spend more time for this paper. Also good memorization skill is required to remember the numbers & data. All the modules are about equally important, hence don’t skip a topic.

Module A: Regulation and Compliance

This is a less important but easier module compared to other modules of the paper.

This module is full of theory related to Banking Regulation and its compliance.

Don’t ever fail to take notes and snippets for explanation & applicability.

We can expect 15 to 20 marks in this unit.

Question from latest development can be asked in this unit.

Module B: Legal aspects of Banking Operations

This module is a foundation and must study.

Understand the concepts and definitions for legal terms

Take notes, Take notes, Take notes and revise it until having a clear picture about the topic.

This is a scoring module so prepare well.

20-30 marks can be expected from this unit.

Module C: Banking related laws

A toughest module and it is a must study for all

Repeated revision is required to remember the numbers & data.

This unit will consume more time and make us feel bore. So study the topics in different sessions of 30 mins.

We can expect 25 to 30 marks from this unit, so it is a mark scoring unit.

Question can be asked from current developments or amendments so update accordingly.

Module D: Commercial Laws with reference to banking operations

This module is conceptual and also requires memorization too.

Some of the topics are common with Module D of Paper 2: Accounting & Finance.

This also a scoring module we can expect 20 – 25 marks from this unit.

On the actual test day

Choose the easy questions first as they will give you an estimate of the score. Then come back to the questions which were missed. Also, there is no negative marking, so attempt all questions. If you stuck in a question, leave that by marking and go ahead.

We hope this will help you out to pass the JAIIB in first attempt. If you have any queries/ suggestions, please write in comment box below.

Conclusion:

The time period mentioned above are for studying those topics at least one time and indicative for understanding. It will vary depending upon personal capacity, skill and knowledge in the subjects. So prepare your own study schedule and stick with it. Remember a determined and self disciplined mind is key to the success. So whatever the strategy you follow for JAIIB examination make sure you are sticking with your plan and be true to yourself.

https://iibfadda.blogspot.com/2018/08/target-jaiib-and-its-strategy.html

Very Nice article on The importance of a vibrant MSME sector

 Very Nice article on The importance of a vibrant MSME sector



The importance of a vibrant MSME sector in the context of the aggregate economy can’t

be over-estimated as it accounts for:

• Roughly one-third of aggregate economy gross value added

• Approximately one-third of manufacturing output in the country

• 45% of all Indian exports

• Three-fourths of all establishments in the country

• Provide employment to around 131.2 million people



However, the MSME sector has not received the due attention it deserves from the financial system on account of the various

challenges inherent in servicing this segment. Like we demonstrated earlier, lending to MSMEs should allow the banks to ameliorate the

deleterious impact of the secular trend of Disintermediation and the cyclical challenges of rising NPAs due to an over-extended largesize

corporate sector.

Thus, it would be fair to surmise that a business realignment towards MSME lending is the antidote to the ills afflicting the Indian banking

system currently. This is one of the rare instances where the commercial imperative of higher growth and profitability is aligned with the

societal imperative of financial inclusion.

The rest of this report deals with the key issues impacting the supply and demand of credit to the MSME segment. Effort has been made

to diagnose the key financial and operational challenges involved in servicing this segment. Finally, the key thrust of this report is to

illustrate the similarities between the business models for the retail and the MSME segment and the relevance of applying the key

success strategies especially the adoption of a credit scoring fueled information lending model in achieving robust and sustainable risk

adjusted growth.

MSME FINANCING – SUPPLY, DEMAND & GAP ANALYSIS

Source: RBI & TransUnion CIBIL Calculations

Overall bank credit to the Micro & Small Enterprises (MSE) has increased at a CAGR of 15.2% from INR 2.5 trillion in FY08 to INR 9.0

trillion FY17. This is marginally ahead of the 13.4% and 13.9% growth exhibited by the Nominal GDP and the Non-food Credit

respectively over the same time period. Thus, MSE credit penetration (as measured by proportion to GDP) has increased from around

5.2% in FY08 to a high of 6.4% in FY15.

Ongoing deceleration in economic activity and the emergence of the NPA overhang in the past couple of years has meant that credit

growth to the MSE sector has slowed down considerably. This has manifested itself in share of MSE Lending coming down as a

proportion of the GDP as well as a proportion of the total non-food credit.

Most SMEs in India face poor access to finance within a financial system dominated by banks. The following points will conclusively

highlight the scale of funding challenges faced by the Indian MSME sector:

• MSME bank credit to GDP ratio for India was at around 6.2% in FY 15 – less than one-sixth of the levels seen in countries like Korea

and China. It is around one-fourth of countries like Thailand and Malaysia and is even lower than Bangladesh.

• As per IFC, the total financing demand of the Indian MSME sector is around INR 32.5 trillion – comprised of entrepreneur’s contribution

of INR 4.6 trillion and estimated external finance demand of INR 27.9 trillion.

• Considering that the MSMEs have access to formal finance of around INR 10 trillion, the sector is grappling with a formal credit gap of

around INR 17.9 trillion. The enormity of the financial challenge is clear from the fact that the credit gap is close to twice the actual

outstanding amount of formal credit extended to the sector.



From a sectoral perspective, the credit gap for the manufacturing sector (73% of aggregate credit gap) is much higher than services

sector due to the capital intensive nature of the manufacturing enterprises. This trend is exacerbated by the fact the bank lending to the

Services sector has expanded at the expense of Manufacturing. Share of Services sector in aggregate MSE lending has increased from

47% in FY08 to 59% in FY17.



• As per the sixth economic census, roughly 78% of all enterprises in India are self-financed and have no access to financing from

formal sources.

MSME FINANCING – KEY CHALLENGES



Inadequate access to financing by the MSMEs is a function of the inherent limitations of the current business models of the financial

institutions. The underlying heterogeneity, pervasive geographical presence of the MSME sector and the utilization of physical bank

branches for bulk of the loan origination means that entrepreneurs in remote locations lack access to finance. Even though Banks have

tried to ease this issue through the usage of the Banking Correspondents model, access remains a key challenge – especially for

entrepreneurs based out of low-income or geographically far-flung areas.





The current business model is also characterized by manual check-list based risk assessment at the origination stage. MSMEs are also

bedeviled by the insistence of the banks on following a cumbersome and inflexible documentation procedure that is difficult for new

borrowers. The net result is a significant increase in turnaround times. Currently, the sector is characterized by turnaround times (for

loans < INR 1 Million) ranging from 17 days for the NBFC sector to 30 days for PSU Banks.

Such high level of turnaround time means that the formal financial sector is unable to provide timely credit to entrepreneurs in times of a

crisis – especially important as MSME entrepreneurs have very limited financial capabilities to handle life cycle shocks. These

entrepreneurs turn to informal sources in such crisis situations and it is difficult to bring them back into the formal financial sector after

such an experience.

Despite the preponderance of evidence to the contrary (NPA analysis by size segments showed that the MSME-CMR segment had one

of the best performance), most financial sector participants consider the MSME sector to be massively risky and are loath to disburse

loans without adequate collateral. World Bank Enterprise surveys show that around 81% of all loans in South Asia are collateralized –

significantly higher than the 64% share in high income OECD countries. Further, most financial institutions insists on immovable

collateral like land or buildings on account of unenforceable secured transaction laws. Thus, MSME loans have comparatively higher





rejection rate for feasible projects.

The informal nature of most MSMEs, consequent lack of adequate compliance to tax and other legal regulations means that most

MSMEs find it difficult to adapt to the high levels of document requirements of the formal financial system. This situation is exacerbated

by the lack of qualified personnel for preparing the annual financial statements. Consequently, most MSMEs gravitate towards the

informal system that ask for little documentation.

The combination of the above discussed trends of physical branch based origination systems, low access, high turnaround times due to

complicated processes, inadequate access to collateral and documentation and perceptions of higher risk translate into significantly

higher cost of funding in terms of both the interest rate as well as processing costs for the MSMEs. The high cost of financing in turn has

a significant adverse impact on the future profitability and growth of the sector.

MSME LENDING – CREDIT SCORING BASED INFORMATION LENDING

The centrality of the MSMEs in ensuring India’s future economic and employment growth and the inability of the formal financial sector in

supporting the continued robust growth of MSMEs underline the need for a radical redesign of the entire MSME lending value chain.

Fortunately, the banks and the NBFCs already have a business segment – Retail Lending – that can serve as a guidepost for

redesigning a business model that can facilitate robust volume growth whilst maintaining risk under control.

As our previous research article “Credit Bureaus, Scoring & Technology – Key Pillars Of Sustainable Retail Lending” illustrated, financial

institutions have been able to robust risk-adjusted growth in retail lending in the past few years as the confluence of the structural trends

of the advent of the Credit Bureaus like TransUnion CIBIL, increasing information technology intensity and the resultant development of

credit scoring based automatic decision making has radically redefined the consumer lending business model from “manual, judgmental

and relationship driven” to “digital, credit scoring and transaction driven”. This paradigm shift in the business model has translated into

multi-faceted benefits for consumer lending industry, consumers and the aggregate economy.



In contrast to the current practice of a one-size-fits-all risk assessment system based on financial statement analysis and

collateralization, banks need to come up with risk assessment systems that are targeted at different commercial client segments.



6/8

Financial Statement Lending is suitable for large enterprises with a significant history of audited financial statements and consequent

financial transparency. Risk assessment and monitoring is largely a function of achievement and maintenance of financial performance

covenants.

Asset Based Lending i.e. Collateralized Lending should be used for medium-sized firms that exhibit the characteristics of limited

financial transparency, inadequate future cash flow generation capacity but access to reasonable amount of moveable collateral like

high quality accounts receivables and inventory and immovable collateral like land and buildings.

Credit Scoring Based Information Lending is the most appropriate form of lending for Micro and Small Enterprises that may lack

updated financial statements as well as reasonable amounts of collateral. In this type of lending, decisions involving the approval of the

loan, pricing and the other terms and conditions are linked to the Credit Score.

Credit Scoring is a quantitative technique in which the future probability of default is determined by financial and non-financial

characteristics of both the business and the business owner. A well-known example of Credit Score is the CIBIL MSME Rank (MSME

(CMR)) score provided by TransUnion CIBIL. The MSME (CMR) measures and predicts the future probability of default over a one-year

horizon on a rank scale of 1 to 10 with 1 being the best and 10 being the worst.

CREDIT SCORING BASED INFORMATION LENDING – KEY BENEFITS

Just like Consumer Lending, judicious use of credit scoring results in multifaceted benefits to lenders, borrowers and the aggregate

economy.

Use of credit scoring and the associated change in risk assessment practices leads to greater process standardization and concomitant

increase in objectivity in risk assessment practices. Financial Institutions can achieve meaningful increase in profitability as credit

scoring can reduce the costs associated with the processing of individual applications whilst increasing the volumes as lenders are able

to safely approve marginal applications that an individual underwriter may have rejected.

Various international studies have documented the positive impact of credit scoring on the availability, price and risk of credit to micro

and small enterprises. A US Study examining the benefits of credit scoring for micro business lending estimated that the usage of credit

scoring resulted in the loan processing costs coming down from a range of USD 500-1800 to around USD 100. Another study by the

Federal Reserve Bank of Atlanta found out that usage of credit scoring led to significant increase in credit availability especially in lowincome

areas – traditionally the geographic segments facing the largest credit gap – due to the rise in objectivity of the credit

assessment process.

The usage of credit scoring has the potential of solving the access challenges faced by MSMEs based in geographically remote areas

that have comparatively lower penetration of formal financial sector. Research by Raghuram Rajan and Mitchell Peterson showed that

the confluence of the trend of availability of credit information from infomediaries like Credit Bureaus and ability of banks to synthesize

this information through Credit Scoring and Information Technology investments has resulted in significant expansion of the distance

between the small firms and their lenders.

The combination of credit scoring and automatic decisioning platforms provided by Credit Bureaus like TransUnion CIBIL can have a

significant impact on the turnaround time of micro and small business lending. Since the majority of applications come from applicants

that are low risk in nature, an automatic decision rule (say accept all companies having a MSME (CMR) rank of 4 or below) would

significantly reduce the turnaround time for bulk of the applicants. Conversely, turnaround times are also reduced by explicit rejection

rules e.g. reject all applicants having a MSME (CMR) rank of 8 or above. It is our opinion that the current turnaround time of 17-30 days

can be reduced to around 1-5 days by utilizing the credit scoring risk assessment system in conjunction with automatic rule-based

decisioning systems.

Proactive utilization of Consumer Bureau data as well periodic monitoring of bureau scores should lead to a meaningful reduction in bad

debts. It is a well-established fact that enterprises would exhibit certain behavior patterns like irregular payments, deteriorating credit

score, multiple financial enquiries etc. before showing actual delinquency. A well-thought out delinquency indicator alert system

developed in partnership with a Credit Bureau would allow a lender to identify the set of clients going through a challenging time. This in

turn allows the financial institutions to limit the bad debt exposure as well as implement risk mitigation strategies that benefit both the

lender and the borrower.

In addition to application scoring, Credit Scores like the MSME (CMR) developed by TransUnion CIBIL can be leveraged for Collections

purposes as well. Collection process efficiency and profitability can be significantly increased by segmenting the default and the neardefault

clients into collection priority buckets through the usage of scores and ability and propensity of future payments.

Thus, the principal benefits accruing to a lender – lower bad debt expense, reduced turnaround time, lesser processing / operational

cost – result in expanded credit at comparatively lower cost to the micro and small enterprises. Additionally, there is a meaningful

improvement in the service quality as well.

In conclusion, it would be fair to say that the usage of credit scoring would go a long way in expanding credit availability at comparatively

lower cost to the MSME sector – one of the prime movers of the Indian economy and one of the principal sectors suffering from financial

exclusion.

MSME LENDING – PROFITABILITY STRATEGIES

Conventional wisdom suggests that the profitability of the MSME segment is likely to below-par on account of myriad operational and

financial challenges in servicing this segment. The profitability question become even more challenging in today’s economic scenario

characterized by weakening economic growth and rising NPAs.

However, IFC research of MSME Banking business models across various countries shows that banks can tackle this challenge by

having some innovations in the business model. Following best practices that banks have used to enhance the profitability of the SME

lending segment:

• Transitioning the business model from a relationship based lending business model to a sophisticated high volume approach that

emphasizes quantitative credit score based risk assessment system to get scalability and efficiency advantages.

• Harnessing the synergy between the MSME lending and personal banking of the MSME owners through retail or personal banking

divisions to enhance aggregate profitability.

• Sophisticated risk-tier based pricing dynamic pricing to better capture the risk-adjusted profitability and allow differentiated lending to

different risk profiles.

• Successful banks have developed product-specific profitability models to identify the optimum bouquet of products / services for the

MSME segment. In addition to asset products, successful banks have targeted the sale of non-lending products to enhance the overall

risk-adjusted profitability.

• Early warning risk indicators that allow the bank to proactively tackle the loans that are about to become delinquent is also a major

factor that distinguishes between a profitable and loss making portfolio. Key attributes of this approach would include the ability to timely

respond to arrears, maintenance of credit relationships as long as the situation seems resolvable and proactive loss minimization when

risk mitigation fails.

Very important banking terminologies

BANKING TERMINOLOGIES

 LIQUIDITY ADJUSTMENT FACILITY (LAF):

 As part of the financial sector reforms in 1998 the Committee on Banking Sector Reforms (Narasimham Committee II), LAF was

introduced under which the Reserve Bank would conduct auctions periodically, if not necessarily daily. LAF is used to aid banks

in adjusting the day to day mismatches in liquidity. LAF helps banks to quickly borrow money in case of any emergency or for

adjusting in their SLR/CRR requirements.

 LAF consists of Repo and Reverse repo operations. The Reserve Bank could reset its Repo and Reverse Repo rates which would

in a sense provide a reasonable corridor for the call money market. At present, daily LAF operations are being conducted on

overnight basis, in addition to term repo auctions.

 REPURCHASE AGREEMENT (REPO):

 Repo is a money market instrument combining elements of two different types of transactions viz., lending-borrowing and salepurchase.

Repo or repurchase option is a collaterised lending i.e. banks borrow money from RBI to meet short term needs by

selling securities to RBI with an agreement to repurchase the same at predetermined rate and date. The rate charged by RBI for

this transaction is called the repo rate. The collateral used for repo and reverse repo operations are Government of India

securities. Under Repo, the RBI injects funds to organisations (SCBs and Primary Dealers) which have both current account and

SGL account with the RBI.

 The Repo transaction has two legs. In the first leg, the Seller sells securities and receives cash while the purchaser buys

securities and parts with cash. In the second leg, the securities are repurchased by the original holder by paying to the counter

party the amount originally received by him plus the return on the money for the number of days for which the money was used

by him which is mutually agreed.

 REVERSE REPO:

 Reverse repo rate is the rate at which the Reserve Bank of India borrows money from commercial banks within the country. This

is exactly the opposite of the Repo transaction and is used for absorption of liquidity.

 The Reverse Repo Rate at present is at 25 basis points below the repo rate. Reverse Repo facility is available to Primary Dealers

also.

 The Reverse Repo is a monetary policy instrument which can be used to control the money supply in the country. An increase in

the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant. An increase in reverse

repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply

of money in the market.

 MARGINAL STANDING FACILITY (MSF):

 The Reserve Bank, in 2011, introduced MSF for banks and primary dealers to reduce the volatility in the inter-bank call money

market. The interest rate w.e.f. 6th April, 2017 is 25 bps above the repo rate, which is the rate at which banks borrow from the

RBI for the short term against the collateral of government securities. The rate may vary relative to the repo rate as warranted

by economic conditions.

 Banks can borrow funds through MSF when there is a considerable shortfall of liquidity. This measure has been introduced by

RBI to regulate short-term asset liability mismatches more effectively.

 The MSF Scheme is operational on the lines of the existing Liquidity Adjustment Facility – Repo Scheme (LAF – Repo) i.e.

commercial banks can borrow money from RBI. The basic difference between Repo and MSF scheme is that in MSF banks can

use the securities under SLR to get loans from RBI and hence MSF rate is 25 bps more than repo rate. All Scheduled Commercial

Banks having Current Account and SGL Account with RBI will be eligible to participate in the MSF Scheme.

 Under the facility, the eligible entities can avail overnight, facility up to one per cent of their respective Net Demand and Time



Liabilities (NDTL) outstanding at the end of the second preceding fortnight. Requests will be received for a minimum amount of

Rs. One crore and in multiples of Rs. one crore thereafter.

 TERM REPOS:

Term repo is a new window for providing liquidity to the banking system. Through Term repo auctions of 7-day and 14-day tenors

for a combined notified amount equivalent to 0.75 per cent of net demand and time liabilities (NDTL) of the banking system are

conducted by the Reserve Bank through variable rate auctions on every Friday.

Gist of Important FEDAI Rules

Gist of Important FEDAI Rules

Rule 1: Hours of Business

1.1 The exchange trading hours for Inter-bank forex market in India would be from

9.00 a.m. to 5.00 p.m. No customer transaction should be undertaken by the

Authorised Dealers after 4.30 p.m. on any working day. 1.2 Cut-off time limit of 05.00 p.m. is not applicable for cross- currency transactions.

In terms of paragraph 7.1 of Internal Control Guidelines over Foreign Exchange

Business of Reserve Bank of India (February 2011), Authorised Dealers are

permitted to undertake cross-currency transactions during extended hours, provided

the Managements lay down the extended dealing hours. 1.3 For the purpose of Foreign Exchange business, Saturday will not be treated as

a working day. 1.4 “Known holiday” is one which is known at least 4 working days before the date. A holiday that is not a “known holiday” is defined as a “suddenly declared holiday”. Rule 2: Export Transactions

2.1. Post-shipment Credit in Rupees

(c) Application of exchange rate: Foreign Currency bills will be

purchased/discounted/ negotiated at the Authorised Dealer’s current bill buying rate

or contracted rate. Interest for the normal transit period and/or usance period shall

be recovered upfront simultaneously. (d) Crystallization and Recovery:

(ii) Authorized Dealers should formulate own policy for crystallization of foreign

currency liability into rupee liability, in case of non-payment of bills on the due

date. (iii) The policy in this regard should be transparently available to the customers. (iv) For crystallization into Rupee liability, the Authorised Dealer shall apply its TT

selling rate of exchange. The amount recoverable, thereafter, shall be the

crystallized Rupee amount along with interest and charges, if any.



(v) Interest shall be recovered on the date of crystallization for the overdue period

at the appropriate rate; and thereafter till the date of recovery of the

crystallized amount. (vi) Export bills payable in countries with externalization issues shall also be

crystallized as per the policy of the authorised dealer, notwithstanding receipt

of advice of payment in local currency. (d) Realization of Bills after crystallization: After receipt of advice of realization,

the authorised dealer will apply TT buying rate or contracted rate (if any) to convert

foreign currency proceeds. (e) Dishonor of bills: In case of dishonor of a bill before crystallization, the bank

shall recover:

(ii) Rupee equivalent amount of the bill and foreign currency charges at TT selling rate. (iii) Appropriate interest and rupee denominated charges. 2.2. Application of Interest

(c) Rate of interest applicable to all export transactions shall be as per the

guidelines of Reserve Bank of India from time to time. (d) Overdue interest shall be recovered from the customer, if payment is not

received within normal transit period in case of demand bills and on/or before

notional due date/actual due date in case of usance bills, as per RBI directive. (e) Early Realization: In case of early realization, interest for the unexpired period

shall be refunded to the customer. The bank shall also pay or recover notional swap

cost as in the case of early delivery under a forward contract. 2.3. Normal Transit Period:

Concepts of normal transit period and notional due date are linked to concessional

interest rate on export bills. Normal transit period comprises the average period

normally reckoned from the date of negotiation/purchase/discount till the receipt of

bill proceeds.

It is not to be confused with the time taken for the arrival of the goods at the destination. Normal transit period for different categories of export business are laid down as below:

(c) Fixed Due Date: In the case of export usance bills, where due dates are fixed, or are reckoned from date of shipment or date of bill of exchange etc, the actual due

date is known. Therefore, in such cases, normal transit period is not applicable. (d) Bills in Foreign Currencies – 25 days

(e) Exports to Iraq under United Nations Guidelines – Max. 120 days

(g) Bills drawn in Rupees under Letters of Credit (L/C)

(i) Reimbursement provided at centre of negotiation - 3 days

(ii) Reimbursement provided in India at centre different from centre of

negotiation - 7 days

(iii) Reimbursement provided by banks outside India - 20 days

(iv) Exports to Russia under L/C where reimbursement is provided by RBI - 20 days. (h) Bills in Rupees not under Letter of Credit - 20 days

(i) TT reimbursement under Letters of Credit (L/C)

(i) Where L/C provides for reimbursement by electronic means - 5 days

(ii) Where L/C provides reimbursement claim after certain number of days

from the date of negotiation - 5 days + this additional period. 2.4. Substitution/Change in Tenor:

(o) In case of change in the usance of a bill, interest on post-shipment credit shall

be charged to the customer, as per RBI guidelines. In addition, the bank shall

charge or pay notional swap difference. Interest on outlay of funds for such

swaps shall also be recovered from the customer at rate not below base rate

of the bank concerned. (p) It is optional for banks to accept delivery of bills under a contract made for

purchase of a clean TT. In such cases, the bank shall recover/pay notional

swap difference for the relative cover. Interest at the rate not below base rate

of the bank would be charged on the outlay of funds. 2.5. Export Bills sent for collection:

(a) Application of exchange rates: The conversion of foreign currency proceeds of

export bills sent for collection or of goods sent on consignment basis shall be

done at prevailing TT buying rate or the forward contract rate, as the case

may be. The conversion to Rupee equivalent shall be made only after the

foreign currency amount is credited to the nostro account of the bank. (b) On receipt of credit advice/statement of nostro account and compliances of

guidelines, requirements of the Bank and FEMA, the Bank shall transfer funds

for the credit of exporter’s account within two working days. (c) If the above stipulated time limit is not observed, the Bank shall pay

compensation for the delayed period at the minimum interest rate charged on

export credit. Compensation for adverse movement of exchange rate, if any, shall also be paid as per the compensation policy of the bank.



Rule 3: Import Transactions

3.1 Application of exchange rate:

(a) Retirement of import bills - Exchange rate as per forward sale contract, if

forward contract is in place. Prevailing Bills selling rate, in case there is no

forward contract. (b) Crystallization of Import - same as above bill (vide para 3.3 below)

(c) For determination of stamp - As per exchange rate provided by the duty on

import bills authority concerned. 3.2. Application of Interest:

(a) Bills negotiated under import letters of credit shall carry commercial rate of

interest as applicable to banks’ domestic advances from time to time. (b) Interest remittable on interest bearing bills shall be subject to the directive of

Reserve Bank of India in this regard. 3.3. Crystallization of Import Bill under Letters of Credit. Unpaid foreign currency import bills drawn under letters of credit shall be

crystallized as per the stated policy of the bank in this respect. Rule 4 Clean Instruments:

4.1. Outward Remittance: Outward remittance shall be effected at TT selling rate of

the bank ruling on that date or at the forward contract rate. 4.2. Encashment of foreign currency notes and instruments, Foreign currency

travelers’ cheques, currency notes, foreign currency in prepaid card, debit/credit

card will be encashed at Authorised Dealer’s option at the appropriate buying rate

ruling on the date of encashment. 4. 3. Payment of foreign inward remittance, Foreign currency remittance up to an

equivalent of USD 10,000/- shall be immediately converted into Indian Rupees. Remittance in excess of equivalent of USD 10,000 shall be executed in foreign

currency. The beneficiary has the option of presenting the related instrument for

payment to the executing bank within the period prescribed under FEMA. 4.4. The applicable exchange rate for conversion of the foreign currency inward

remittance shall be TT buying rate or the contracted rate as the case may be. 4.5. Compensation for delayed payment: Authorised Dealers shall pay or send

intimation, as the case may be, to the beneficiary in two working days from the date

of receipt of credit advice / nostro statement. In case of delay, the bank shall pay

the beneficiary interest @ 2 % over its savings bank interest rate. The bank shall

also pay compensation for adverse movement of exchange rate, if any, as per its

compensation policy



Rule 5 Foreign Exchange Contracts:

5.1. Contract amounts: Exchange contracts shall be for definite amounts and

periods. When a bill contract mentions more than one rate for bills of different

deliveries, the contract must state the amount and delivery against each such rate. 5.2. Option period of delivery: Unless the date of delivery is fixed and indicated in

the contract, the option period may be specified at the discretion of the customer

subject to the condition that such option period of delivery shall not extend beyond

one month. If the fixed date of delivery or the last date of delivery option is a known

holiday, the last date for delivery shall be the preceding working day. In case of

suddenly declared holidays, the contract shall be deliverable on the next working

day. Contracts permitting option of delivery must state the first and last dates of

delivery. For Example: 18th January to 17th February, 31st January to 29th Feb. 2012. “Ready” or “Cash” merchant contract shall be deliverable on the same day. “Value next day” contract shall be deliverable on the working day immediately

succeeding the contract date. A spot contract shall be deliverable on second

succeeding working day following the contract date. A forward contract is a contract

deliverable at a future date, duration of the contract being computed from spot value

date at the time of transaction”. 5. 3. Place of delivery: All contracts shall be understood to read “to be delivered or

paid for at the Bank” and “at the named place”. 5.4. Date of delivery: Date of delivery under forward contracts shall be:

(i) In case of bills/documents negotiated, purchased or discounted - the date of

negotiation/purchase/ discount and payment of Rupees to the customer. However, in case the documents are submitted earlier than, or later than the

original delivery date, or for a different usance, the bank may treat it as proper

delivery, provided there is no change in the expected date of realization of

foreign currency calculated at the time of booking of the contract. No early

realization or late delivery charges shall be recovered in such cases. (ii) In case of export bills/documents sent for collection - Date of payment of

Rupees to the customer on realization of the bills. (iii) In case of retirement/crystallization of import bills/documents - the date of

retirement/ crystallization of liability, whichever is earlier?

5.5. Option of delivery: In all forward merchant contracts, the merchant, whether a

buyer or a seller will have the option of delivery. 5.6. Option of usance: The merchant purchase contract should state the tenor of

the bills/documents. Acceptance of delivery of bills/documents drawn for a different

tenor will be at the discretion of the bank



5.7. Merchant quotations: The exchange rate shall be quoted in direct terms i.e. so many Rupees and Paise for 1 unit or 100 units of foreign currency. 5.8. Rounding off: Rupee equivalent of the foreign currency Settlement of all

merchant transactions shall be effected on the principle of rounding off the Rupee

amounts to the nearest whole Rupee i.e. without paise. RULE 6 Early Delivery, Extension and Cancellation of Foreign Exchange

Contracts

6.1. General

(i) At the request of a customer, unless stated to the contrary in the provisions of

FEMA, 1999, it is optional for a bank to: (a). Accept or give early delivery; or

(b). Extend the contract. (ii) It is the responsibility of a customer to effect delivery or request the bank for

extension / cancellation as the case may be, on or before the maturity date of

the contract. 6.2. Early delivery: If a bank accepts or gives early delivery, the bank shall

recover/pay swap difference, if any. 6.3. Extension: Foreign exchange contracts where extension is sought by the

customers shall be cancelled (at an appropriate selling or buying rate as on the date

of cancellation) and rebooked simultaneously only at the current rate of exchange. The difference between the contracted rate, and the rate at which the contract is

cancelled, shall be recovered from/paid to the customer at the time of extension. Such request for extension shall be made on or before the maturity date of the

contract. 6.4. Cancellation

(i) In case of cancellation of a contract at the request of a customer, (the request

shall be made on or before the maturity date) the Authorised Dealer shall

recover/ pay, as the case may be, the difference between the contracted rate

and the rate at which the cancellation is effected. The recovery/payment of

exchange difference on cancellation of forward contracts before the maturity

date may be either upfront or back-ended at the discretion of banks. (ii) Rate at which cancellation is to be effected:

(a) Purchase contracts shall be cancelled at T.T. selling rate of the

contracting Authorised Dealer

(b) Sale contracts shall be cancelled at T.T. buying rate of the contracting

Authorised Dealer



(c) Where the contract is cancelled before maturity, the appropriate forward

T.T. rate shall be applied. (bi) Notwithstanding the fact that the exchange contract between the customer

and the bank becomes impossible of performance, for whatever reason,

including Government prohibitory orders, the exchange contract shall not be

deemed to have become void and the customer shall forthwith apply to the

Authorised Dealer for cancellation, as per the provisions of paragraph 6.4.(i)

and (ii) above. (iv)

(d) In the absence of any instructions from the customer, vide para 6.1(ii), a

contract which has matured shall be cancelled by the bank on the 7th working

day after the maturity date. (e) Swap cost, if any, shall be recovered from the customer under advice to him. © When a contract is cancelled after the maturity date, the customer shall not be entitled

to the exchange difference, if any, in his favour, since the contract is cancelled on

account of his default. He shall, however, be liable to pay the exchange difference

against him. 6.5. Swap cost/gain:

(ii) In all cases of early delivery of a contract, swap cost shall be recovered from

the customer, irrespective of whether an actual swap is made or not. Such

recoveries should be made either back-ended or upfront at discretion of the

bank. (iii) Payment of swap gain to a customer shall be made at the end of the swap period. 6.6. Outlay and Inflow of funds:

Authorised Dealer shall recover interest on outlay of funds for the purpose of

arranging the swap, in addition to the swap cost in case of early delivery of a

contract.

If such a swap leads to inflow of funds, interest shall be paid to the customer. Funds

outlay / inflow shall be arrived at by taking the difference between the original

contract rate and the rate at which the swap could be arranged. The rate of interest

to be recovered / paid should be determined by banks as per their policy in this

regard.