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Employment of funds /assets of bank Cash in hand and with Reserve bank

1. Cash balance maintained by a bank with itself.

2. Cash with Reserve Bank Balance with other banks and Money at call and short

notice

1.Balance with other banks :is termed as the first line of

defenceMoney at call and short notice: is termed as second line

of defence

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Investments

Advances :

.. Loans, Cash Credits and overdrafts

.. Bills discounted and purchased.

Fixed assets

Other assets: comprises of inter-office adjustments taxpaid in advance, stationary and stamps, non-bankingassets in satisfaction of claims.

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Non baking assets: represents those assets which a bankingcompany have to take in its possession because of thefailure of a customer to repay the loan in time. Such an

asset should be disposed of by a banking company withinseven years of its acquisition.

Contingent liabilities: it comprises of the following Liability for partly paid investment.

Liability on account of outstanding forward exchangecontracts.

Guarantees given on behalf of constituents:

in India and outside india.

Acceptances, endorsement and other obligations.

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Non-Performing Assets (NPAs)A non performing assets basically means an asset

which has ceased to generate income for the bank.

With effect from march 31, 2001, a NPA is an advancewhere:

i) Interest and /or instalment of principal remainoverdue for a period of more than 180days in respect of

term loan.ii) the account remains overdue for a period of more

than 180 days in respect of an Overdraft/cash credit(OD/CC)

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Sub-standard: asset is one which remains NPA for aperiod less than or equal to 18 months

NPAs are classified intoDoubtful: asset is one which remains NPA for more than

18 months

Loss: asset is one where the loss has been identified by

the bank or internal /external auditors or the RBIinspection but the amount has not been written off.

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INVESTMENT POLICY OF C.BInvestment policy of a CB involves appropriateallocation and distribution of funds among variousassets in such a way that the main objectives ofliquidity, solvency and profitability are achieved.

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Funds of a bank may be deployed

for Investment in government and corporate securities;

Extending loans and advances to the customer in the

form of cash credits, OD term loans, bills purchasedand discounted;

Purchase of fixed assets; and

Keeping cash in hand and with RBI etc.

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The obligations which have to be kept in

mind while deciding investment policy are: Towards owners: the bank has the obligation to pay a

fair return on investment.

Towards workers: workers should have a share in thesurplus created.

Towards depositors: the banks have the obligation togive expected standards of services to the depositors.

To create good financial base: to strengthen internalfinancial structures

To create and make best use for growth in size andgeographical spread.

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Factors affecting investment policy Portfolio consideration:

The total deployment of funds should be such that

any gradual or sudden change in economicenvironment should not affect the aggregate fundsadversely.

The requirement for a balanced portfolio decision

policy are:i. The person and activity

ii.Time roll-over of funds and possibility to withdrawfrom commitment;

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iii. Income generated from deployment of funds;

iv. Expected environmental changes.

The objective is safety of funds deployed in the long run.

Marketing of Funds:Portfolio needs will decide the need for deployment of funds.

The bank has to reach the market to make desirable deploymentof funds rather than being dictated by the market.

The lending policy has to be evolved from marketing point ofview.The experience shows that most of the borrowing units go

through the stages of initial development, growth to maturity,stability and stagnation.

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The policy should aim at having maximum number ofgrowing stage accounts and minimum number ofstagnating accounts, a good number of initialdevelopment stage accounts and a fair number ofsteady accounts.

This will require policy decision regarding:

New activities, areas and borrowers Review of stagnating accounts,

Promotional activities in worth while assets.

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Flexibility in deployment of funds:-

The deployment of funds should meet the

expectations of depositors, borrowers and society.The funds available should match with the demand of

borrowers.

The desire and need to generate returns may push

banks towards making commitments for longer periodand doubtful cash inflows.

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Human resources:

-human factors like attitudes, skill equation, and

leadership will also influence the policies of acommercial bank.

No policy can be successfully implemented unless, theproblems in this area adequately tackled.

Much depends on the ability and expertise of officials.

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Credits needs of the area:

- the lending policy shall take note of the credit needs of

the area served by it.-If a bank is located in agricultural belt, it should beable to meet the credit needs of farmers, otherwise itwill result into funds drain to other areas.

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Principles/objectives of investment policy1.Liquidity

the proportion of the assets required to be maintained

as liquid assets will be guided by the following :1.Ownership of demand deposits

2. Requisite cash or liquid reserves

3. Banking habits of the population

4.Seasonal requirements

5. State of the money market

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2.Solvency:

The capacity of the bank to meet its demand liabilities

is its liquidity and the capacity to meet its liabilities inthe long run is its solvency.

The value of assets is not constant or fixed. Asubstantial fall in the realisable value of assets will

threaten the solvency of the bank.

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Factors that cause change in the

value of assets are: Loss or misappropriation of assets

Risk of default

Risk of interest rate fluctuation

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3.Profitability:

it must earn sufficient revenue to meet the costs andthen yield a reasonable return for the owners.

-income consideration is a sub-ordinate to liquidity andsolvency. However, it must be appreciated that in thelong run higher income can be ensured only by

maintaining a sound liquidity and solvency position.

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Conflicts in investments Objectives

Conflict between income and solvency Conflict between liquidity and income

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Commercial bank and economic development Mobilisation of savings

Role in implementation of monetary policy

Directing funds into desired channels Implementation of the policies of the government.

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Banking Reforms Foundation Phase:

- the foundation phase is the period up to firstNationalisation of banks

in this period focus was on laying of a foundation forsound banking system

Imperia bank of India was converted into the state

bank of India in 1955.The role of the banking sector in the Indian economy

was redefined.

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Expansion phase This phase started in mid 1960s but gained

importance after the nationalisation of 14 banks.

This is phase of mass banking.

The network of branches was expanded at a rapidspeed.

During this period the credit was directed into priority

sectors.

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Consolidation phase This phase started in 1985.

the RBI started some initiatives.

Some relaxation in control was started. The branch expansion was slowed down.

Banks were asked to tone up internal management.

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Reform Phase: India faced a macro-economic crisis in 1991.

The foreign exchange reserves fund touched very low.

The economy was growing at a very low rate . This set the government of India on a path of

liberalisation and globalisation.

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Recommendation of the committee on the

financial system(1991 Narasimham committee I) SLR and CRR

Phasing out of Directed credit

Deregulated interest rates:Deregulate interest rates to reflect emerging market

condition.

Concessional interest rates be phased out.

Structure of interest rates should bear a broadrelationship with bank rate.

Capital Adequacy Norms

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Adoption of uniform accounting practices

Income recognition

Provisioning:

The assets should be classified into four categories-

Transparency

Asset reconstruction fund

Structure of banking system Branch licensing

Comuperisation

Development of financial institution.

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Implementation Interest rate deregulation Reduction in CRR and SLR Directed credit Capital Adequacy Ratio(CAR) Prudential accounting standards Private and foreign banks Branch licensing banks access to capital market

Supervision Customer services Merger of Banks Recovery tribunal computerisation.

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Recommendation of committee -II Need for strong banking system Merger of strong banks Confine area of local banks

Review Govt.s Role in public sector banks Review of legislations Integrate lending activities Speed up computerisation Review of personnel policies. Asset reconstruction company. System for asset-liability and risk management. Money market rate.

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The Khan committee recommendations 1998 Need for a super regulator

Move towards universal banking

Redefine priority sector

Mergers between FIs and Banks Co-ordination committee.

Removal of certain restrictions on FIs

Other recommendations:

-quick legal reforms in the area of debt recovery.-there should be no CRR for financial institutions.

Institutional neutral regulatory framework for both foreignand local entities