Primary security and collateral security

Primary security means a specific asset against which loan granted. For example, where a Bank finances the purchase of a home, the home is the primary security. In the same way, a car purchased with the help of a Bank loan, is the primary security for that loan. Bank creates a charge against this primary security, to secure its loan. This charge gives the Bank the legal authority to dispose off the asset, and apply the proceeds therefrom, to the loan amount in default. Primary security may be either personal security or impersonal security or both. Personal Guarantee & Corporate Guarantee may be treated as personal security & imported or locally produced goods may be treated as impersonal security. Collateral/Secondary  Security:  if any additional  security  provides  other  than "primary  Security"  it is called collateral security. When primary security remains under the custody of borrowers, banker to secure  its position  ask the borrower  to  provide  additional  security.  Such  tangible  security  is called collateral security. The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation. If a borrower does default on a loan (due to insolvency or other event), that borrower forfeits (gives up) the property pledged as collateral - and the lender then becomes the owner of the collateral.

Property pledged by a borrower to protect the interests of the lender in the event of the borrower's

default;; specifically  under Article 9 of the Uniform Commercial Code  :  property subject to a security interest.

What is meant by material alteration of a check? What material alteration is so important for a banker

 Any change altering operation of the instrument or the rights and liabilities of the parties is a material alteration. If a cheque or any negotiable instrument is altered materially, it will not be paid. It appears from section-3 of the Negotiable Instrument Act 1881 that any alteration of the following constitutes material alteration:

• Date
• Sum payable
• Time of payment
• Place of payment
• Addition of place of payment without acceptor’s assent

It is needless to say that the above mentioned changes fundamentally alter the character of the cheques.

How can a banker exercise his right of set off

 When an overdraft facility on a current account runs out and the customer fails to pay the amount owed, the firm takes money from the customer’s savings account to reduce or clear the debt.

Or, if a customer fails to make credit card or mortgage payments, bank may use available funds from that  customer’s  current  or  savings  account  to  make  the  missing  payments,  thereby  helping  the customer to avoid extra interest or charges.

Bank has a right, but not a duty, to look at a customer’s overall position and to ‘combine’ the accounts held by that customer. This is sometimes called a right of ‘set off’ or a right to ‘combine’ accounts. A bank has this as a general right, whether or not it mentions the right in the account terms.

To exercise right of set off the the following feature must be present

I.       Mutual debt must be certain: before excercising right of set –off the claim and the counter claim must be determined accurately

II.      Debt must be due: only those debts, which are due and recoverable on the date of set off, can be subject of set off.

How does the payment modality change with the crossing of a check

Significance of General Crossing:

i.           The effect of general crossing is that it gives a direction to the paying banker.

ii.          The direction is that, the paying banker should not pay the cheque at the counter. It should be paid only to a fellow banker. In other words, payment is made through an account and not at the counter. Sec.126 of the NI Act clearly lays down that, “Where a cheque is crossed generally, the banker on whom it is drawn, shall not pay it otherwise than to a banker”.

iii.         If a crossed cheque is paid at the counter in contravention of the crossing:

a)          The payment does not amount to payment in due course. So, the paying banker will lose his statutory protection;

b)         He  has  not  right  to  debit  his  customer’s  account,  since,  it  will  constitute  a  breach  of  his customer’s mandate;

c)He will be liable to the drawer for any loss, which he may suffer; 

d)          He will be liable to the true owner of the cheque who may be a third party, irrespective of the fact, that, there is no contract between the banker and the third party. As a general rule, a banker is answerable only to his customer.

iv.         The main intention of crossing a cheque is to give protection to it. When a cheque is crossed generally, a person who is not entitled to receive its payment, is prevented from getting that cheque cashed at the counter of the paying banker. But, it gives only a limited protection, in the sense, that if the thief is not the customer of the paying banker, he can encash that cheque through his banker, by forging the signature of the payee. However, it can be detected. To avoid this danger, special crossing was introduced.

a)         Significance of Special Crossing:

i.           It is also a direction to the paying banker. The direction, is the, that paying banker should pay the cheque only to the banker, whose name appears in the crossing or to his agent. Sec.126 the NI Act clearly lays down that “where a cheque is crossed specially the banker on whom it is drawn, shall not pay it, otherwise than to the banker to whom it is crossed or his agent for collection.

ii.          If a cheque specially crossed to a bank is presented by another bank, not in the capacity of its agent, the paying banker is justified in returning the cheque.

iii.         A special  crossing  gives  more protection  to the cheque  than a general  crossing.  It makes  a cheque still safer because a person, who does not have a real claim for it, would find it difficult to obtain payment. In special crossing, the cheque is specially crossed to the payee’s banker. Hence, the banker, in whose favour the cheque has been crossed, knows the payee and his specimen signature well. So, he will not collect if for any person other than the payee. If there is any forgery, it can be easily detected by the banker. But, we can not say that, it gives full protection in the sense, that, an unscrupulous person, who has an account in the same bank but at a different branch, can encash it by forging the signature of the payee. It can also be detected.

What do you mean by crossing a check

 A cheque is said to be crossed when two transverse parallel lines with or without any words are drawn across its face. A crossing is a direction to a payee banker to pay the money generally to a particular banker, as the case may be, and not to the holder at the counter.

Ordinarily, the payee of a cheque is entitled to encash at the counter of the paying banker by presenting it within the specified banking hours. In case of a bearer cheque, the paying banker does not need to go into an elaborate exercise with regard to the identity of the holder of the cheque. An order cheque is 

also paid by the paying banker on being apparently satisfied about the true identity of the presenter of the cheque. To ensure that the cheque is not encashed by a wrong person, by concealing his identity, there has developed a practice called ‘crossing of a cheque’. The practice has been given legal coverage in the Negotiable Instrument Act, 1881.

When cheque is crossed it in effects means a request-more appropriately, an instruction by the client not to pay the cheque directly over the counter but to a banker only for crediting the payees account with the bank. A cheque bearing such an instruction is called a ‘crossed cheque’. The crossing of a cheque is intended to ensure that its payment is made to the right payee. Section 123 to 131 of the Negotiable Instrument Act contain provisions relating to crossing. According to section 131-A, these sections  are  also  applicable  in case  of drafts.  Thus  not  only  cheques  but  bank  drafts  also  may  be crossed.

For our discussion we may differentiate crossing into following two types:

1.          General Crossing.

2.          Special Crossing.

Under what circumstances collecting banker losses its protection under the Negotiable Instrument Act 188?

According  to the section 131 of Negotiable Instrument Act 1881 a collecting  bank is provided such statutory protection, “where a banker in good faith and without negligence receives payment for a customer  of  a  cheque  crossed  generally  or  specially  to  himself  or  the  customer  has  no  title  or  a defective title thereto, the banker shall not incur any liability to the true owner of the cheque by reason of only having received such payment”. For the following circumstance, however, the collecting banker losses its protection:

I. If the cheque is not crossed. The protection is available for the crossed (generally or specially) cheques only.

II.   Cheque is collected for person who is not a customer of the bank

III. The cheque is not collected in good faith, i.e. with notice of defective title of the customer and with any involvement in the act of conversion.

IV.   For following type of negligence:

a)  Opening of account without satisfactory introduction 

b) Endorsement is not properly verified

c)Insufficient inquiries in doubtful cases.

d)  Failure to take note or account payee crossing and not negotiable crossing.

collecting bank

 The collecting banker is one who does the duty of collecting the proceeds of cheques and other instruments for its customers. A bank may undertake to collect a cheque either as a holder for value or merely as an agent to the holder thereof. Banker shall continue to act as an agent of its customer till the amount of the cheque has actually been paid off.

What are the duties and responsibilities?

Collecting Bank's Responsibility

Confirm the following checking ----

1. In case of Crossed Cheque confirm the genuineness  of the drawee name and check signature in account and endorsement

2. Cheque is properly endorsed

3. Name of Drawee, Bank address, date, amount of taka in wording and numeric are ok

4. If any modification made, must be signed by the maker

5. Must be placed before the payee bank in time (to present a cheque for payment with in a reasonable time, not post/anti-dated) 

6. Reason for dishonor must be mentioned (if a cheque is dishonored to notify its customer on the same day that it is aware of the dishonor)

7. Should not collect cheque of an unknown person (collecting proceeds in the payees’ account which is properly introduced.)

8. To adhere to current banking practice

9. Its responsibility is not discharged until the cheque in favor of its customer is delivered to the branch upon which it is drawn.

10. Acting as agent of the client

11. The date of issue of the instrument must not be before opening of the account

What do you understand by banker-customer relationship

A  banker,  in course  of  his  day  to  day business,  enters  into  different  kinds  of  relationship  with  his customers and clients. These relationships may be broadly categorized as -

(a) General Relationship and

(b) Special Relationship.

The general relationship between a banker and customer differs depending on the basis of types of dealing they undertake between themselves. Banker-customer is contractual relationship. Generally the following are the major forms of relationships between a banker and his customers:

(1) Debtor-Creditor, 

(2) Principal-Agent,

(3) Trustee-Beneficiary, (4) Bailor-Bailee and

(5) Lessor-Lessee.

(1) Debtor-Creditor: The general relationship between a banker and customer (account holder) is that of a debtor and creditor. If the customer's account shows credit balance, the bank is debtor and customer is creditor. On the other hand, if the account of the customer is overdrawn, the relationship is just the reverse and here the customer is the debtor.

(2) Principal-Agent: All modern banks provide agency services to their customers. When a bankers buys or sells securities on behalf of his customer, he performs an agency function. Similarly, when he collect cheques,  bills,  interest  and dividend  etc. or when  he pays insurance  premium  from the customers account, as per his instruction, he acts as an agent.

(3) Trustee-Beneficiary: Many times a banker is in the position of a trustee. A trustee is one who holds property for the benefit of a person or beneficiary. The banker is a trustee when a customer deposits his valuables and securities for safe custody. In this case, the customer continues to be the owner and is entitled to the same goods and valuables as he deposited. The banker can not use the articles kept for safe custody anyway he likes. He can not return equivalent goods in place of the original one. Here the legal position of a banker as a trustee is quite different from that of debtor and creditor. For example, in the event of bank's liquidation, securities and valuables held by the bank as trustee are not available for distribution to the general creditors. Fund, if any, coming to the hands of the bank as a trustee must also be applied for specific purpose as the trust deed indicates.

(4)  Bailor-Bailee: When  a bank advances money  to  a borrower,  the  goods  of  the  borrower  may  be brought under the control of a bank (pledge). Such goods are called pledged goods. In this case, the relationship   between   a  customer   and   a  banker   in  respect   of  the  goods   under   pledge   is  of a bailor and bailee.

(5) Lessor-Lessee: In case of locker operation, the relationship between the banker and customer is

lessor-lessee. Here the banker is Lessor and customer is Lessee.

Define customer in relation to a banker

We can define customer in this manner that a person/ institution intend to open an account or having an account, and want to avail investment facility, and other services fulfilling the prescribed format of the bank.

Main features of Customer:

        The Customer  contains  all the basic  information  about  any "Customer"  which  the bank has dealings with.

         Customer ID contains all records of related customer.

         It is unique and may be use into all branch of our Bank.

        We should have open customer first then account, Deposit Ac, LC, Investment Ac, etc. To monitor the customers properly, we can divide them into three categories:

a)          Retail customer

b)          Corporate Customer c)           General Customer

Repo and Reverse Repo

The rate at which the central bank lends money to commercial  banks keeping the treasury bills as security is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage 

of funds they can borrow from the BB. A reduction in the repo rate helps banks get money at a cheaper rate and vice versa. The repo rate in Bangladesh is similar to the discount rate in the US. Reverse Repo rate is the rate at which the central bank borrows money from commercial banks. Banks are always happy to lend money to the BB since their money is in safe hands with a good interest. An increase in reverse repo rate can prompt banks to park more funds with the central bank to earn higher returns on idle cash. It is also a tool which can be used by the BB to drain excess money out of the banking system. The Bangladesh Bank (BB) has slashed its interest rate on repurchase agreement (repo) and reverse repo by 50 basis points. The rate was cut after nearly four years aiming at boosting fresh investment particularly in productive sectors, officials said.

The interest rate on repo auction came down to 7.25 per cent from 7.75 per cent while that on reverse

repo was re-fixed at 5.25 per cent from 5.75 per cent.

The revised interest rates on both repo and reverse repo will come into effect from February  1, a central bank circular said Thursday.

CAMELS Rating

CAMELS ratings are the result of the Uniform Financial Institutions Rating System, the internal rating system used by regulators for assessing financial institutions on a uniform basis and identifying those institutions requiring special supervisory attention. Regulators assign CAMELS ratings both on a component and composite basis, resulting in a single CAMELS overall rating.  When introduced in 1979, the system had five components.   A sixth component—sensitivity to market risk—was added in 1996. The regulators that year also added an increased emphasis on an organization’s management of risk.

The six component areas are:

• C—Capital adequacy

• A—Asset quality

• M—Management

• E—Earnings

• L—Liquidity

• S—Sensitivity to market risk

The ratings  range  from  1 to 5,  with  1 being  the  highest  rating  (representing  the  least  amount  of regulatory concern) and 5 being the lowest.  CAMELS ratings are strictly confidential, and may not be disclosed to any party.      But only to the top management of the banking company use the rating to prevent a bank run on a bank which has a bad CAMELS rating.

Clearing House

Clearing House is a kind of house, where the representatives of all Banks would be met to settle their inter-banking transactions under the control of Central Bank. Bangladesh Bank does the act as a Central Bank but there is no branch of Central Bank; where Sonali Bank will do the same job.

The old practice of receiving the payment of the cheque drawn on other banks was to send bank clerk with all such cheque and other instruments to collect the cash from various banks. Since this method was time-consuming and aweful, the Automated Clearing House system was introduced where all the member bankers daily assemble to settle their drawings upon each other.

Now a days Bangladesh Bank has modernize the Clearing House under (BACPS) Bangladesh Automated

Cheque Processing System. Under the BACPS, (BACH)  Bangladesh Automated Clearing House has been established. Live BACH has established in Dhaka on 20101007.

Main features of BACPS:

          MICR Cheque (Magnetic Ink Character recognition)

          Point of Truncation

          Scanning Standard

          Software/Integration

          Communication Link

There are two types of Clearing:

            Clearing outward

            Clearing inward

What is Lead Bank System

Mandated lead Arranger/Arranger/Lead Arranger (captain of the syndication ship) :-

o  Mandated lead arranger/arranger/lead  arranger  has to co-ordinate  all the activities  at various stages of handling proposal and raising the fund from Banks/Financial Institutions.

o  Role of lead arranger/Mandated lead arranger (MLA):-

     The customer nominates lead Bank. It is very importer factor for a customer to nominate lead

arranger in the light of maintaining long term relationship

     It leads to a lead arranger being an agent Bank of syndication, which is very common syndication investment process. For this reason it should be an organization with which the customer is likely to feel comfortable over the whole investment period.

     After analyzing all the relevant aspects of risk, lead arranger helps the customer by taking proper step and will set a plan to raise the fund from the Banks/Fls to set up the proposed project. A time schedule to be prepared by the lead arranger to close the syndication deal

     A  good  professional  arranger  will  always  be  able  to  add  something  to  a  customer’s  own deliberations. It should be able to suggest amendments/value additions, which will make it easier for a syndicate to take up the investment without compromising its essential elements.

     It is very important that the lead bank has an in-depth knowledge of the individual customer. This applies not only to the particular company but also to the wider environment in which it works, the economic pressures, the competitive environment and so on.

     As part of the process  of selecting  a potential  syndicate leader it will be necessary  to decide whether it can sell this deal to the sort of syndicate that is desired. If a high-quality group is the aim, then a high level of past performance in similar transactions will be required in order to encourage other experienced into the syndicate.

     Credibility can be equally important when dealing with less heavyweight players, who will to a much greater extant on the senior members of the syndicate.

     The lead Bank/arranger has responsibility for much of the selling of the investment to participants.

     The lead Bank will be the first port of call for question and needs to be able to answer them authorities in order to head off problems and sensitivities before they arise. This role will be particularly important with respect to syndicate members who do not know the borrower particularly well. 

what is consortium financing/ Syndicated financing

 Syndicate:

     As per encyclopedia of banking and finance “syndicate means a temporary association of parties for the financing and execution of some specific business project”

     Syndicate is a group of financial institutions participating in a single investment facility.

Syndicated financing:

Syndicate financing menas joint financing by a more than one bank or NBFIs to the same customer against a common security. The entire security remains charged to all these banks for the total loans. All the participating banks have a pari passu charge (a charge ranking equally in priority) on the syndicate finance. In other words, syndicate financing means the gathering of more than one bank or NBFIs to finance in aproject jointly, arranging a leader among them, against a common security.

Characteristics of Syndicated Investment:

1.      Single/one customer

2.      More than one investor/bank

3.      Set of common documents with common terms & conditions

4.      The borrower could be a corporation, a large project, or government.

5.       The investment may involve fixed amounts, a credit line, or a combination of two.

6.      Profit/rent rate can be fixed for the term of the investment or floating based on a benchmark rate such as Dhaka Interbank offered rate (DIBOR).

II. What are the advantages and disadvantages?

Advantages: 

I.       It accommodate large loan project among different banks

II.      It shares spreads risk among two or more banks

III.     It examines/ analysis the project feasibility reports byn the experts of syndicate members from different angels

IV.     It comply the BB’s instruction regarding single borrower exposer limit and to maintain deposit advance liquidity ratio properly.

V.      It creates opportunity for the entrepreneurs of high potential to undertake big ventures

VI.     it industrializes and creates employment opportunity in the country

VII.    it enhances in return on assets

How does a bank strike a balance between liquidity and profitability

A commercial bank deals in the business of banking with a view to make profits. In order to earn profits, the asset portfolio of a bank is of utmost importance.

It also gives a picture of the soundness of a commercial bank. MEANING:

The manner in which a bank applies the various sources of funds on different types of assets reflects the

soundness of the bank .

Every bank has two important objectives : Profitability

Since these two objectives are contradictory in nature, a good banker aims to reconcile both these objectives by creating diversified and balanced asset portfolio.

EXPLANATION :

The two most important objectives of a commercial bank are : 

PROFITABILITY :

Every bank aims to earn optimum profit for its shareholders

Hence, it invests in those assets that give them maximum returns

For regular updated Information on Investments keep visiting what is investments

Such assets are of long – term in nature and so, They cannot be easily converted into cash .

So, these assets are less liquid in nature and so cannot be used to meet the withdrawal demands of the

customers (depositors) Such assets include:

Cash credit and overdraft

Term loans

Investment in stocks, shares, bonds, debentures, mutual funds

Loans and advances (long term) 

LIQUIDITY:

Liquidity is the second most important objective of a commercial bank as it ensures the bank's own safety and security.

Hence a bank should invest in those assets that can be easily converted into cash.

It readily meets the withdrawal needs of the depositors and helps to build their confidence and trust in the bank.

However, the more liquid the asset is, the less profit it yields. These assets include:

Cash balances

Money at call and short notice

Bills of exchange

Investment in Government securities

Thus these twin-conflicting objectives of liquidity and profitability can be achieved to their optimum level by wisely allocating the funds to various assets.

These assets are shown in the balance sheet in ascending order of profitability and descending order of liquidity.

A well diversified and balance asset portfolio helps in creating a trade off or a reconciliation between liquidity and profitability.

CONCLUSION:

Therefore, a commercial bank has to strike a balance between the contradictory objectives a liquidity and profitability.

This can be achieved with an optimum mix of assets that lead to a sound and successful banking system.