Why the private commercial banks discourage to consider long term loans

 Most of the time the private commercial banks discourage to finance the long term loans due to some relative risky and problems. These are:

1) Lower Rates: Long-term loan normally have lower interest rates than short- term credits.

2) Slow Cash Inflow: A long-term debt obligation also prevents the faster cash inflow.

3) Risk Involvement: Generally, the level of the interest rate is depends upon the risk involved with making the loan. In case of default, long-term loan includes a greater span of time.

4) Credit turn-over loss: The long-term loan will be paid over a loan period. So the lender get recovered the amount by a long period as the lender has missed the rapid credit turn over.

5) Long term debt is often costly to service

6) The cost of capital is higher in case of long term debt

Define Term Loan

Term loan refers to asset based loan payable in a fixed number of equal installments over the term of the loan, usually for 1 to 5 years. Term loans are generally provided as working capital for acquiring income producing assets like machinery, equipment, inventory that generate the cash flows for repayment of the loan. Banks have term-loan programs that can offer small businesses the cash they need to operate from month to month.

Do you think that, absence of good/effective ALM of a bank may lead it to different crisis jeopardizing image and foundation of the bank? Please elaborate your answer.

 In banking, asset liability management is the practice of managing the risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. Banks face several risks such as liquidity risk, interest rate risk, credit and operational risk. Asset/Liability management (ALM) is a strategic management tool to manage Asset, Liability, spread of interest rate and liquidity risk faced by banks & Financial Institutions.

In absence of good/effective ALM of a bank may lead it to following crisis:

1. Liquidity risk: the current and prospective risk arising when the bank is unable to meet its obligations as they come due without adversely affecting the bank's financial conditions.
2. Interest rate risk: The risk of losses resulting from movements in interest rates and their impact on future cash-flows. One of the primary causes are mismatches in terms of bank deposits and loans.
3. Currency risk management: The risk of losses resulting from movements in exchanges rates. To the extent that cash-flow assets and liabilities are denominated in different currencies.
4. Funding and capital management: As all the mechanism to ensure the maintenance of adequate capital on a continuous basis. (Usually a prospective time-horizon of 2 years).
5. Profit planning and growth: Profit planning is required to make a sufficient growth for the organization itself.
6. In addition, ALM deals with aspects related to credit risk as this function is also to manage the impact of the entire credit portfolio (including cash, investments, and loans) on the balance sheet. The credit risk, specifically in the loan portfolio, is handled by a separate risk management function and represents one of the main data contributors to the ALM team.

So, it can be said undoubtedly that absence of good/effective ALM of a bank may lead it to different crisis jeopardizing image and foundation of the bank

Define ALM (Asset Liability Management) and ALCO (Asset Liability Committee). Highlight the role and responsibilities of ALCO for proper functioning of a bank

ALM: Asset Liability Management (ALM) can be defined as a mechanism to address the risk faced by a bank due to a mismatch between assets and liabilities either due to liquidity or changes in interest rates. Liquidity is an institution’s ability to meet its liabilities either by borrowing or converting assets. Apart from liquidity, a bank may also have a mismatch due to changes in interest rates as banks typically tend to borrow short term (fixed or floating) and lend long term (fixed or floating).

A comprehensive ALM policy framework focuses on bank profitability and long term viability by targeting the net interest margin (NIM) ratio and Net Economic Value (NEV), subject to balance sheet constraints. Significant among these constraints are maintaining credit quality, meeting liquidity needs and obtaining sufficient capital.

ALCO: Asset Liability Management (ALM) is an integral part of Bank Management; and so, it is essential to have a structured and systematic process for manage the Balance Sheet. Committee comprising of the senior management of the bank to make important decisions related to the Balance Sheet of the Bank (asset-Liability). The committee typically called the Asset Liability Committee (ALCO). As per BB guideline, the committee consists of the following key personnel of a bank:

- Chief Executive Officer / Managing Director

- Head of Treasury / Central Accounts Department

- Head of Finance

- Head of Corporate Banking

- Head of Consumer Banking

- Head of Credit

- Chief Operating Officer / Head of Operations

The committee calls for a meeting once every month to set and review strategies

The key roles and responsibilities of the ALM Desk:

1) To assume overall responsibilities of Money Market activities.

2) To manage liquidity and interest rate risk of the bank.

3) To comply with the local central bank regulations in respect of bank’s statutory obligations as well as thorough understanding of the risk elements involved with the business.

4) Understanding of the market dynamics i.e competition, potential target markets etc.

5) Provide inputs to the Treasurer regarding market views and update the balance sheet movement.

6) Deal within the dealer’s authorized limit.

1. What do you mean by a prospective borrower? In selecting a prospective borrower, what are the points to be taken into consideration? Highlight the role and responsibilities of a branch manager in identifying a prospective borrower and processing his loan proposal.

 1. What do you mean by a prospective borrower? In selecting a prospective borrower, what are the points to be taken into consideration?  Highlight the role and responsibilities of a branch manager in identifying a prospective borrower and processing his loan proposal.

Prospective borrower: An individual, organization or company having requirement of additional fund for utilization and have the ability to borrow the same is treated as potential borrower.

Selecting a prospective borrower: Not all banks are giving concentration on the same area for all time to select a borrower, but many of them focus on the same areas throughout the loan review process.

Following points to be taken into consideration in selecting a prospective borrower-

a.       Borrower (himself) analysis

    i.       Man behind the business to be judged(Character, willingness)

   ii.      Management integrity, quality, and competencies;

   iii.      Majority share holders & relation among the owners;

b.      Industry Analysis:

         i.      Industry  Situation

        ii.      Borrower’s position into the industry’

       iii.      Production capacity

      iv.      Product distribution & marketing;

      v.      Market Competition

      vi.      Demand Supply situation

• c.       Supplier/Buyer analysis: Any concentration on buyer or supplier to be checked which may disrupt the borrower performance in future.
• d.      Historical financial analysis: An analysis of historical financial statement of the borrower to be conducted to ascertain the profitability, liquidity and solvency of the borrower.
• e.       Projected financial analysis: Borrower’s projected financial to be analyzed to check whether borrower will be able to meet their future debt obligation. 
• f.       Account conduct: the historic performance in meeting repayment obligation (Trade repayment, interest, principal, cheque repayment)
• g.      Adherence to lending guideline: the credit facility to be proposed must comply with the internal & regulatory guideline.  
• h.      Loan Pricing: Total earning from the client is also important to sanction any loan.
• i.        Debt structure: the loan amount, tenor of the proposed loan to be justified with the repayment ability of the customer.
• j.        Security: The proposed loan to be secured enough so that loan can be fully adjusted incase of liquidating the security.

Role & responsibilities of a branch manager in identifying a prospective borrower and processing his loan proposal:

1.      Marketing

2.      Customer hunting

3.      Product offering to the proposed customer

4.      Customer Analysis

5.      Selecting

6.      Risk Grading

7.      Processing Loan application

RAM

Random-access memory (RAM /ræm/) is a form of computer data storage. A random-access memory device allows data items to be read and written in approximately the same amount of time, regardless of the order in which data items are accessed.^[1] In contrast, with other direct-access data storage media such as hard disks, CD-RWs, DVD-RWs and the older drum memory, the time required to read and write data items varies significantly depending on their physical locations on the recording medium, due to mechanical limitations such as media rotation speeds and arm movement delays.

MasterCard

 MasterCard Incorporated (NYSE: MA) or MasterCard Worldwide is an American multinational financial services corporation headquartered in the MasterCard International Global Headquarters, Purchase, New York, United States,^[1] in Westchester County. The Global Operations Headquarters is located in O'Fallon, Missouri, United States, a suburb of Saint Louis, Missouri. Throughout the world, its principal business is to process payments between the banks of merchants and the card issuing banks or credit unions of the purchasers who use the "MasterCard" brand debit and credit cards to make purchases. MasterCard Worldwide has been a publicly traded company since 2006. Prior to its initial public offering, MasterCard Worldwide was a cooperative owned by the 25,000+ financial institutions that issue its branded cards.

Visa Card

 VISA stands for Visa International Settlement Association. It is an American multinational financial services corporation headquartered in Foster City, California, United States.[3] It facilitates electronic funds transfers throughout the world, most commonly through Visa-branded credit cards and debit cards.[4] Visa does not issue cards, extend credit or set rates and fees for consumers; rather, Visa provides financial institutions with Visa-branded payment products that they then use to offer credit, debit, prepaid and cash-access programs to their customers. In 2008, according to The Nilson Report, Visa held a 38.3% market share of the credit card marketplace and 60.7% of the debit card marketplace in the United States.[5] In 2009, Visa’s global network (known as VisaNet) processed 62 billion transactions with a total volume of $4.4 trillion.[6][7]

Audit trail

 An audit trail (also called audit log) is a security-relevant chronological record, set of records, and/or destination and source of records that provide documentary evidence of the sequence of activities that have affected at any time a specific operation, procedure, or event.^[1][2] Audit records typically result from activities such as financial transactions,^[3] scientific research and health care data transactions,^[4] or communications by individual people, systems, accounts, or other entities.

The process that creates an audit trail is typically required to always run in a privileged mode, so it can access and supervise all actions from all users; a normal user should not be allowed to stop/change it. Furthermore, for the same reason, trail file or database table with a trail should not be accessible to normal users. Another way of handling this issue is through the use of a role-based security model in the software.^[5] The software can operate with the closed-looped controls, or as a 'closed system,' as required by many companies when using audit trail functionality.

Power of Attorney

 Power of attorney (POA) is a legal authorization that gives a designated person, termed the agent or attorney-in-fact, the power to act for another person, known as the principal. The agent may be given broad or limited authority to make decisions about the principal's property, finances, investments, or medical care.

Power of attorney is most frequently used in the event of a principal's temporary or permanent illness or disability, or when the principal is unable to be present to sign necessary documents.

A power of attorney can end for several reasons, such as when the principal revokes the agreement or dies, when a court invalidates it, or when the agent can no longer carry out the responsibilities outlined. In the case of a married couple, the authorization may be invalidated if, the principal and the agent divorce.

There are many types of powers of attorney. A “durable” power of attorney takes effect when the document is signed while a “springing” power of attorney comes into effect only if and when the principal becomes incapacitated. A power of attorney may also be limited to medical matters, enabling the agent to make crucial decisions on behalf of an incapacitated person.

Most powers of attorney documents authorize an agent to represent the principal in all property and financial matters as long as the principal’s mental state of mind is good. If the principal becomes incapable of making decisions for themself, the agreement would automatically end.

Types of Powers of Attorney

 1. General Power of Attorney

The general power of attorney is a broad mandate that gives an agent a lot of power to handle the affairs of a principal. The agent or the person designated to act on behalf of the principal is charged with handling several tasks. The tasks include buying or disposing of real estate or even entering into contractual relationships on the principal’s behalf.

 2. Limited or Special Power of Attorney

An individual looking to limit how much the agent can do should choose limited or special power of attorney. Before signing to notarize a limited power of attorney, a person needs to be as detailed as possible about how much the agent should handle. If an individual is not clear what should fall under the special power of attorney, it is best to speak to a legal counsel.

 3. Durable Power of Attorney

The durable type of power of attorney is only effective during the period a person wished to get someone else act on his or her behalf. A non-durable POA will end the moment it is revoked or when the expiration date specified arrives. However, what will happen in the event the agent becomes debilitated? Will the POA still be applicable?

In such a case, the principal would prefer that the POA remains active even if he or she becomes unable to communicate. For example, if the principal becomes comatose, but would prefer that the spouse be the agent, it can be specified in the form of a durable power of attorney. The POA gives power to the spouse to make decisions even when the principal is comatose.

 4. Medical or Healthcare Power of Attorney

If the principal becomes very ill, he or she reserves the right to decide the quality of care preferred. Medical or health care POA authorizes the agent to make decisions on behalf of the principal in case of a life-threatening illness. Most health POAs fall under the durable kind because they take into consideration the fact that the principal may be too sick to make their own decisions.

In all the instances above, the principal should speak to a counsel before choosing an agent. In addition, it is best for the principal to get the counsel to walk him or her through every step of notarizing a power of attorney in order to understand what should go into the document.

Banks will make information available about POAs to their clients using clear, simple language. These areas are outlined below

1. “The bank may offer its own form of POA to clients, but will not require such form to be used.”4 It is important for clients to be aware that creating a new POA – including a bank POA – normally has the effect of revoking (cancelling) any prior POA.5 This may seriously affect estate plans previously put in place. ACE recommends seeking independent legal advice before creating any new POA.

 2. The bank will provide “(g)eneral information about bank-form POAs and POAs.”6 The federal, provincial and territorial Ministries responsible for seniors have collaborated to produce a booklet called What Every Older Canadian Should Know about Powers of

Attorney (for Financial Matters and Property) and Joint Bank Accounts.7 The banks may satisfy this Commitment by providing a copy of the booklet to their clients. Alternatively, the bank may provide its own publication as long as it includes the same material. 

3. The bank will provide its “minimum requirements for an account to operate under the authority of a POA.”8 This may include presenting either the original POA document, or a notarial copy of the POA, to the bank along with valid ID. A notarial copy is one that has been certified by a lawyer to be a true copy of the original document. At times, banks will request a notarial copy as an alternative to their keeping the original. This is usually done as a convenience to the attorney, who may need to present the original document at more than one place.

 4. “If a POA or attorney’s instructions require further review when presented to the bank, except where the review is related to potential financial abuse or other illegal activity, the bank will inform the client or attorney that a review is required and provide a general timeline for the review and that certain reviews may require more time.”9 Where the review is related to suspected financial abuse, the bank may choose not to advise you of the review, and/or may be prohibited by law from doing so. It should be noted that banks are more likely to scrutinize "do-it-yourself" POA kits, including kits provided by the Public Guardian and Trustee, than POAs drawn up by a lawyer. A bank may seek assurances from the lawyer who drew up the POA that it is valid. However, a lawyer can only attest to the document’s validity at the time that it was executed (signed): the grantor of the POA may have since revoked it, or caused it to be revoked by creating a new POA, without the lawyer’s knowledge.

 5. The bank will advise regarding “(t)he recourse available to clients or attorneys where a bank refuses to act on a POA or attorney instructions.” 10 ACE recommends taking the following steps in the face of such a refusal: First, contact your bank’s Office of the Ombudsman. All five major banks in Canada have an Ombudsman’s office in place. The Ombudsman’s office is expected to be an impartial service designed to resolve conflicts between a bank and its clients. If the issue cannot be resolved by your bank’s Ombudsman, contact the Ombudsman for Banking Services and Investments (“OBSI”) at www.obsi.ca. Please confirm that your bank participates in the program by checking the OBSI website. It is important to note the OBSI will not look into complaints that have not first been reviewed by your bank’s own Ombudsman. The OBSI offers an alternative dispute resolution process, and while its recommendations are not binding, they are very often accepted by banks and clients.