Distinguish between Cash Flow and Fund Flow statement

 The points of distinction between cash flow and funds flow statement are as below:

 

Sl.	Cash flow statement	Funds flow statement
1	Useful in short term analysis and cash planning	Useful in long-term analysis of financial planning
2	It prepared on cash basis	It prepared on accrual basis
3	It ascertains the changes in balance of cash in hand and bank	It ascertains the changes in financial position between two accounting periods
4	Analyses the reasons for changes in balance of cash in hand and bank	Analyses the reasons for change in financial position between two balance sheets
5	It shows the inflows and outflows of cash	It reveals the sources and application of finds

What is Fund flow? Importance/ Uses/ Purposes of Fund Flow Statement

Flow Fund flow refers to movement of funds in working capital in the normal course of business transactions. The changes in working capital may be in the form of inflow of working capital or outflow of working capital. If the component of working capital results in increase of the fund, it is known as inflow of fund. Similarly, if the components of working capital effects in decreasing the financial position it is treated as outflow of fund.

 The importance's to uses of fund flow statement for a bank are as follows:

1) It highlights the different sources and uses of funds between the two accounting period.

2) It brings into light about financial strength and weakness.

3) It acts as an effective tool to measure the causes of changes in working capital.

4) It helps the management to take corrective actions while deviations between two balance sheets figures.

5) It also presents detailed information about profitability, operational efficiency, and so on.

6) It serves as a guide to the management to formulate its dividend policy,

retention policy and investment policy etc.

7) It helps to evaluate the financial consequences of business transactions involved in operational finance and investment.

8) It gives the detailed explanation about movement of funds from different sources and uses of funds.

Do you think the present system of loan classification should be changed? Do you have any suggestion of the present system of provisioning against regular loans and advances

It is due to the increase of classified loans of the bank, that they are now facing liquidity problems and the borrower inter-bank call money at very high rate. Justify the viewpoint

It is simple understanding that due to increase of classified loans, the bank has faced to liquidity crisis. However, when loans go bad they have some adverse effects on the financial health of banks. Banks make adequate provisions and charges for bad debts which impact negatively on performance. The provisions for bad loans reduce total loan portfolio of banks and as such affects interest earnings on such assets. This constitutes huge cost, as it makes a liquidity crisis for the banks.

On other hand, when banks will go into liquidity crisis, they try to borrow from inter-bank call money at a high interest rate.

The inter-bank call money market is an overnight market in meeting bank‘s immediate liquidity needs and reserve deficiencies. Hence, an important task of the call money market is to facilitate liquidity management in the inter-bank market. The orderly and stable functioning of the inter-bank call money market is important to minimize liquidity risk in the banking system as a whole.

 

So that the banks will penetrate to call money at high interest rate to maintain their adequate liquidity due to loan classification and keeps provision in this same.

Discuss The Base For Provision

 For eligible collateral of the following types, provision will be maintained at the stated rates on the outstanding balance of the classified loans less the amount of interest suspense and the value of eligible collateral:

a) Deposit with the same bank under lien against the loan b) government bonds/savings certificate under lien

c) Guarantee given by government of Bangladesh bank

For all other eligible collateral, the provision will be maintained at the stated rates on the balance calculated as the greater of the following two amounts-

a) Outstanding balance of the classified loan less the amount of interest suspense and the value of eligible collateral; and

b) 15% of the outstanding balance of the loan

 

Eligible securities

Following securities will be included as eligible securities in determining base for provision:

a) 100% of deposit under lien against the loan

b) 100% of the value of government bonds/savings certificate under lien

c) 100% of the value of guarantee given by government or Bangladesh bank d) 100% of the value of gold or gold ornaments pledge with the bank

e) 50% of the market value of easily marketable commodities kept under control of the bank

f) Maximum 50% of the market value of land and building mortgage with the bank

g) 50%of the average market value for last 06 months or 50% of the

face value, which is less, of the shares traded in the stock exchange.