Banking for Beginners

Finance Minister’s announcement in Union Budget 2016, for providing Rs. 25,000 crores towards capitalization of Public sector Banks, has sparked off a debate about adequacy of this amount. In this context it is important to understand what is Bank capitalization per se and its ramifications. As this blog is primarily meant for persons who have not been exposed to technicalities of Banks and Banking operations, the underlying issues are sought to be discussed in simple terms. ‘Capitalization’ of a company broadly refers to resources infused in the Company for acquiring assets or for its operations. Capital can be issued with varying terms of face value and premium. But for the limited purpose of this blog, structuring and terms are not very relevant and Capitalization can be assumed to mean aggregate funds infused as Capital to run the show. For a Bank, Capital  is classified under Tier I or core capital and Tier II or supplementary capital. Tier I capital consists of s...

Mr Arun Jaitley has presented the third budget of the present BJP-NDA Government. Truly speaking, the Union Budget is a statement of Income and Expenditure of Government of India , but it gains importance since the income gets generated from various taxes and levies, affecting all citizens and expenditure statement lays down development agenda for the country. In Indian context, Government is the biggest spender, and direction of its expenditure become policy statements affecting vast majority of population. Government's direct tax (income) policies determine the cut in our take home income and indirect taxes (income for Government again) determine how much of our expenses contribute to the Govt coffers like excise we pay on all the goods we purchase. Similarly, Governmnet's expeniture lays down the road map for infrastructure, public health, education, defence expenditure etc etc.  Main thrust of budget 2016 is to strenghthen rural economy and infrastructure development.  ...

Most of the PSBs have registered either slippage in profits or losses for the quarter ended 31st December 2015. While SBI, PNB and Canara Bank have managed to declare profits, although greatly reduced as compared to December 2014 quarter, 11 PSBs have declared losses. BOB with a loss of Rs 3,342 crores tops the list, which incidentally also marks the biggest ever quarterly loss declared by any Bank in Indian History. BOB is followed by IDBI Bank (Rs 2,184 cr), BOI ( Rs 1,505 cr),UCO Bank (Rs 1,497 cr), IOB (Rs 1,425 cr), Central bank (Rs 837 cr), Dena Bnak (Rs 663 cr) , Allahabad Bank (Rs 486 cr), OBC (Rs 425 cr), Corporation Bank (Rs 383 cr) and Syndicate Bank (Rs 120 cr). Only two Banks namely Bank of Maharshtra and Vijaya Bank have regstered a rise in profits vis-a-vis comparable quarter. The main issue to understand here, is that these losses are not due to write offs of bad or unrecoverable loans, but due to additional provision for sticky loans. As RBI Governor Raghuram Rajan ha...

The Government is in a dilemma right now. Whether to rein in the fiscal deficit at the projected levels of 3.9 % for FY 2016 and then bring it down to 3.5 % in FY 2017, or to go for increased public spending which may spur economic growth but which may also drain out Government revenues thus affecting fiscal deficit targets. Another cause of concern is the payout expected from OROP and seventh pay commission. While the Reserve Bank has advised against tinkering with fiscal deficit targets to drive growth, there is a large section of economists who are for pushing economic growth through large infra spends, even though it may mean slippage in fiscal deficit. Government has made a concerted attempt in the last few months to mop up resources through increase in excise duties on petroleum products, thus effectively denying benefits of crude price slump to the consumer. But this has been greatly offset by poor performance on the divestment front. All in all, its a tough call for FM Arun Ja...

A lot has been written about the impact of interest rate reduction on growth. I think the noise is a result of a mis-understanding of basics. Economic growth is an extension of demand generation. A project's viability depends on whether the goods produced can be sold, and of course at what cost. While computing the cost of goods for the manufacturer, interest component plays a much smaller role as compared to other costs viz. raw material, labour, fuel etc etc If the cost is 100, raw material may be 70 %, labour may be 5 %, power and fuel may be 5 % and other manufacturing costs may contribute another 5%. Suppose the financial costs are also 5 % of total costs, a reduction in 1 % in the interest cost may result in saving of 0.40 % to 0.45 % app. Though this may add to the profits of the manufacturer, it definitely cannot be the guiding factor for the manufacturer to decide as to whether the project per se should be established or not. Therefore to say that a reduction in interest ...

I earn my living as a professional Banker. In fact sometimes I wonder that I do not know anything except for Banking and if I have to make a living through some other means or trade or vocation, I'll probably die hungry. Not that I know everything about Banking. In my 34 years of experience in Banking industry, I have found that this is the most mis-understood subject. Persons or professionals, who may know Accountancy, try to pass off as Bankers. So that brings me to the real issue. Accountancy and Banking are entirely different. In our schools and colleges and professional courses, we teach accountancy but don't teach Banking. In life every activity, be it manufacturing or trade or services or profession or for that matter pure household work, gets converted into money at the end, and everybody has to deal with a Bank. So it is extremely important for everybody, whatever he or she is doing in life, to learn elements of Banking. Our education system does not take care of th...