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A Hand Book On Statutory Bank Branch Audit - Rajkumar S. Adukia
GLOSSARY OF TERMS
USED IN BANKS
- A standard clause in a mortgage instrument permitting the lender
to demand full payment of principal from the borrower upon default of the
Account History - The payment
history of an account over a specified period of time, including the
number of times the account was past due or over limit.
Guarantee - Bank Guarantee could be a finance guarantee or a
performance guarantee. Under finance guarantee, the bank guarantees the
beneficiaries (The person named in the guarantee to receive the guaranteed
sum under stated circumstances), certain amount on behalf of its customers
who has commercial relationship with the beneficiary. Under performance
guarantee, the bank guarantees performance of a contract or goods/
services supplied under a contract by its customers. However, even in the
later case, if its customers fail to deliver, it settles the claim of the
beneficiary in money terms only; the bank does not fulfil the contract,
obligation of its customer.
Statement - A periodic record of a customer's account that is
issued at regular intervals, showing all transactions recorded for the
period in question.
- Usually mistaken for commercial invoice. Actually bill in the
banking parlance means a bill of exchange drawn by a seller on the buyer
whenever he sells goods or services on “payment later” basis. Such a
transaction is also referred to as a credit transaction. The bill is
routed through the bank for collection of amount from the buyer.
Commercial invoice is a part of the document submitted to the bank by the
seller. A bill of exchange is an order made to the buyer by the seller
that in exchange for the goods or services sold by him on credit, the
buyer is required to pay on a specific date a certain amount with or
without interest to him or to any other directed party.
Cash Credit - A credit
facility under which a customer draws up to the preset limit, subject to
availability of sufficient security with the bank. The difference between
an overdraft and cash credit account is that while the former is extended
more to individuals, and less for business, the latter is extended only to
business bodies. The cash credit facility is unique to India, as in most
of the countries it is called overdraft.
Further the cash credit facility is more or
less on a permanent basis so long as the business is going on.
Internationally at the end of specific period the overdraft facility is
withdrawn and the customer is required to pay back the amount lent by the
bank. The purpose of cash credit is for working capital. The operations
are similar to overdraft.
Reserve Ratio - Called in short CRR. Suppose a bank has total
deposits of Rs.100 Bn and is required to maintain a CRR of say 5%. This
means that the bank should maintain in current accounts with the central
bank or any other approved bank balances, not less than Rs. 5 Bn. This
much amount is impounded and kept in the free form. And the bank cannot
lend this money. This acts as a buffer to the bank. In India, RBI decides
from time to time and at present it is 5% of the deposits, held by the
Report - It is called by different names. At times it is referred
to as credit information report. At other times it is also called
customer’s confidential report. Bankers report also means the same. With
the growth of commerce within a country and abroad, most of the times,
trade is done with the organizations about which you are in the dark. The
banker provides good platform for knowing something about the business
enterprise with which you are likely to deal. There are accepted
abbreviations internationally for denoting the soundness or the lack of it
of a business enterprise. These abbreviations are commonly used in such
reports. You can seek confidential informations about your prospective
customers about whom you do not have sufficient knowledge. The banker
provides this information for a fee which includes the fees that they have
to remit to international credit agencies.
Product Basis - This is the basis on which interest is usually
determined on credit facilities, like loan, overdraft, cash credit etc.
for this; the basis is 365 days in a year. Some banks do take 360 days in
a year also. There is no hard and fast rule in this behalf. e.g A bank has
given a customer an overdraft facility to the extent of Rs.10,000/- for 45
days at 6% p.a. on a daily product basis the interest is determined as
Step No 1. 10000*45 days= known as product= 450000
Step No 2. Determination of annual average
as rate of Interest is on annual basis i.e. 450000/365=Rs. 1233/-.
This means that on a 365 days per year
basis, drawing Rs. 10000/- for 45 days is equivalent to drawing Rs. 1233/-
through out the year, i.e. on annual basis.
Step No 3. Calculation of interest at 6% p.a is equal to 1233*0.06= Rs. 73.98.
This means that by adopting daily product basis we are converting the amount drawn for a period less than a year to its annual equivalent so that the rate of Interest, which is universally on annual basis can be applied to determine the quantum of interest.
Discount - Less than face
value. If the value of the bill is Rs. 100/- and in case the bank gives
the finance against the same, the amount of finance will be less than Rs.
100/-, say Rs. 98/-. Rs 98 is the discounted value of the bill for Rs.
100/-, while the difference of Rs. 2/- is known as “discount”. Discount is
the interest recovered upfront, especially in the case of those bills for
which payment will be forthcoming after a specific or extended period.
of Credit - Seller “A” enters into contract with Buyer “B”. One of
the terms of supply is that buyer will establish a letter of credit in
favour of the seller through his bank. The buyer approaches his bank,
which, on certain conditions, agrees to extend this facility. Under this
facility, the buyer’s bank gives commitment of payment to the seller
through his bank. The commitment is dependent upon the seller fulfilling
specific conditions as per the L/C. The conditions are:
The seller should furnish proof of dispatch of goods or services and submit all the documents required under the L/C.
Then, the buyer’s bank will pay the amount of bill drawn by the seller on the buyer under this agreement. International letter of credit are by and large, “irrevocable” (cannot be cancelled by the buyer without the consent from the seller).
- A lump-sum amount given to the customers, either in one installment
or in two or three installments, and repayment over a period of time in
monthly or quarterly, or half yearly or annual (very rarely) installments.
Interest may be recovered separately from the customer who is called
borrower or combined with the installment. In case it is combined with the
installment it is called equated installment. If interest is recovered
separately it is usually on a quarterly basis. Loans against property and
for the purpose of owning flats/ apartments/ houses are known as mortgage
Money Margin money is like a security deposit retained by the
bank till the loan is fully settled. The banks sanction the credit limit
after retaining a margin on the value of the security offered. The
percentage of margin requirements varies as per RBI guidelines.
Product Basis - In India, in the savings account, the product is
taken on a monthly basis; the rule is interest is paid on the minimum
balance in the account between the 10th and the last day of
every month. This means that any credit to the account after the tenth of
the month is ignored for the particular month, while debit is taken into
account. Accordingly let us say for example. The following minimum credit
balances in the savings account earning 3.5 % pa interest in India
January, 2005 1000
February, 2005 800
March, 2005 150
April, 2005 250
May, 2005 300
June, 2005 300
Suppose the Interest is payable every
half-year and accordingly this customer will be entitled to 1.75 % for the
half year ending June 2005. In order to determine the correct half yearly
interest, you need to find out the annual equivalent of the deposit that
the customer has kept in his savings account. Then divide the sum of the
monthly products by 12. The annual equivalent amount is RS 233.33 and the
interest at 3.5% p.a. for the half year on this work out to be Rs 8.17.
This is the way the interest is found out on a monthly product basis.
- An extension of current account in which the customer is allowed to
withdraw more than the credit balance lying in the account. This may be a
temporary accommodation to tide over temporary cash crunch or on a regular
basis. If permitted on a regular basis, withdrawals are allowed up to a
ceiling (called “a limit”), subject to availability of sufficient security
with the bank. In case the overdraft is given to the business enterprises
and it is for day-to-day operations, it is known as “working capital”.
– A facility, by which its customers at one place makes funds
available to the bank and the bank in exchange, makes the funds available
to the customer or any other specified party at the required place, within
the same country or abroad.
Remittance can be in the form of Demand Draft (DD), mail Transfer (MT), Telegraphic Transfer (TT), Electronic mail transfer (EMT) through computer networking (or satellite channel), International Money Order (IMO) etc.
Holiday - Whenever a loan is taken especially for acquiring fixed
assets, the repayment does not start immediately. It starts after the
fixed assets starts giving a return especially in the case of business
enterprises. This is not so in the case of personal loans. The period
during which there is no repayment is known as repayment holiday period.
This is also known as moratorium period. The period is longer in the case
of industrial loans and minimum or absent in case of personal loans. It
should be noted that during this period, Interest is charged and there is
no period on non-levy of interest. Although there may be a period of
non-recovery of Interest. That is interest although levied, not recovered
for a specific period. Again if this is the case interest on interest is
refers to the settlement system where, settlement of payments on an
individual order basis are done on continuous basis, without netting
debits with credits across the books of a central bank. RTGS system is
also defined as a gross settlement system, in which both processing and
final settlement of funds transfer instructions take place continuously
(i.e. on real time basis). Thus we can say that RTGS system reduces
settlement risk because
inter-bank settlements are done throughout the day, rather than just at
the end of the day. One of the main attraction of the RTGS systems is
that payee banks and their customers receive funds with certainty, or
so-called finality, during the day, enabling them to use the funds
immediately without exposing themselves to risk. RTGS is a system where
both the processing and final settlement take place on real time basis.
RTGS is regarded as the centerpiece of an integrated payments system. Settlement
risk refers to the risk when a settlement (in a
transfer system) does not take place as expected. This can happen due to
various reasons, e.g. one party may default on its clearing obligations to
one or more counter parties. Thus, settlement risk consists of two
components namely credit and liquidity risks. Credit risk arises when a
counter party fails to meet an obligation for full value on due date and
Reserve Ratio – Called in short SLR. In the above example, suppose
the bank is supposed to maintain SLR of 25%, this means that over and
above CRR the bank is expected to keep aside an amount of Rs. 25 Bn. This
will be kept in easy-to–encash securities like, treasury bills of the
government and any other approved securities. In India at present it is
25%. This again acts as buffer to the bank and prevents the bank from
lending the entire amounts of deposits kept with it by various customers.
Receivables Audit is one of the most important aspects of the
overall exercise of audit of any organization. In stock and receivable
audit, auditor ensures himself about the quantity, quality, composition
and actual value of the stock and the debtors.
Syndication – Making arrangement for loans for borrowers. Should not be confused for granting of loans. The bank may or may not participate in the loan process, but would assume responsibility for getting “in principle” sanction from all participating banks and financial institutions. Syndication fees are part of non-interest income as no funds are involved in the activity. For example. An Indian company wants a foreign currency loan of 100 mn Rs. Making arrangement for this is known as syndication. Even if the arranging bank participates in the loan, by granting a portion of it, syndication is different from it. It gets paid separately for this activity.
Other Pages from This e-book
HISTORY OF BANKING | TYPES OF BANKS AND BANKING ACTIVITIES | GLOSSARY OF TERMS USED IN BANKS | Bank audit process | PROVISIONS RELATING TO AUDITOR | LETTERS SEEKING INFORMATION | LAWS APPLICABLE TO BANK | ACCOUNTING SYSTEM IN BANKS | Banking Softwares | GENERAL INTERNAL CONTROL IN BANKS | INTERNAL CONTROLS IN AN EDP ENVIRONMENT | Asset Classification Income Recognition and Provisioning | FOREIGN EXCHANGE TRANSACTIONS | SALIENT FEATURES OF JILANI, GHOSH | COMMITTEES AND LFAR | Audit Planning | Audit Procedures in bank | CHECKLISTS | DOCUMENTS TO BE TAKEN FROM MANAGEMENT | MANAGEMENT REPRESENTATION LETTERS | BANK BRANCH AUDIT REPORTS | DISCLOSURES MANDATED BY RBI IN NOTES TO ACCOUNTS | ANNEXURE A | ANNEXURE B | ANNEXURE C | ANNEXURE D | ANNEXURE E | About the Author