Bankers Right of Set-off

1. Set-off means- that the bank can adjust the credit balance in a customer's account against a debit balance in another account maintained by the same customer.
2. In an on going, situation, the right of set-off can be exercised by a banker- by serving a reasonable notice on the customer.
3. The right of set-off can be exercised by the banker only when the relationship between the customer and the banker is that of- Debtor and Creditor.
4. The banker can exercised the right of set-off only in respect of- debts due and determined.
5. The following condition are required to be fulfilled before a banker can exercise the right of set-off-     (a)The debt must be a sum certain and due immediately, (b) The debt must be due by and to the same parties and the in the same right, (c) There should be no agreement to the contrary.
6. The right to set-off account arise immediately in the following cases- (a) On the death, metal incapacity or insolvency of a customer, (b) On the insolvency of a firm, or on the liquidation of a company, (c) On the receipt of garnishee order.

Banker's Lien

1. A lien is the right to- retain goods or securities belonging to a debtor until he discharged a debt to the retainer thereof.
2. A lien may be- Particular or/and General.
3. Banker's lien is a general lien and is specially conferred by- Section 171 of the Indian Contract Act, 1872.
4. Banker's general is available in respect of- all securities deposited with him as banker by the customer, unless there is contract inconsistent with lien.
5. The right of lien is available to the banker only when the goods/securities have been given to him as:- Bailee.
6. The right of lien is available to the banker- even in respect of time-barred debts.
7. The banker's lien is- an implied pledge.

BANKER AND CUSTOMER RELATIONSHIP

1. When a Person maintain a deposit account with the bank, principal relationship between the two is one of- Debtor and Creditor.
2. Upon the banker's allowing an overdraft to customer in his current account, the relationship between the two will be that of- Creditor and Debtor.
3. While collecting cheques/bills etc. for a customer, the bank act as- An agent of the customer.
4. When a customer deposits a sealed box with the bank for safe custody, the relationship between the two is that of- Bailor and Bailee.
5. When a customer takes a locker in the Bank, the relationship between the bank and the customer is one of- Lessor and Lessee.
6. When a customer gives standing instruction to the bank for remitting a specified sum of money every month towards payment of his rent to a person, the bank act as-an agent of the customer.
7. In case the securities or documents are deposited by a customer for purpose of safe custody the banker deals with them according to the instructions of the customer, the position of the banker is that of a- trustee.
8. When a banker undertakes to pay bills domiciled on him by his customer, the relationship between the two is that of- Principal and Agent.

BANKING REGULATION ACT

1. The Banking Regulation Act, 1949 does not at all apply to- Primary agriculture credit societies and co-operative land mortgage banks.
2. Nothing contain in the Banking Regulation Act, 1949 (except section 34-A) applies to- Industrial Development Bank of India.
3. Section 11 of the Banking Regulation Act, 1949 stipulates that if a foreign bank wishes to carry on business in India at a place other than Bombay and Calcutta, the aggregate value of its paid-up capital and reserves shall not be less than- Rs. 15,00,000.00.
4. A foreign banking company having a place of business in the city of Bombay or Calcutta or both, must have an aggregate value of its paid up capital and reserves of amount not less than- Rs. 20,00,000.00.
5. In terms of the explanation (ii)(b) to section 35 of the Banking Regulation Act, 1949, inspection of branches of Indian banks situated abroad is to be carried out by- Reserve Bank of India.

RBI-Quantitative Credit Control

1. Stipulation of certain minimum margin in respect of advance against specified commodities- is adopted by RBI does not fall within "general" or "quantitative" method of credit control.
2. For the performance of its duties as the regulator of credit, the RBI posses the usual instruments of general credit control viz,- Bank Rate, Open market operation and the power to vary the reserve requirements of banks.
3. Open market operation are employed by RBI with a view to- minimise fluctuations in money supply, as as an adjunct to Bank Rate to make it function more effectively, maintain stability in the average price of government securities.
4. Bank rate policy, open market operations, variable reserve reserve requirements and, statutory liquidity requirements employed by RBI as measures of credit control are classified as- Quantitative methods.
5. Selective credit control, credit authorisation scheme, Moral Suasion- are fall under the Qualitative methods of credit control adopted  by RBI.
6. The term Moral Suasion refers to- the advice given by RBI to banks/financial institution in the matter of their lending and other operations with the objective that they might implement or follow it.

RBI-Bank Rate

1. Bank Rate means- the standard rate at which the RBI is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase under the Reserve Bank of India Act, 1934.
2. When the RBI desires to restrict expansion of credit it- raise the Bank Rate.
3. In period of depression when the Reserve Bank desires to encourage the Banking system to create more credit it- reduce the bank rate.

RBI-OPEN MARKET OPERATION

1. To regulate the flow of credit in the economy, one of the measures adopted by RBI is 'Open Market Operation'. The term open market operation in this connection refers to- sale or purchase of short term or long term government securities by Reserve Bank.
2. Open market operations are employed by Reserve bank of India- to control the reserve base of banks, to minimize fluctuation in money supply, as an adjunct to Bank Rate to make it function more effectively.
3. In period of boom, which leads to economic instability, the Reserve Bank resorts to- sale in the market of first class securities in its possession to reduce the supply of money as a measure of open market operations.

RESERVE BANK OF INDIA

1. The Remittance Facility Scheme which the reserve bank has been operating since 1940 may be availed of by all-Central and State Governments, Schedule and non-schedule banks, General public.
2. The terms "Ways and Means" advances refers to- the temporary advance made to the Government by its bankers to bridge the interval between expenditure and the flow of receipts of revenues.
3. Section 17(5) of the Reserve Bank of India Act, empowers the Bank to make, to the Central and State Governments, ways and means advances which are repayable not later than- three months from the date of advance.
4. Accepting deposit and making loans and advances to public- do not fall within the functions of Reserve Bank of India.
5. Acting as note issuing authority, banker's bank and banker to the government- are the main functions of the Reserve Bank of India.

BASEL II: RECOMMENDATIONS ON CAPITAL CHARGE

The ability of a bank to absorb unexpected shocks and losses rests on its capital base. Basel II norms are centered on sustain economic development over the long haul and include
(1) promotion of safety and soundness in the financial systems,
(2) the enhancement of competitive equality, and
(3) the constitution of more comprehensive approach to address risk.
The new proposal is based on three mutually reinforcing pillars that allow banks and supervisors to evaluate properly the various risk that banks face and realign the regulatory capital more closely with the underlying risk.

SINKING-FUND METHOD OF RETIRING A DEBT

A common method of paying off long-term loan is to pay the interest on the loan at the end of each interest period and create a sinking-fund to accumulate the principle at the end of the term of the loan. Usually, the deposit into the sinking fund are made at the same times as the interest payments on the debt are made to the lender. The sum of the interest payment and the sinking-fund payment, is called the periodic expense or cost of the debt. It should be noted that the sinking fund remains under the control of the borrower. At the end of the term of the loan, the borrower returns the whole principal as a lump-sum payment by transferring the

SINKING FUND

When a specified amount of money is needed at a specified future date, it is good practice to accumulate systematically a fund by means of equal periodic deposit. Such a fund is called a sinking fund. Sinking funds are used to pay-off debts, to redeem bond issues, to replace worn-out equipment, to by new equipment, or in one of the depreciation method. Since the amount needed in sinking fund, the time the amount is needed and interest rate that the fund earns are known, we have an annuity problem in which the size of payment, sinking

ANNUITIES

At some point of your life, you may have had to make a series of fixed payments over a period of time- such as rent or car payment- or have received a series of payments over a period time, such as bond coupons. These are called annuities. If you under stand the time value of money and have an understanding of the future and present value, it would be easy to understand annuities.
The most common famous frequencies are yearly, semi-annually, quarterly and monthly. There are two basic types of annuities : ordinary annuities and annuities due
Ordinary annuities: Payment are required at the end of each period, For an illustration, straight bonds usually make coupon payments at the end of every six months until the bond's maturity date
Future Value of Ordinary Annuity = C*[{(1+i)^n-1}/i]
Present Value of Ordinary Annuity = C*[{(1+r)^n-1}/r(1+r)^n]

C = Cash flow per period
i = Interest rate
n = number of payment

FIXED AND FLOATING INTEREST RATES

Fixed Rate: In the fixed rate, the rate of interest is fixed. It will not change during entire period of the loan. For example, if a home loan, taken at an interest rate of 12%, is repayable in 10 years, the rate will remain the same during the entire tenure of 10 years even if the market rate increase or decrease. The fixed rate is, normally higher than the floating rate, as it is not affected by market fluctuation.

EQUATED MONTHLY INSTALLMENTS(EMI)

This is the most common method of repayment of loan is adopted in banking. Under this system, the principal and interest thereon is repaid through equal monthly installment over the fixed tenure of loan.
The formula for calculation of EMI
 EMI = [(P*r)*(1+r)^n]/[1+r)^n-1]
Where P = principal (amount of loan)
           r = rate of interest per installment period
           n = no. of installments in the tenure
For Example, for a loan of Rs. 1,00,000 at an interest rate of 12% p.a. is to be repaid in 12 months, the EMI is
P = 1,00,000
r = 12%/12 = 1% i.e. 1/100 = 0.01

Compound Interest

If the interest is charges more than once during the period and the interest is reinvested , we need to compound the interest.
Compound interest is paid on the original principal and accumulated part of interest.
P = Principal ( Initial amount you borrowed or deposit.)
r = Annual rate of interest (per cent)
n = Number of year the amount of deposit.
A = Amount of money accumulated after n year including interest.
When interest is compound once in a year for n years
             A=P(1+r)^n
if you borrow for 5 years the formula is
            A=P(1+r)^5
Annual Compounding = P(1+r)
Quarterly Compounding = P(1+r/4)^4
Monthly Compounding = P(1+r/12)^12

The basic formula is
     

Simple Interest

When money is loaned, the borrower usually pays a fee to the lender. this fee is called 'interest'. Simple interest or flat rate interest is the amount of interest paid each year in a fixed percentage of the amount borrowed or lent at the start.
The formula foe calculating simple interest is as follows:
Interest = Principal * Rate * Time

Illustration
A Student purchase a computer by obtaining a loan on simple interest. The computer cost Rs. 1,500 and the interest rate on the loan is 12 %. If, the loan is to be paid back on weekly installments over two years,,
Interest: =  (1,500*12*2)/100
             = Rs. 360
Total Repayments = Principal + Interest
                            = Rs. 1,500 + Rs.360
                            = Rs. 1,860
Weekly payment amount =        Total repayment       
                                          Loan period, T, in weeks
                                      = Rs. 1,860/(2*52)
                                      = Rs. 17.88 per week