Monday, April 6, 2009

Non-Government organisation(NGO)

A non-governmental organization (NGO) is an organization that is not part of a government and was not founded by states. NGOs are therefore typically independent of governments. Although the definition can technically include for-profit corporations, the term is generally restricted to social, cultural, legal, and environmental advocacy groups having goals that are primarily noncommercial. NGOs are usually non-profit organizations that gain at least a portion of their funding from private sources. Current usage of the term is generally associated with the United Nations and authentic NGOs are those that are so designated by the UN.

Because the label "NGO" is considered too broad by some, as it might cover anything that is non-governmental, many NGOs now prefer the term private voluntary organization (PVO).

A 1995 UN report on global governance estimated that there are nearly 29,000 international NGOs. National numbers are even higher: The United States has an estimated 2 million NGOs, most of them formed in the past 30 years. Russia has 65,000 NGOs. Dozens are created daily. In Kenya alone, some 240 NGOs come into existence every year.

The International Red Cross and Red Crescent Movement is the world's largest group of humanitarian NGO's.

Though voluntary associations of citizens have existed throughout history, NGOs along the lines seen today, especially on the international level, have developed in the past two centuries. One of the first such organizations, the International Committee of the Red Cross, was founded in 1863.

The phrase non-governmental organization came into use with the establishment of the United Nations in 1945 with provisions in Article 71 of Chapter 10 of the United Nations Charter [1] for a consultative role for organizations that neither are governments nor member states – see Consultative Status. The definition of international NGO (INGO) is first given in resolution 288 (X) of ECOSOC on February 27, 1950: it is defined as 'any international organisation that is not founded by an international treaty'.

Saturday, March 28, 2009

Reverse Mortagage

When you bought your home, the bank loaned you the money to buy it and you paid them back with monthly mortgage payments.

A reverse mortgage is the opposite. With a reverse mortgage, the bank pays you a monthly payment from the equity in your home.

You repay the money when you sell your home, refinance, permanently move out, or pass away. At that time, you or your heirs must repay the loan plus interest in one payment.

Reverse mortgages are available through most major banks and lenders

STEPS:

Here’s what happens when you contact the lender:

* An appraiser will determine the value of your home.
* The lender will tell you how much you qualify for based on your age, the equity in your home, and the cost of the loan.
* You decide how you want to receive the money. You can receive the money:
o As a lump sum
o In monthly payments
o As a credit line that lets you decide how much of the loan to use, and when to use it
* You sign a contract. The contract will outline the payments you will receive and the amount you have to repay including interest.

Maintaining your Reverse Mortgage

To keep your reverse mortagage in good standing you must:

* Pay your property taxes on time
* Maintain and repair your home
* Have homeowner’s insurance

Your lender can end the reverse mortgage and require immediate repayment if you:

* File for bankruptcy
* Rent out part of your home
* Add a new owner to title
* Take a new loan against your property

Friday, February 20, 2009

Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) is permited as under the following forms of investments.
Through financial collaborations.
Through joint ventures and technical collaborations.
Through capital markets via Euro issues.
Through private placements or preferential allotments.
Forbidden Territories:
FDI is not permitted in the following industrial sectors:
Arms and ammunition.
Atomic Energy.
Railway Transport.
Coal and lignite.
Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.
Foreign Investment through GDRs (Euro Issues) :
Foreign Investment through GDRs is treated as Foreign Direct Investment Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have consistent track record for good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads.
Clearance from FIPB
There is no restriction on the number of Euro-issue to be floated by a company or a group of companies in the financial year . A company engaged in the manufacture of items covered under Annex-III of the New Industrial Policy whose direct foreign investment after a proposed Euro issue is likely to exceed 51% or which is implementing a project not contained in Annex-III, would need to obtain prior FIPB clearance before seeking final approval from Ministry of Finance.
Use of GDRs
The proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in JV/WOSs in India.
Restrictions
However, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticiption of the use of funds for approved end uses. Any investment from a foreign firm into India requires the prior approval of the Government of India.

Fact file about Indian Banks ( 10 story makers in indian Financial Industry )

1) The first bank in India to be given an ISO Certification
Canara Bank
2) The first bank in Northern India to get ISO 9002 certification for their selected branches
Punjab and Sind Bank
3) The first Indian bank to have been started solely with Indian capital
Punjab National Bank
4) The first among the private sector banks in Kerala to become a scheduled bank in 1946 under the RBI Act
South Indian Bank
5) India's oldest, largest and most successful commercial bank, offering the widest possible range of domestic, international and NRI products and services, through its vast network in India and overseas
State Bank of India
6)India's second largest private sector bank and is now the largest scheduled commercial bank in India
The Federal Bank Limited
7) Bank which started as private shareholders banks, mostly Europeans shareholders
Imperial Bank of India
8) The first Indian bank to open a branch outside India in London in 1946 and the first to open a branch in continental Europe at Paris in 1974
Bank of India, founded in 1906 in Mumbai
9)The oldest Public Sector Bank in India having branches all over India and serving the customers for the last 132 years
Allahabad Bank
10) The first Indian commercial bank which was wholly owned and managed by Indians
Central Bank of India

OLDEST BANK OF INDIA ( LITTLE HISTORY)


ALLAHABAD BANk (An Overview)
Allahabad Bank, established in 1865, is the first fully Indian owned bank of India. It is an Oldest Joint Stock Bank of the Country, which was founded on April 24, 1865 by a group of Europeans at Allahabad. At that juncture Organized Industry, Trade and Banking started taking shape in India.
But at present, banks are passing through a very interesting phase; there is a transition from banking to financial services. As this is an age when the world has become a global village and money can move as quickly as information; thus, meeting world requirement has become a huge challenge for international players. So, banks are uniquely poised to broaden their product lines into complete offerings that would go under the rubric of financial services. But underlying this is the need to have sound fundamentals. There is no doubt that only those banks/financial institutions, which are focused on efficiency; productivity and profitability, have a chance to survive in this highly competitive market because now-a-days, banking is not just confined to acceptance of deposit for purpose of lending, it refers to intermediating and managing risk.
Allahabad Bank has been actively and efficiently participating in this present competitive financial market and its success is evident from the following:
October 2002: The Bank came out with Initial Public Offer (IPO), of 10 crores share of face value Rs.10 each, reducing Government shareholding to 71.16%.

April’2005: Follow on Public Offer (FPO) of 10 crores equity shares of face value Rs.10 each with a premium of Rs.72, reducing Government shareholding to 55.23%,

June’2006: The Bank Transcended beyond the National Boundary, opening Representative Office at Shenzen, China.

October’2006: Rolled out first Branch under CBS, now we have 18 CBS branches.

Febury’2007: The Bank opened its first overseas branch at Hong Kong.Dec’2008: Bank's business crossed Rs.250000 crores mark.

Monday, February 9, 2009

What is Corporate Governance

Corporate governance is a reflection of the company’s culture, policies, relationship with stakeholders, commitment to values and ethical business conduct. In the same spirit, timely and accurate disclosure of information regarding the financial situation, performance, ownership and governance of the company is an important part of corporate governance.
Corporate governance is all about “promoting corporate fairness, transparency and accountability.” This chapter provides some definitions of corporate governance and explains how it differs from corporate management.
It also identifies the various issues that must be addressed by corporate governance. It analyzes various corporate governance models that are adopted in various parts of the world and explains how corporate governance has evolved into its present form.
REPORTS ON CORPORATE GOVERNANCE
Corporate Governance when used in the context of business organisations is a system of making directors accountable to share holders for effective management of the companies, in the best interest of the company and shareholders along with concern for ethics and values. It is a management of companies by the board of directors. It hinges on complete transparency, integrity and accountability of management that includes executive and non-executive directors. Its genesis can be traced to the internal audit function and its importance was enhanced after the Stock Market Crash of 1987. With the CG reports of Adrian Cadbury in the United Kingdom, Mervyn King in South Africa and Kumarmangallam Birla in India the subject was reduced to controlling shareholder operations and ensure ethical practices in the financial sector. From thence, it has moved into other areas of the organisation but unfortunately restricts itself to the management and control of funds. The ambit of significance of CG lies far beyond this as has been explained at length in Business Ethics and Corporate Governance: Towards Organisational Excellence (2005).

Thursday, February 5, 2009

3 economist... :):):)




Three economists are out deer hunting one day when they see a huge buck in the clearing in front of them. The first economist takes aim with his rifle and fires. The bullet goes flying by the deer, about 20 feet in front of it. The second economist decides to give it a try. He takes aim and shoots. The bullet goes flying by the deer, this time about 20 feet behind the deer. At this point, the third economist starts jumping up and down, overcome with joy, yelling: WE GOT IT!! WE GOT IT!!





note:- the picture shown does not meant to offend any one.

LETTER OF CREDIT (LC)

LETTER OF CREDIT (LC)
The ICC (International Chambers Of Commerce) in the UCPDC (Uniform Custom Practices for Documentary Credit) defines LC (Letter of Credit) as:
“An arrangement, however named or described, whereby bank (the Issuing Bank) acting at the request and on the instructions of the customer (the applicant) or on its own behalf:
a) is to make a payment to or to the order of a third party(beneficiary) or is to accept bills of exchange(drafts) drawn by the beneficiary), or,
b) Authorizes another bank to effect such payments or to aceept and pay such bills of exchange(drafts), or,
c) Authorizes another bank to negotiate against stipulated documents provided that the terms are compiled with.”
Or in simple words, LC can be characterized as “an arrangement of Making Payment against Documents”. Banks in India normally opens Import LC under following circumstances:
Ø When a resident in India is importing goods into India.
Ø When a resident merchant trader is purchasing goods from one country, for sale to another country, for purpose of merchandising trade.
Ø When an Indian exporter who is executing a contract abroad requires importing goods from a third country to the country where he is executing the contract.
The inter-bank communication and transaction in LCs take place through SWIFT (Society for Worldwide Inter-bank Financial Telecommunication) network. SWIFT is industry owned cooperative supplying secure messaging services and interface software to over 7,000 financial institutions in 196 countries.
SWIFT messages are preset and referred to by category numbers called MT numbers. For example, MT300’s only deal with Forex transactions, MT800’s deal with Traveler’s cheques, etc. Each type of message in each category is preset as well. For instance, there are 89 different messages available under category 0f MT500.

How LC is a “Source of Earning for Bank”
Letters of credit are used nowadays primarily in international trade transactions of significant value, for deals between a supplier in one country and a wholesale customer in another.
From the bank's point of view, the LC they have issued can be called upon at any time (subject to the relevant terms and conditions), and the bank then looks to reclaim this from the applicant.
Banks earn commission from the applicant for making payment on his behalf to his exporter. Commission charged by Bank, on opening of LC or at the amendment is to be realized Upfront and no refund is being allowed. Commission charges concerned with LC(Bank normally) are given as follows:
1. Commitment charges At the time of opening of LC, commission of 0.15% is charged for every quarter and part thereof

2. Usance charges
Name of the Item
Rate of interest
For Bill Upto 10Days sight
0.15%
For Bills upto 3months
0.30%
For Bills over 3months
0.30% for first 3months+0.10% per month in excess of 3 months sight

POST-SHIPMENT CREDIT (PSC)

POST-SHIPMENT CREDIT (PSC)

'Post-shipment Credit' means any loan or advance granted or any other
credit provided by an institution to an exporter of goods from India from the date of extending credit after shipment of goods to the date of realization of export proceeds. It also includes any loan or advance granted to an exporter, in consideration of, or on the security of, any Duty Drawback or any receivables from Government Of India. PS Finance can be classified as under:
a. Negotiation/Payment/Acceptance of export documents under LC.
b. Purchase/Discount of export documents under confirmed orders/export contracts etc.
c. Advances against export bills sent on collection basis.
d. Advances against exports on consignment basis.
e. Advances against undrawn balances on exports.
f. Advances against receivables from Government of India.
g. Advances against retention money relating to exports.
h. Advances against approved deemed exports.

PS Credit is generally availed by exporters to get immediate payment against the goods (or services) shipped by them abroad. For availing this facility from Bank, documents are to be submitted within 21 days

How PS is a “Source of Earning for Bank”

Post shipment finance is meant to finance export receivables. In Post-Shipment sought of credit, Bank charges nearly Rs.20000 as commission per sanction.
The rate of interest charged for this facility by the same is as follows:

Name of the Item
Rate of interest
For Bill Upto 10Days sight
0.15%
For Bills up to 3months
0.30%
For Bills over 3months
0.30% for first 3months+0.10% per month in excess of 3 months sight



The interest scheme is given as under:

Name of the Item
Rate of Interest
On demand bills for transit period (as specified by FEDAI)
not exceeding 0.75% over LIBOR
(LIBOR is 5.35%)
2.Against usance bills (credit for total period comprising usance period of export bills, transit period as specified by FEDAI +grace period wherever applicable) up to 6 months from the date of shipment
not exceeding 0.75% over LIBOR(that is, not more than 6.10%)
3.Export bills (demand or usance) realized after due date but up to date of crystallization
0.75% + 2.0%points (that is, 8.10%)
Thus, banks earn mainly through commission and rate of interest charged under Post-Shipment Credit granting sort of transaction. Foreign Currency earned may be kept as deposit with the bank, or, it may also use it for trade purposes, so, as to earn exchange profit

Pre-Shipment/Packing Credit(PC)

Pre-Shipment/Packing Credit(PC)


PCFC is a scheme which provides credit to exporter in domestic/foreign currency in order to facilitate the purchase of raw material/components that are required to fulfill the export order. Or, in brief, it is a Working Capital (short-term) finance extended to the exporters, in anticipation of his exporting the goods. The exporter can procure the raw materials/components either from international or from domestic market.
This facility can be availed by exporter in one convertible foreign currency in respect of an export order invoiced in another convertible foreign currency. The risk and cost involved in such cross currency transaction is that of exporter.

Pre-Shipment Credit can be availed in the form of:
a. Packing Credit in Indian Rupees
b. Packing Credit in Foreign Currency
c. Advance against incentives receivable from Government covered by ECGC (Export Credit Guarantee Corporation) Guarantee.
d. Advance against Cheques/Drafts received as Advance Payment.

Bank provides all the forms of PC. It strictly follows the instructions and rules and regulations governing the following:
1. Exchange Control Regulations
2. Trade Control Regulations
3. RBI’s Interest rate directives and other operational guidelines
4. ECGC policies and guarantees
5. Rules of FEDAI(Foreign Exchange Dealers Association of India)

How PC is a “Source of Earning for Bank”
PC is being introduced with the objective of making credit available to exporter at internationally competitive rates.
Bank charges Rs. 20000 per sanction (that is, it charges this amount on every PCFC request by an exporter).
The rate of interest charged for this facility, by Bank, is linked to LIBOR (that is, rate of interest charged to exporter should not exceed 0.75% over 6months on LIBOR, excluding withholding tax.). The interest scheme, followed by Banks, is given as under:

Name of the Item
Rate of Interest
Up to 180 days
not exceeding 0.75% over LIBOR
Beyond 180 days and up to 360
not exceeding 0.75% over LIBOR+2%LIBOR (London International Bank Offer Rate) is presently 5.35%

Tuesday, February 3, 2009

15 important Tips for better life


Tips for Better Life on "2009"

1. Take a 10-30 minutes walk every day. And while you walk, smile.
2. Sit in silence for at least 10 minutes each day.
3. Sleep for 7 hours.
4. Live with the 3 E's -- Energy, Enthusiasm, and Empathy.
5. Play more games.
6. Read more books than you did in 2008.
7. Make time to practice meditation, yoga, and prayer. They provide us with daily fuel for our busy lives.
8. Spend time with people over the age of 70 & under the age of 6.
9. Dream more while you are awake.
10. Eat more foods that grow on trees and plants and eat less food that is manufactured in plants..
11. Drink plenty of water.
12. Try to make at least three people smile each day.
13. Don't waste your precious energy on gossip.
14. Forget issues of the past. Don't remind your partner with his/her mistakes of the past. That will ruin your present happiness.
15. Don't have negative thoughts or things you cannot control. Instead invest your energy in the positive present moment.

Thursday, January 29, 2009

top 7 tips for investment.....


1. First and foremost, invest in yourself or in you and your family.

2. Allocate your nest egg simply and practically.

Decide on a level of risk diversification that fits your sleep index, i.e. that allows you to sleep well at night even when the markets are going a little crazy.

3. Decide to mainly invest in either bargain stocks or in a few good growth and income mutual funds, not both.



4. If comfortable making stock picks, every other week select and buy the the best classic value asset you can find.


5. Do not worry about a target MARKET value for your stocks portfolio. Insist on a target equity BOOK value instead.


The market performs at times almost randomly and at others emotionally, reacting with wild positive and negative swings to relatively minor stimuli. As such, it is undependable except in the long-term, when happily the trend is upward. But one can buy stocks in such a way as to insure desired levels of book value (essentially net asset value).

6. Consider adding regularly, for instance with every paycheck.

7. Pay off debts faster than you acquire them.

Wednesday, January 28, 2009

Statutory Liquidity Ratio (SLR)

In terms of Section 24 (2-A) of the B.R. Act, 1949 all Scheduled Commercial Banks, in addition to the average daily balance which they are required to maintain under Section 42 of the RBI Act, 1934, are required to maintain in India,

a) in cash, or

b) in gold valued at a price not exceeding the current market price,

or

c) in unencumbered approved securities valued at a price as specified by the RBI from time to time.

an amount of which shall not, at the close of the business on any day, be less than 25 per cent or such other percentage not exceeding 40 per cent as the RBI may from time to time, by notification in gazette of India, specify, of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight,
At present, all Scheduled Commercial Banks are required to maintain a uniform SLR of 24 per cent of the total of their demand and time liabilities in India as on the last Friday of the second preceding fortnight

Cash Reserve Ratio (CRR)

With a view to monitoring compliance with statutory reserve requirements viz. Cash Reserve Ratio by the Scheduled Commercial Banks, Reserve Bank of India has prescribed statutory returns .

1 Maintenance of CRR
In terms of Section 42(1) of the RBI Act 1934, Scheduled Commercial Banks are required to maintain with RBI an average cash balance, the amount of which shall not be less than three per cent of the total of the Net Demand and Time Liabilities (NDTL) in India, on a fortnightly basis and RBI is empowered to increase the said rate of CRR to such higher rate not exceeding twenty percent of the Net Demand and Time Liabilities (NDTL) under the RBI Act, 1934. At present, effective from the fortnight beginning Jan 14, 2009, the rate of CRR is 5.25 per cent of the NDTL.

Demand Liabilities

'Demand Liabilities' include all liabilities which are payable on demand and they include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfer (MTs), Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand. Money at Call and Short Notice from outside the Banking System should be shown against liability to others.

Time Liabilities

Time Liabilities are those which are payable otherwise than on demand and they include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit if not payable on demand, deposits held as securities for advances which are not payable on demand, India Millennium Deposits and Gold Deposits.

Tuesday, January 27, 2009

RISKS in an INTERNATIONAL TRANSACTION

In any business transaction, there are risks. However, these risks are enlarged when dealing internationally. Added to commercial risks present in a domestic transaction are foreign exchange risks as well as country risks.
COUNTRY RISKS
Political Stability:
Political Instability resulting from internal or external conflict can jeopardize any imports/exports transactions of the companies involved in trade activities with such countries. It may result in delayed payments at best to outright default at worst.
Economic Environment:
Adverse economic conditions in the country may get reflected in the poor paying capacity of the companies operating there (also, unstable currency).
Legal Infrastructure:
In case of Trade Disputes, a solid legal framework assures a company of a quick and just solution.
Foreign Exchange Restrictions:
Forex restrictions in an importer’s country can limit an importer’s ability to make payments for its international purchases.
FOREIGN EXCHANGE RISKS
1. Foreign Currency Volatility:
A volatile foreign currency may result in uncertainty in terms of value of future payments in that currency.
COMMERCIAL RISKS
1. Reliability of Information:
The very fact that International Trade partners are seperated by large geographical, cultural and political distances, implies that they tend to have limited information on each other’s financial standings and business track records. As a result, the mutual level of cofidence and trust on each otheris low.
2. Trade Dispute:
Dispute resolution mechanisms in each country are different and international trade disputes are more complicated to resolve that domestic trade disputes. Hence, in case of a default, unilateral termination of contract or any other trade dispute, the legal proceedings may turn out to be very expensive and long drawn.

Unquoted SLR securities3

Central Government Securities
i) Banks should value the unquoted Central Government securities on the basis of the prices/ YTM rates put out by the PDAI/ FIMMDA at periodical intervals.
ii) The 6.00 per cent Capital Indexed Bonds may be valued at “cost”, as defined in circular DBOD.No.BC.8/12.02.001/ 97-98 dated January 22, 1998 and BC.18/12.02.001/ 2000-2001 dated August 16, 2000.
iii) Treasury Bills should be valued at carrying cost.

State Government Securities

State Government securities will be valued applying the YTM method by marking it up by 25 basis points above the yields of the Central Government Securities of equivalent maturity put out by PDAI/ FIMMDA periodically.

Other ‘approved’ Securities

Other approved securities will be valued applying the YTM method by marking it up by 25 basis points above the yields of the Central Government Securities of equivalent maturity put out by PDAI/ FIMMDA periodically.

Unquoted SLR securities3

Central Government Securities
i) Banks should value the unquoted Central Government securities on the basis of the prices/ YTM rates put out by the PDAI/ FIMMDA at periodical intervals.
ii) The 6.00 per cent Capital Indexed Bonds may be valued at “cost”, as defined in circular DBOD.No.BC.8/12.02.001/ 97-98 dated January 22, 1998 and BC.18/12.02.001/ 2000-2001 dated August 16, 2000.
iii) Treasury Bills should be valued at carrying cost.

State Government Securities

State Government securities will be valued applying the YTM method by marking it up by 25 basis points above the yields of the Central Government Securities of equivalent maturity put out by PDAI/ FIMMDA periodically.

Other ‘approved’ Securities

Other approved securities will be valued applying the YTM method by marking it up by 25 basis points above the yields of the Central Government Securities of equivalent maturity put out by PDAI/ FIMMDA periodically.

Investment Reserve Account (IRA)

In the event, provisions created on account of depreciation in the ‘AFS’ or ‘HFT’ categories are found to be in excess of the required amount in any year, the excess should be credited to the Profit & Loss account and an equivalent amount (net of taxes, if any and net of transfer to Statutory Reserves as applicable to such excess provision) should be appropriated to an IRA Account in Schedule 2 – “Reserves & Surplus” under the head “Revenue and other Reserves”, and would be eligible for inclusion under Tier-II within the overall ceiling of 1.25 per cent of total Risk Weighted Assets prescribed for General Provisions/ Loss Reserves.
Banks may utilise IRA as follows:
The provisions required to be created on account of depreciation in the AFS and HFT categories should be debited to the P&L Account and an equivalent amount (net of tax benefit, if any, and net of consequent reduction in the transfer to Statutory Reserve), may be transferred from the IRA to the P&L Account.
Illustratively, banks may draw down from the IRA to the extent of provision made during the year towards depreciation in investment in AFS and HFT categories (net of taxes, if any, and net of transfer to Statutory Reserves as applicable to such excess provision). In other words, a bank which pays a tax of 30% and should appropriate 25% of the net profits to Statutory Reserves, can draw down Rs.52.50 from the IRA, if the provision made for depreciation in investments included in the AFS and HFT categories is Rs.100.
(vii) The amounts debited to the P&L Account for provision should be debited under the head ‘Expenditure - Provisions & Contingencies’. The amount transferred from the IRA to the P&L Account, should be shown as ‘below the line’ item in the Profit and Loss Appropriation Account, after determining the profit for the year. Provision towards any erosion in the value of an asset is an item of charge on the profit and loss account, and hence should appear in that account before arriving at the profit for the accounting period. Adoption of the following would not only be adoption of a wrong accounting principle but would, also result in a wrong statement of the profit for the accounting period:a)the provision is allowed to be adjusted directly against an item of Reserve without being shown in the profit and loss account, OR
(b) a bank is allowed to draw down from the IRA before arriving at the profit for the accounting period (i.e., above the line), OR
(c) a bank is allowed to make provisions for depreciation on investment as a below the line item, after arriving at the profit for the period, Hence none of the above options are permissible.(viii) In terms of our guidelines on payment of dividend by banks, dividends should be payable only out of current year's profit. The amount drawn down from the IRA will, therefore, not be available to a bank for payment of dividend among the shareholders. However, the balance in the IRA transferred ‘below the line’ in the Profit and Loss Appropriation Account to Statutory Reserve, General Reserve or balance of Profit & Loss Account would be eligible to be reckoned as Tier I capital.

valuation of bank portfolio

Held to Maturityi)

Investments classified under HTM need not be marked to market and will be carried at acquisition cost, unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity. The banks should reflect the amortised amount in ‘Schedule 13 – Interest Earned : Item II – Income on Investments’, as a deduction. However, the deduction need not be disclosed separately. The book value of the security should continue to be reduced to the extent of the amount amortised during the relevant accounting period. 2
ii) Banks should recognise any diminution, other than temporary, in the value of their investments in subsidiaries/ joint ventures, which are included under HTM and provide therefor. Such diminution should be determined and provided for each investment individually.
3.2 Available for Sale

The individual scrips in the Available for Sale category will be marked to market at quarterly or at more frequent intervals. Securities under this category shall be valued scrip-wise and depreciation/ appreciation shall be aggregated for each classification referred to in item 2(i) above. Net depreciation, if any, shall be provided for. Net appreciation, if any, should be ignored. Net depreciation required to be provided for in any one classification should not be reduced on account of net appreciation in any other classification. The book value of the individual securities would not undergo any change after the marking of market.
3.3 Held for Trading

The individual scrips in the Held for Trading category will be marked to market at monthly or at more frequent intervals and provided for as in the case of those in the Available for Sale category. Consequently, the book value of the individual securities in this category would also not undergo any change after marking to market.2 Please refer to the Mailbox clarification dated July 11, 2007.

Investment Fluctuation Reserve

(i) With a view to building up of adequate reserves to guard against any possible reversal of interest rate environment in future due to unexpected developments, banks were advised to build up Investment Fluctuation Reserve (IFR) of a minimum 5 per cent of the investment portfolio within a period of 5 years.
(ii) To ensure smooth transition to Basel II norms, banks were advised in June 24, 2004 to maintain capital charge for market risk in a phased manner over a two year period, as under:
(a) In respect of securities included in the HFT category, open gold position limit, open foreign exchange position limit, trading positions in derivatives and derivatives entered into for hedging trading book exposures by March 31, 2005, and
(b) In respect of securities included in the AFS category by March 31, 2006.
(iii) With a view to encourage banks for early compliance with the guidelines for maintenance of capital charge for market risks, it was advised in April 2005 that banks which have maintained capital of at least 9 per cent of the risk weighted assets for both credit risk and market risks for both HFT (items as indicated at (a) above) and AFS category may treat the balance in excess of 5 per cent of securities included under HFT and AFS categories, in the IFR, as Tier I capital. Banks satisfying the above were allowed to transfer the amount in excess of the said 5 per cent in the IFR to Statutory Reserve.(iv) Banks were advised in October 2005 that, if they have maintained capital of at least 9 per cent of the risk weighted assets for both credit risk and market risks for both HFT (items as indicated at (a) above) and AFS category as on March 31, 2006, they would be permitted to treat the entire balance in the IFR as Tier I capital. For this purpose, banks may transfer the balance in the Investment Fluctuation Reserve ‘below the line’ in the Profit and Loss Appropriation Account to Statutory Reserve, General Reserve or balance of Profit & Loss Account.

classification of bank portfolio

Classification
i) The entire investment portfolio of the banks (including SLR securities and non-SLR securities) should be classified under three categories
viz. ‘Held to Maturity’, ‘Available for Sale’ and ‘Held for Trading’. However, in the balance sheet, the investments will continue to be disclosed as per the existing six classifications:
viz. a) Government securities, b) Other approved securities, c) Shares, d) Debentures & Bonds, e) Subsidiaries/ joint ventures and f) Others (CP, Mutual Fund Units, etc.).
ii) Banks should decide the category of the investment at the time of acquisition and the decision should be recorded on the investment proposals.
2.1 Held to Maturityi). The securities acquired by the banks with the intention to hold them up to maturity will be classified under ‘Held to Maturity (HTM)’.
ii). Banks are allowed to include investments included under HTM category upto 25 per cent of their total investmentsThe following investments are required to be classified under HTM but are not counted for the purpose of ceiling of 25 per cent specified for this category;a.Re-capitalisation bonds received from the Government of India towards their re-capitalisation requirement and held in their investment portfolio. This will not include re-capitalisation bonds of other banks acquired for investment purposes.
b.Investment in subsidiaries and joint ventures (A Joint Venture would be one in which the bank, along with its subsidiaries, holds more than 25 percent of the equity).c.The investments in debentures/bonds, which are deemed to be in the nature of advance. [Refer sub-paragraph (vii) below]iii). Banks are, however, allowed since September 2, 2004 to exceed the limit of 25 percent of total investment under HTM category provided:
d) the excess comprises only of SLR securities, and
e) the total SLR securities held in the HTM is not more than 25 percent of their DTL as on the last Friday of the second preceding fortnight.ii)The non-SLR securities, held as part of HTM as on September 2, 2004 may remain in that category. No fresh non-SLR securities, are permitted to be included in HTM, except the following:
(a) Fresh re-capitalisation bonds, received from the Government of India, towards their re-capitalisation requirement and held in their investment portfolio. This will not include re-capitalisation bonds of other banks acquired for investment purposes.
(b) Fresh investment in the equity of subsidiaries and joint ventures.
(c) RIDF / SIDBI deposits
iii) To sum up, banks may hold the following securities under HTM:
(a) SLR Securities upto 25 percent of their DTL as on the last Friday of the second preceding fortnight.
(b) Non-SLR securities included under HTM as on September 2, 2004.
(c) Fresh re-capitalisation bonds received from the Government of India towards their re-capitalisation requirement and held in Investment portfolio.
(d) Fresh investment in the equity of subsidiaries and joint ventures
(e) RIDF/SIDBI deposits.
(vi) Profit on sale of investments in this category should be first taken to the Profit & Loss Account, and thereafter be appropriated to the ‘Capital Reserve Account’. Loss on sale will be recognised in the Profit & Loss Account.
(vii) The debentures/ bonds must be treated in the nature of an advance when:
The debenture/bond is issued as part of the proposal for project finance and the tenure of the debenture is for a period of three years and aboveOrThe debenture/bond is issued as part of the proposal for working capital finance and the tenure of the debenture/ bond is less than a period of one yearAnd the bank has a significant stake i.e.10% or more in the issue
Andthe issue is part of a private placement, i.e. the borrower has approached the bank/FI and not part of a public issue where the bank/FI has subscribed in response to an invitation.
Since, no fresh non-SLR securities are permitted to be included in the HTM, these investments should not be held under HTM category and they should be subjected to subject to mark- to-market discipline. They would be subjected to prudential norms for identification of non-performing investment and provisioning as applicable to investments.
2.2 Available for Sale & Held for Trading
i) The securities acquired by the banks with the intention to trade by taking advantage of the short-term price/interest rate movements will be classified under ‘Held for Trading (HFT)’.
ii) The securities which do not fall within the above two categories will be classified under ‘Available for Sale (AFS)’.
iii) The banks will have the freedom to decide on the extent of holdings under HFT and AFS. This will be decided by them after considering various aspects such as basis of intent, trading strategies, risk management capabilities, tax planning, manpower skills, capital position.
iv) The investments classified under HFT would be those from which the bank expects to make a gain by the movement in the interest rates/market rates. These securities are to be sold within 90 days.
v) Profit or loss on sale of investments in both the categories will be taken to the Profit & Loss Account.
2.3 Shifting among categories
i) Banks may shift investments to/from HMT with the approval of the Board of Directors once a year. Such shifting will normally be allowed at the beginning of the accounting year. No further shifting to/from HTM will be allowed during the remaining part of that accounting year.
ii) Banks may shift investments from AFS to HFT with the approval of their Board of Directors/ ALCO/ Investment Committee. In case of exigencies, such shifting may be done with the approval of the Chief Executive of the bank/Head of the ALCO, but should be ratified by the Board of Directors/ ALCO.
iii) Shifting of investments from HFT to AFS is generally not allowed. However, it will be permitted only under exceptional circumstances like not being able to sell the security within 90 days due to tight liquidity conditions, or extreme volatility, or market becoming unidirectional. Such transfer is permitted only with the approval of the Board of Directors/ ALCO/ Investment Committee.
iv) Transfer of scrips from one category to another, under all circumstances, should be done at the acquisition cost/ book value/ market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer should be fully provided for. Banks may apply the values as on the date of transfer and in case, there are practical difficulties in applying the values as on the date of transfer, banks have the option of applying the values as on the previous working day, for arriving at the depreciation requirement on shifting of securities.