Do banks need to advertise?

1. This activity placates any fears about the stability of the company.
2. Fund managers and investment banks struggle to attract top talent to their organization when
they are not well known.
3. When the industry is commoditized it will only be the brands (and excellent, honest service) that
will differentiate these evolving financial supermarkets.
4. More stress has been laid upon explaining to the public clearly and simply the services which
banks have to offer, and perhaps to trace the constructive work performed by bankers in
establishing the industries of the country.

Is pricing important?
Pricing for retail financial products matters for the economy as a whole. Prices serve as signals in
markets, provide information and therefore influence supply and demand of financial products. Prices
therefore have an impact on savings, wealth accumulation and efficient financial market inter-mediation
in an economy and also have distributional effects. Finally, banks’ pricing policy for financial products
has become increasingly scrutinized by regulators and subject to public criticism.
Retail banks are under continuing cost and earnings pressure. The refocusing of many financial
institutions on retail banking and the emergence of new competitors from other sectors, such as for
mobile payment services, is intensifying competition. Given this situation, pricing policy may generate
short and long-term competitive advantages by boosting profitability and customer satisfaction.

Banks’ clients have become more demanding and customers’ willingness to switch to other providers
has risen. It is against this background they need to set prices for their products and services at present.
Analyses suggest that prices for bank products play a central role in the consideration to switch banks.
Customers identify pricing as an area where they wish to see improvements and regard these as a
suitable means of increasing satisfaction with their bank

Reasons for having CRR?

The CRR is the proportion of deposits that commercial banks must maintain with the central bank. Cash
reserves with central banks perform the following functions: initially, safety to deposits with commercial
banks, facilitation of interbank settlement, transaction clearance, fund transfers to needy banks and
liquidity to the financial sector. Central banks have been using CRR exogenously to control the volume of
primary deposits and potential to generate secondary deposits in order to regulate the money supply
and inflation. Thus, variation of reserve requirement has always impacted money supply whenever it has
been used. In the beginning, central banks desired that commercial banks should keep separate cash
reserve against time and demand deposits. Recent discussions on rationality of cash reserves in order to
prevent excess credit expansion or contraction, CRR is being used as an instrument of monetary
regulation along with open market operations, repo rate and reverse repo rate with the objective to
regulate money supply, to assist growth and to control inflation. As a matter of fact, CRR is a useful
instrument to regulate money supply as it induces the banking system to adjust its deposits liabilities to
its actual reserves more rapidly within each reserve maintenance period. If cash reserves have to be
abolished, then commercial banks should have to achieve the status of zero non-performing assets
along with a satisfactory level of investment risk reserves in order to protect the depositors in a financial
breakdown.
Calculating debt capacity?
Debt capacity means capacity of company to repay the Debt. To calculate the debt capacity of company
is effected by lots of factors. But on the basis of risk and return in company, we can calculate or measure
the debt capacity.
1. Debt to Total Capitalization Ratio: It will tell us, how much company has already taken the loan of
total capitalization. In total capitalization, we will include capital, reserve and debt. For example,
if equity share capital is $ 10,00,000. Total reserves are $ 2,00,000 and total debt is $ 4,00,000. It means
Debt to total capitalization ratio is 25%. We have to pay $ 25 out of $100 outside  and $ 75 is our own.
So, it will be helpful to decide the capacity of debt of company. Instead of debt to total capitalization
ratio, we can calculate debt to total asset ratio, just see following screenshot. It will give more clear idea
about the current debt capacity of company.
2. Gear Ratio Gearing ratio is the relationship between equity share capital and preference share capital
+ debt.
Gearing Ratio = Equity share capital / preference share capital + debt
This ratio is also helpful for calculating the debt capacity of company. Only that company whose ratio
will more than 50% will be good. If this ratio is 25% or less, it is sign of risk. Because both pref. share
capital and debt have no right to vote and both are not owners of company. So, company has to reduce
both as soon as it gets the profit.
3. Debt Equity Ratio: We can also find debt equity ratio. It is also helpful for finding company's solvency.
4. Cash Payment Capacity: For knowing debt capacity, we should know the cash payment capacity. If
its profit and loss account is showing that there are lots of expenses which still payable. It means, it is
earning profit but cash payment capacity is very low. Now, you can easily know when a company cannot
pay the small expense, then how can it pay the big debt?
5. Working Capital Capacity: We should also find the working capital. Its value will be helpful for finding
the capacity of working capital. There is a statement and its name is Changes in working capital. Both
should be calculated for knowing debt capacity. If working capital is low. Working capital's current
requirement is very high, then it is the sign, company's debt capacity is low.

Reasons for glass stegall act enacted?

In 1933, in the wake of the 1929 stock market crash and during a nationwide commercial bank failure
and the Great Depression, two members of Congress put their names on what is known today as
the Glass-Steagall Act (GSA). This act separated investment and commercial banking activities. At the
time, "improper banking activity," or what was considered overzealous commercial bank involvement in
stock market investment, was deemed the main culprit of the financial crash. According to that
reasoning, commercial banks took on too much risk with depositors' money. Additional and sometimes
non-related explanations for the Great Depression evolved over the years, and many questioned
whether the GSA hindered the establishment of financial services firms that can equally compete against
each other.

Reasons for the Act - Commercial Speculation

Commercial banks were accused of being too speculative in the pre-Depression era, not only because
they were investing their assets but also because they were buying new issues for resale to the public.
Thus, banks became greedy, taking on huge risks in the hope of even bigger rewards. Banking itself
became sloppy and objectives became blurred. Unsound loans were issued to companies in which the
bank had invested, and clients would be encouraged to invest in those same stocks.

As a collective reaction to one of the worst financial crises at the time, the GSA set up a regulatory
firewall between commercial and investment bank activities, both of which were curbed and controlled.
Banks were given a year to decide on whether they would specialize in commercial or in investment
banking. Only 10% of commercial banks' total income could stem from securities; however, an exception
allowed commercial banks to underwrite government-issued bonds. Financial giants at the time such as
JP Morgan and Company, which were seen as part of the problem, were directly targeted and forced to
cut their services and, hence, a main source of their income. By creating this barrier, the GSA was aiming
to prevent the banks' use of deposits in the case of a failed underwriting job.

Graham leach act?

The Gramm-Leach-Bliley Act requires financial institutions – companies that offer consumers financial
products or services like loans, financial or investment advice, or insurance – to explain their
information-sharing practices to their customers and to safeguard sensitive data.

It repealed part of the Glass–Steagall Act of 1933, removing barriers in the market

among banking companies, securities companies and insurance companies that prohibited any one
institution from acting as any combination of an investment bank, a commercial bank, and an insurance
company.

A year before the law was passed, Citicorp, a commercial bank holding company, merged with the
insurance company Travelers Group in 1998 to form the conglomerate Citigroup, a corporation
combining banking, securities and insurance services under a house of brands that
included Citibank, Smith Barney, Primerica, and Travelers. Because this merger was a violation of the
Glass–Steagall Act and the Bank Holding Company Act of 1956, the Federal Reserve gave Citigroup a
temporary waiver in September 1998. Less than a year later, GLBA was passed to legalize these types of
mergers on a permanent basis.

Marginal Standing Facility (MSF) is a new scheme announced by the Reserve Bank of India (RBI) in its
Monetary Policy (2011-12) and refers to the penal rate at which banks can borrow money from the
central bank over and above what is available to them through the LAF window.
MSF, being a penal rate, is always fixed above the repo rate. The MSF would be the last resort for banks
once they exhaust all borrowing options including the liquidity adjustment facility by pledging through
government securities, which has lower rate of interest in comparison with the MSF. The MSF would be
a penal rate for banks and the banks can borrow funds by pledging government securities within the
limits of the statutory liquidity ratio. The scheme has been introduced by RBI with the main aim of
reducing volatility in the overnight lending rates in the inter-bank market and to enable smooth
monetary transmission in the financial system.

MSF represents the upper band of the interest corridor and reverse repo as the lower band and the repo
rate in the middle. To balance the liquidity, RBI intend to use the sole independent "policy rate" which is
the repo rate and the MSF rate automatically gets adjusted to a fixed per cent above the repo rate (MSF
was originally intended to be 1% above the repo rate).
MSF came into effect from 9th May 2011. MSF scheme is provided by RBI by which the banks can
borrow overnight upto 1 per cent of their net demand and time liabilities (NDTL) i.e. 1 per cent of the
aggregate deposits and other liabilities of the banks. However, with effect from 17th April 2012 RBI has
raised the borrowing limit under the MSF from 1 per cent to 2 per cent of their NDTL outstanding at the
end of the second preceding fortnight. The rate of interest for the amount accessed through this facility
is fixed at 100 basis points (i.e. 1 per cent) above the repo rate for all scheduled commercial banks.
However, the rate of interest on the amount accessed from this facility got fixed at 300 basis points (i.e.
3%) above the repo rate with effect from 15/07/2013. In addition, access to the LAF window was
reduced by RBI to just 0.5% of their NDTL which in turn forced banks to access the MSF window for their
requirements, as LAF window was not sufficient enough. In the credit policy of September 2013, i.e.,
after one month, this was reversed, whereby MSF rate was cut by 75 bps from 10.25% to 9.5% and as on
September 2013 MSF stands at 200 bps (2%) above the repo rate, which is considered as the "policy
rate" in the economy. However, the amount that can be accessed using LAF window remains at 0.5% of
the NDTL.

Liquidity adjustment facility (LAF) is a monetary policy tool which allows banks to borrow money
through repurchase agreements. LAF is used to aid banks in adjusting the day to day mismatches in
liquidity.LAF consists of repo and reverse repo operations. Repo or repurchase option is a collaterised
lending i.e. banks borrow money from Reserve bank of India to meet short term needs by selling
securities to RBI with an agreement to repurchase the same at predetermined rate and date. The rate
charged by RBI for this transaction is called the repo rate. Repo operations therefore inject liquidity into
the system. Reverse repo operation is when RBI borrows money from banks by lending securities. The
interest rate paid by RBI is in this case is called the reverse repo rate. Reverse repo operation therefore
absorbs the liquidity in the system. The collateral used for repo and reverse repo operations comprise of
Government of India securities. Oil bonds have been also suggested to be included as collateral for
Liquidity adjustment facility

Liquidity adjustment facility has emerged as the principal operating instrument for modulating short
term liquidity in the economy. Repo rate has become the key policy rate which signals the monetary
policy stance of the economy.
Banks with ST liabilities more stable:
Liuidity at a bank is a measure of its ability to readily find the cash it may need to meet demands upon it.
Liquidity can come from direct cash holdings in currency or on account at the Federal Reserve or other
central bank. More commonly it comes from holding securities that can be sold quickly with minimal
loss. This typically means highly creditworthy securities, including government bills, which have short-
term maturities. Indeed if their maturity is short enough the bank may simply wait for them to return
the principal at maturity. Short-term, very safe securities also tend to trade in liquid markets, meaning
that large volumes can be sold without moving prices too much and with low transaction costs (usually
based on a bid/ask spread between the price dealers will pay to buy -- the bid -- and that at which they
will sell -- the ask.)However, a bank’s liquidity situation, particularly in a crisis, will be affected by much
more than just this reserve of cash and highly liquid securities. The maturity of its less liquid assets will
also matter, since some of them may mature before the cash crunch passes, thereby providing an
additional source of funds. Or they may be sold, even though this incurs a potentially substantial loss in
a fire sale situation where the bank must take whatever price it can get. On the other side, banks often
have contingent commitments to pay out cash, particularly through lines of credit offered to its retail
and business customers. (A home equity line is a retail example, while many businesses have lines of
credit that allow them to borrow within set limits at any time.) Of course, the biggest contingent
commitment in most cases is the requirement to pay back demand deposits at any time that the
depositor wants.
ST liabs for banks – CASA
For I banks- money market funds etc.
CASA more stable than MM funds which are affected by mobetary policy etc.
Comm and central bank and payment systems
To facilitate convertibility between different forms of money, central banks support the existence of at
least one payment system for their own currency that is widely accessible to banks. Payment systems
play a fundamental role in the economy by providing a range of mechanisms through which transactions
can be easily settled. As such, banknotes are part of this broad notion of payment systems. In spite of
the expanding role of its various substitutes, the banknote is still a fundamental payment instrument in
economic life. Yet this report focuses on a narrower concept whereby a payment system is a defined set
of instruments, procedures and rules for the transfer of funds from one bank to another. In these
systems, banks hold funds at a common agent (referred to in the report as “settlement institution”).
Payments between these banks are made by exchanging the liabilities of this settlement institution (the
“settlement asset”). Deposits at the settlement institution and the credit of the settlement institution
(when available) are both accepted as money by all the participants in the system. “Payment systems”
include payment mechanisms used by securities settlement systems (SSSs), whether the payment
mechanism is “embedded” within the SSS or external to it. This report does not distinguish between the
role central bank money plays in embedded mechanisms and in external payment systems, and the
analysis which follows is relevant to both. In practice, most - although by no means all - payment
systems settle in central bank money.3 In other words, the settlement institution is generally the central
bank. This role is consistent with the monetary order described earlier, whereby a commercial bank
honours its sight liabilities by converting them into central bank money if their clients demand it. It also
reflects the layered architecture of financial systems, whereby private individuals and non-financial
businesses hold (part of) their liquidity in banks, and banks in turn hold (part of) their liquidity in the
central bank.

Commercial banks perform many functions. They satisfy the financial needs of the sectors such as
agriculture, industry, trade, communication, so they play very significant role in a process of economic
social needs. The functions performed by banks, since recently, are becoming customer-centred and are
widening their functions. Generally, the functions of commercial banks are divided into two categories:
primary functions and the secondary functions.

Commercial banks perform various primary functions, some of them are given below:
 Commercial banks accept various types of deposits from public especially from its clients,
including saving account deposits, recurring account deposits, and fixed deposits. These deposits
are payable after a certain time period

 Commercial banks provide loans and advances of various forms, including an overdraft facility,
cash credit, bill discounting, money at call etc. They also give demand and demand and term loans
to all types of clients against proper security.

 Credit creation is most significant function of commercial banks. While sanctioning a loan to a
customer, they do not provide cash to the borrower. Instead, they open a deposit account from
which the borrower can withdraw. In other words, while sanctioning a loan, they automatically
create deposits, known as a credit creation from commercial banks.

Along with primary functions, commercial banks perform several secondary functions, including many
agency functions or general utility functions. The secondary functions of commercial banks can be
divided into agency functions and utility functions.

The agency functions are the following:

 To collect and clear cheque, dividends and interest warrant.

 To make payments of rent, insurance premium, etc.
 To deal in foreign exchange transactions.
 To purchase and sell securities.
 To act as trustee, attorney, correspondent and executor.
 To accept tax proceeds and tax returns.

The utility functions are the following:

 To provide safety locker facility to customers.

 To provide money transfer facility.
 To issue traveller's cheque.
 To act as referees.
 To accept various bills for payment: phone bills, gas bills, water bills, etc.
 To provide merchant banking facility.
 To provide various cards: credit cards, debit cards, smart cards, etc.

Adv and Disadv of internet only banks

ADVANTAGES OF INTERNET-ONLY BANKING

COST-SAVINGS PASSED TO CUSTOMERS
How often do you visit your branch? With Internet-Only banks not having the overheads involved in
maintaining a physical presence in your town or city, they can pass those cost savings across to you; the
customer. So, what does this mean for you? Lower loan rates and higher savings and deposit rates. This
is one of the big benefits of Internet-only banking. "But, how do I withdraw money?" I hear you ask.
Well, this can still be done from any ATM.

PAPER STATEMENTS ARE AVAILABLE ON DEMAND

Look back across your life - can you remember how many times you've needed to access a paper bank
statement? If you've ever had any type of credit the odds are that you have used a paper statement as
proof of income or savings. But wasn't it tedious waiting for the bank to mail you a statement?
Fortunately, you can now get your much needed paper work on demand. By cutting out the middleman
(the cashier) and printing off you statements at home you have almost instantaneous access to your
banking information.

INSTANT VISIBILITY OF YOUR FINANCIAL HEALTH

‘How much money do I have available to spend?’, ‘What do my monthly outgoings look like?’ or ‘Can I
really afford a holiday this year?’ - these are the sort of questions most people find themselves
wondering on a regular basis. Not so long ago, providing an answer involved going to your bank,
ordering statements and then using a pen and paper to work out how healthy your finances really were.
Online banking changed all of this faster than you can say, ‘Damn, I’m broke!’. Whilst access to your
banking data is pretty much the norm, most banks have gone one step further and now provide you
with a selection of tools that give a graphical depiction of your spending history.

ACCESS TO ALL BANKING FACILITIES FROM YOUR ARMCHAIR

This boils down to convenience. Traditionally, banks required customers to deal with certain issues and
requests over the counter. This allowed banks to keep a tight rein on security and put new offers, loans
and deals directly in front of the customer (because, after all, we know how ineffective most mail
marketing campaigns are, right?)
Internet only banking has changed this whole business model. Sure, some people still like to have the
personal touch involved in their financial dealings. But, more and more, their hectic lifestyles are fuelling
a demand for Internet-based banking activities. Ordering a cheque book, raising your overdraft limit and
applying for loans can now all be done from the comfort of your armchair.

REAL-TIME ACCOUNT ALERTS

A few years ago, the first you knew that you’d breached your overdraft limit was when a plain, white
envelope landed in your mailbox. Accompanied by a penalty charge. Not a nice feeling for anyone, we
know. It’s not that we’re all spendthrifts - sometimes we just have a bad month. But, with an arcane
method of banking based on customers visiting their local branch, all but the most iron-willed eventually
lose track of their finances.
Real-time alerting solved this problem almost overnight. With minimal effort, it’s now possible to set
alerts for just about every financial eventuality you could ever think of. Want a warning when you’re
close to your overdraft limit? Simple - set up an email alert. Interested about how much money gets
spent using debit cards? No problem - the bank will send a text direct to your phone.

PAYING YOUR BILLS ONLINE

Remember the bad old days when online payments were simply the twinkle in an application
developer's eye? Debit cards were touted as the revolution that would signal the end of having to carry
cold, hard cash in your pocket. This meant that your payment mechanism was incredibly secure - unless
you wrote your pin number on a post-it note and stuck it to the back of your card!
But online payments have managed to fill this gap as well. This is one of the real plus points of Internet
only banking. Sure, pretty much all of the banks have online payment facilities but do you want to go
back to the bad old days of filling in reams of paperwork every time you want something done? I guess
not, which make this argument fairly moot. The bottom line is this: Internet only means exactly that and
it also leaves you free from the normal headaches you associate with the big high street banks.
So, that's four advantages of moving your bank account away from the tired old system that's been in
place for hundreds of years. Does it all seem a bit too good to be true? Of course it does. You see, like
anything in life, there are always negative aspects to consider. Let's take a look at some of the most
obvious points

DISADVANTAGES OF INTERNET-ONLY BANKING

DEPOSITING CHECKS

Do you still receive checks for payment? Without a local branch to visit, banking checks can be an
inconvenient process. You'll need to post them off in the mail. So, if you're hoping to get quick access to
the money, be aware that the whole clearing process may take significantly longer.

THERE WILL ALWAYS BE SECURITY CONCERNS

When you think about security what's the first thing that comes to mind? Did you lock the doors before
going to bed? Would it be better to put the parcel in the trunk of your car rather than simply leaving it
on the back seat? How difficult would it be for someone to break into your bank, steal all the money and
bankrupt you? That last question doesn't really apply to you, does it? After all, Internet banks don't have
physical premises being spied on by cunning thieves, right?
Yes, this is very true, but there are other security concerns that put customers off. After all, we live in
the age of the world wide web. A dangerous place filled with hackers and crackers who are attempting
to steal your information at every turn. It's fair to say that most banks have incredibly complex security
mechanisms to prevent such a thing happening. But, ultimately, we are the weakest link in the chain. Or,
to put it another way, hands up who has their online account details 'disguised' as a person's name and
telephone number? See how easy it is to steal your details?

NO ACCESS TO ALL BANKING FACILITIES FROM YOUR ARM CHAIR

As we noted earlier, ease of access from pretty much anywhere in the world is a big plus point for
Internet banks. Our busy lives have made it harder and harder to deal with the everyday, tangible stuff
that simply must be done. Even a 10 minute detour to drop a direct debit form to your local branch can
turn into a 45 minute journey from hell when you hit the rush hour traffic. Thank heavens for Internet
access. Unless, of course...
...your internet connection dies! Sure, most of the time that's not a major issue. You simply get up and
go somewhere else where the web is working. But, although that proves universal access works, it's still
an inconvenience which is what you were trying to get away from. Have you considered what you would
do in the event of your bank's website going down? Scary thought if your only access to you account is
via the web.

YOUR CLUNKY COMPUTER MIGHT NOT BE UP TO THE JOB

Do you remember the excitement that coursed through your body when you unpacked your brand new
computer? The hours spent assembling all the components (a job that normally takes on minutes but
ended up taking what seemed like an age because, like me, you, 'don't need an instruction manual'). Can
you recall regaling your friends with tales of how the digital love of your life opens websites in the blink
of an eye? But that was 5 years ago.
Technology, both in your computer and on the web, moves on. Sorry, it doesn't move on - it accelerates
into the distance at mind boggling speed which few home computer users can ever dream of keeping up
with. Now the once pristine companion you welcomed into your life with a fanfare that would rock the
heavens sits in the corner; dusty, unloved and slowly failing. Is it any wonder you get tired of waiting for
two minutes as your computer tries to load the login page of your Internet bank?

YOU DON'T SPEAK 'BANKESE'

A long time ago, human beings evolved a clever mechanism that allowed to communicate basic
commands, warnings and stuff needed to stop them from being eaten by very large, hungry predators.
Many, many years later this series of grunts and clicks became something far more complex - the power
of human speech. As social animals, the ability to communicate complex ideas and principles has
ensured we dominate the planet. But have you ever tried to read a bank's legal documentation? It's
mind numbing.
If you're using an Internet only bank you only have two options - wade through swathes of non-sensical
words and phrases that will paralyse you with boredom or pick up the phone. If you choose the latter
option, expect to either be put on hold for some time or be transferred from department to department
as the operator tries to work out what you want (even though you really did select the right options on
your phone's keypad). Sticking with a bank that has a physical branch means you have access to staff
who don't speak some arcane banking language that was born in the dark ages and they can give you
the answers you need instantly.

DO YOU KNOW WHO I AM?

There is, of course, also the personal aspect of banking. Perhaps you remember the days of being able to
visit your branch and speak to your bank manager - someone who knew you - to get help with solving
your problem? Those days have gone, replaced by minimal staff numbers, super-efficient services and
staff who can't wait to suggest you go online for assistance or to apply for the service you require. With
Internet-only banking it's even worse. If you have a problem then you can't visit your local branch - you
have to rely on telephone service and online help. You're no longer a person, you're simply a number.

FLOAT:
In economics, float is duplicate money present in the banking system during the time between a deposit
being made in the recipient's account and the money being deducted from the sender's account. It
makes up the smallest part of the money supply.

Float is most obvious in the time delay between a cheque being written and the funds to cover that
cheque being deducted from the payer's account. [1] Once the recipient of a cheque (the payee) deposits
it in his account, his bank immediately credits (increases) the payee's account, assuming that the payer's
bank will ultimately send the funds to cover the cheque. Until the payer's bank actually sends the funds,
both the payer and the payee have the "same" money in both of their accounts. Once the payee's bank
notifies the payer's bank (usually by presenting the cheques), the "duplicate" funds will be removed
from the payer's account and the cheques will be considered to have "cleared" the bank.

A Float causes marginal changes in the money supply. Before electronic cheque clearing, bad weather or
communication problems often caused float to significantly increase, as the clearing of cheques was
delayed.

LINE OF CREDIT
An arrangement between a financial institution, usually a bank, and a customer that establishes a
maximum loan balance that the bank will permit the borrower to maintain. The borrower can draw
down on the line of credit at any time, as long as he or she does not exceed the maximum set in the
agreement.

The advantage of a line of credit over a regular loan is that interest is not usually charged on the part of
the line of credit that is unused, and the borrower can draw on the line of credit at any time that he or
she needs to. Depending on the agreement with the financial institution, the line of credit may be
classified as a demand loan, which means that any outstanding balance will have to be paid immediately
at the financial institution's request.

How much equity can a bank have?

Banks can run on zero equity

Can a bank be setup as LLC?

A few types of entities cannot be organized as LLCs. These include banks, insurance companies, and non-
profit organizations. The situation may change in the future. Banking groups are pressuring the IRS for rule
changes which would permit them to form such entities, particularly newly constituted banks.
The Limited Liability Company (LLC), a hybrid of the partnership and the corporation, has become a
popular legal alternative for business owners. Now available in almost all states, the LLC combines the
benefits of limited liability and pass-through taxation, much like an S corporation. But the LLC's legal
structure is much looser, allowing many companies that find S corporation status too restrictive to take
advantage of its benefits. Small business owners are taking advantage of the LLC because it is easier to set
up and maintain than a corporation.
ADVANTAGES OF FORMING AN LLC
Limited Liability
Like corporations, LLCs provide their members (owners) with protection from personal responsibility for
the company's debt. Members are only liable to the extent of their investments in the company. If a
customer slips and is injured on company property, a law suit may still bankrupt the business, but it cannot
touch the personal assets of the LLC's members. This limited liability, then, is a great advantage over
partnerships. In general partnerships, all members are liable for the company's debts and in a limited
partnership, at least one member must still be liable.

Avoiding Double Taxation

Like S corporations, LLCs enjoy exemption from the double taxation required of C corporations. In other
words, the LLC's profits pass through to the company's members who report their share of the profits on
personal federal tax returns. The company itself does not pay a federal tax before the money is distributed
to the members, as in the case of C corporations. But state and local taxes may still be levied against the
LLC.

Flexibility of Income Distribution

According to some observers, one of the biggest benefits that small businesses enjoy when choosing LLC
status is that allocation of profits and losses for tax purposes is easier under this form. Whereas the
amount of profits the S corporation's shareholders report on their federal tax returns must be proportional
to their share of stock, an LLC's members can determine amongst themselves how to divide their income
as long as they follow the Internal Revenue Service's rules on partnership income distribution.

Simplicity
Another great advantage of LLCs over corporations is the ease of setting up and running them. Whereas
incorporation can be an involved and costly process, all that is required to start an LLC is the filing of an
Articles of Organization and the drafting of an Operating Agreement defining the company's policies and
procedures (a filing fee, however, will still be required of LLCs). And whereas a corporation requires a
board of directors, officers, and regular shareholders' and directors' meetings, an LLC is not required to
observe such formalities in its operation. An LLC can be run from day to day essentially as if it were a
partnership.

No Ownership Restrictions
The biggest drawback of forming an S corporation—the restrictions on the type and number of
shareholders the corporation may have—is avoided by forming an LLC. The members of an LLC may be
foreign nationals or other companies, both of which are prohibited from owning stock in an S corporation.
In addition, there is no limit on the number of members an LLC may have, as there is with an S corporation.

Member Involvement in the Company

One problem with limited partnerships is that those partners who wish to protect themselves with limited
liability (which may be all but one of the members) are prohibited from direct involvement in running the
company. These partners may have only a financial investment in the firm. All members of an LLC may be
directly involved in the company's management without jeopardizing their limited liability.

Attractive to Foreign Investors

Because LLCs have been in existence in Europe and Latin America for over a century, investors from those
parts of the world are particularly knowledgeable about this business form. According to The Essential
Limited Liability Handbook, "LLCs often prove to be the most familiar and least imposing business structure
for foreign entrepreneurs who wish to enter the American market."
DRAWBACKS OF FORMING AN LLC
Newness
LLCs are still a very new option in most states (only Wyoming and Florida had LLC statutes on the books
prior to the 1990s). This means that the statutes governing the establishment of LLCs are still evolving. And
there is virtually no case history in the courts to indicate how these laws will be interpreted. The Internal
Revenue Service is also still working out its position concerning LLCs, so it will be imperative for small
business owners to solicit legal and tax advice on the current laws before making a decision about whether
or not to form an LLC. And because the laws may change while the LLC is in existence, it will be important
to keep on top of the developments in LLC statutes to determine whether it remains in the company's best
interests to operate as an LLC.

Interstate Business More Complicated

Laws governing LLCs can vary widely from state to state, complicating the conduct of business across state
lines. There are, as of yet, no uniform laws concerning LLCs, so an even greater knowledge of the state
laws will be required of the company that does business in more than one state.

No Perpetual Existence
Most states require that an LLC's Operating Agreement set a limit to the company's existence (usually 30
years). And in the absence of a clause in the Operating Agreement providing for the continuance of the LLC
in the event of the death or withdrawal of a member, the LLC will cease to exist when such events occur.
The transfer of ownership is also more restricted for an LLC (like a partnership) than for a corporation.

Liabilities of a bank in order of desirability?

Liabilities are either the deposits of customers or money that banks borrow from other sources to use
to fund assets that earn revenue. Deposits are like debt in that it is money that the banks owe to the
customer but they differ from debt in that the addition or withdrawal of money is at the discretion of
the depositor rather than dictated by contract.

Checkable deposits are deposits where depositors can withdraw the money at will. These include all
checking accounts. Some checkable deposits, such as NOW, super-NOW, and money market accounts
pay interest, but most checking accounts pay very little or no interest. Instead, depositors use
checking accounts for payment services, which, nowadays, also includes electronic banking services.

Before the 1980s, checkable deposits were a major source of cheap funds for banks, because they
paid little or no interest on the money. But as it became easier to transfer money between accounts,
people started putting their money into higher yielding accounts and investments, transferring the
money when they needed it.

Nontransaction deposits include savings accounts and time deposits, which are basically certificates

of deposits (CDs). Savings accounts are not used as a payment system, which is why they are
categorized as nontransaction deposits and is also the reason why they pay more interest. Savings
deposits of yore were mostly passbook savings accounts, where all transactions were recorded in a
passbook. Nowadays, technology and regulations have allowed statement savings where transactions
are recorded electronically and may be viewed by the depositor on the bank's website or a monthly
statement is mailed to the depositor; andmoney market accounts, which have limited check writing
privileges and earn more interest than either checking or savings accounts.

A Certificate of Deposit (CD) is a time deposit where the depositor agrees to keep the money in the
account until the CD expires. The bank compensates the depositor with a higher interest rate.
Although the depositor can withdraw the money before the CD expires, banks charge a hefty fee for
this.

There are 2 types of certificates of deposit (CDs): retail and large. A retail CD is for less than $100,000
and is generally sold to individuals. It cannot be resold easily. Large CDs are for $100,000 or more and
are highly negotiable so they can be easily resold in the money markets. Large negotiable CDs are a
major source of funding for banks.

Nontransaction deposits in depository institutions are now insured to $250,000 by the Federal

Deposit Insurance Corporation (FDIC).

Borrowings Banks also borrow money, usually from other banks in what is called the federal funds
market, so-called because funds kept in their reserve accounts at the Federal Reserve are called
federal funds, and it is these accounts that are credited or debited as money is transferred between
banks. Banks with excess reserves, which are usually smaller banks located in smaller communities,
lend to the larger banks in metropolitan areas, which are usually deficient in reserves.

The interbank loans in the federal funds market are unsecured, so banks only lend to other banks that
they trust. Part of the reason for the 2007 - 2009 Credit Crisis is that banks didn't know which other
banks were holding risky mortgage-backed securities that were beginning to default in large numbers,
so they stopped lending to each other, forcing banks to restrict their lending to the public, which
caused the supply of money to decline and the economy to contract.

Banks also borrow from nondepository institutions, such as insurance companies and pension funds,
but most of these loans are collateralized in the form of a repurchase agreement (aka repo), where
the bank gives the lender securities, usually Treasuries, as collateral for a short-term loan. Most repos
are overnight loans that are paid back with interest the very next day.

As a last resort banks can also borrow from the Federal Reserve (Fed), though they rarely do this since
it indicates that they are under financial stress and unable to get funding elsewhere. However, during
the credit freeze in 2008 and 2009, many banks borrowed from the Fed because they could not get
funding elsewhere.

Q1 © Why banks like to have a large number of accounts?

Total of the balance in CASA fluctuates, but there is a CORE which does not fluctuate and remains stable.
The larger the no of accounts the less volatile the CASA and therefore desirable - Insurance of large
numbers. Amount withdrawn in any day is tried to be kept equal to the amount deposited each day.
CASA deposits are the Threshold/core deposits for a bank. It shall not go down beyond certain
limits/threshold for smooth functioning of a bank as these are sources of funds. So larger the number of
banks, lesser is the fluctuation of CASA in a bank, the concept of “Insurance of large numbers”.

Q.1 b How much capital would you keep in absence of banking regulations?
Economic capital is usually defined as the capital level that is required to cover the bank’s losses with a
certain probability or confidence level, which is related to a desired rating.
However, it is our view that such desired solvency standard should not be taken as a primitive, but
should be derived from an underlying objective function such as the maximization of the value of the
bank. For this reason, economic capital may be defined as the capital level that bank shareholders would
choose in absence of capital regulation.

Q.2 a. CASA deposits form a high percentage of total liabilities

Current and Saving Accounts are demand deposits and therefore pay lower interest rates compared to
term deposits where the rates are higher. Thus higher CASA ratio means that more of the money
deposited in the bank is in the demand deposits i.e. the CASA, thus bank is getting the money at lower
cost.
Sources of funds for banks include the following
Deposits
Current accounts and savings account (CASA)
Term deposits
Borrowings
Borrowings from other bank
Borrowings from capital markets
International borrowings
Others – Securitization, etc.

Among the different sources, the deposits account for the largest component. For the banking sector as
a whole, deposits accounted for 78% of the total liabilities in FY 2012-13, hence the cost of funds.
Among the different sources, the deposits account for the largest component. For the banking sector as
a whole, deposits accounted for 78% of the total liabilities in FY 2012-13, hence the cost of funds
are driven largely by the cost of deposits. The component within deposits that has the lowest cost is the
CASA deposits, which accounted for 33% of deposits in FY 2012-13 for the banking sector. High CASA
ratios lead to lower overall cost of funds as the bank pays minimal interest rate on such deposits. Some
of the banks which have high CASA ratios include SBI (44% in FY 2012-13), ICICI Bank (43%), HDFC Bank
(43%), and Axis Bank (43%).

Q.1 e. NBFI applies for a banking license

A banking licence will take care of capital constraints by giving it access to low-cost bank deposits and
reduce reliance on high-cost term loans and, thus, help expand margins. Transforming into a bank would
also enable it to lend to the retail segments and cross-sell profitable fee-based products and services to
its bank customers.

While the banking licence will prove beneficial for IDFC in the long run, analysts expect some pressure in
the short to medium term. In an April 2 report, Adarsh Parasrampuria and Pritesh Bumb of Prabhudas
Lilladher, said, "We expect IDFC's RoEs (return on equity) to come back to 12-13 per cent after dipping
to single digits in the first three-four years, even after assuming Casa (current account-savings
account)/branch of Rs 25-30 crore (in first five-six years) which is similar to Kotak/IndusInd Bank's
current Casa/branch.

Ability to leverage higher will be the key benefit for IDFC, but growth will likely be slow initially to limit
transition period pain. Thus, we expect payback to be back-ended for IDFC even on assuming they can
deliver on Casa (without having a retail foot print currently)."

The downside is that it takes time and lot of capital to build a brand and a large enough branch network
to become a serious retail bank.

"Gains from banking license is a long-term play and gains will take years to show on the balance sheet,"
says a banking analyst with a leading brokerage on condition of anonymity.

Q. 1 d) What would be an ideal mix of deposits?

Ans: Typically CASA shall be 40% of the total deposits. The fixed deposits have to be brought down to
less than 50 per cent of total deposits. The savings and current accounts together must be increased to
more than 50 per cent while call deposit has to be nullified. This is an ideal deposit mix for the bank to
ensure profitability. The ideal deposit mix is considered healthy when it consists of high percentage of
low cost deposits. Efforts shall be oriented towards the mobilization of more savings bank deposits and
current accounts.
What is a call deposit? Deposits collected under money at call and at short notice are termed as call
deposit. To correct the mismatch in deposits while meeting the statutory requirements like CRR, SLR the
bank resorts to call deposits. Therefore call deposits are not regular or normal deposits for a bank. Call
deposits are costly and they attract interest at call money rate on day-to-day basis and hence the rate of
interest will be the highest.

year -2 year -1 Current year year +1

Sales 650 780 936 1123.2 Depreciation = 800*40%
Cost of sales 390 468 562 674.4 Interest = 12.5% *
Other expenses 35 42 50 60 0.75*800
other income 1 8 154 0 Sales, cost of sales, other
expenses = 1.2* current
Depreciation 101 68 45 320
year
Interest 48 38 29 75 EBIT = Sales – cost of sales
– other expenses + Other
income – depreciation
NOPAT = EBIT(1-0.3) {30%
EBIT 125 210 433 68.8 tax rate}
NOPAT 87.5 147 303.1 48.16 FCF=NOPAT + D&A
D&A 101 68 45 320 DSCR = projected
FCF/(Interest+principal
FCF 188.5 215 348.1 368.16
payment{600/5 = 120 per
annum})

DSCR 1.888
Since DSCR > 1.5 , we will consider lending 75% of 800 = Rs. 600 to the company

FCF = NOPAT + D&A – Capex – change in working capital

An SME manufacturer

No of articles: 50000

Cost:

Ram material per article: 1000

Labour: 225

Other exp: 175

Total cost per article: 1400

Transportation Cost: 400000

Total Cost: 50000*1400 + 400000 = 70000000+400000 = 70400000

Assume a haircut of 10%

Therefore Loan amount = 0.9*70400000 = 63360000

This is the loan amount that will be given to the SME by the bank.

For 1st two months, the bank will give a short term bullet loan to the SME.

After shipment, the bank will discount the bill.

Profit Margin = 25%

Therefore revenue = 1.25*70400000 = 88000000

The bill with the above value will be discounted by the bank.
 1 Equity 1000 7 Cash 25
2 Reserves 1265 8 Raw Material 442

3 Bonds Issued 400 9 Stock in Progress 221

4 Bank Borrowing 488 10 Finished Goods 883

5 Bills Payables 626 11 Sundry Debtors 883

6 Other Liabilities 25 12 Other Current Assets 50

      13 Plant Machinery 900

      14 Other Fixed Assets 400

19 Total 3804 15 Total 3804

20 Current Liabilities (4+5+6) 1139 16 Current Assets (15-13-14) 2504

      17 CA * 0.75 1878
21 Net Working Capital (16-20) 1365 18 Revolving Credit (17-20) 739

22 Current Ratio (16/20) 2.20     Answer

3/4th of current assets must be funded by current liabilities
Piyush