Core Banking Concepts - GL - LC - BC - LD

 General Ledger:

  •   User defined Format for the GL code, No Hard coded  GLs
  •   Max 9  alphanumeric characters
  •   Facilitates online posting
  •   All GLs are multi–currency enabled with revaluation options
  •   It supports Multi-level / Hierarchical GL structure
  •   Flexible MIS reporting based on CCY- GL-MIS Class linkages 
  •   Comprehensive query options
  •   Separate  Reporting Lines can be defined to facilitate alternate report requirements
 General Ledger - Multilevel Structure:


What is SLR Rate? 
Statutory Liquidity Ratio  
 SLR (Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI (Reserve Bank of India) in order to control the expansion of bank credit.
  
How is SLR determined?
SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their anytime demand. .
   
What is the Need of SLR?
With the SLR (Statutory Liquidity Ratio), the RBI can ensure the solvency a commercial bank. It is also helpful to control the expansion of Bank Credits. By changing the SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in government securities like government bonds..  
  
SLR to Control Inflation and propel growth
SLR is used to control inflation and propel growth. Through SLR rate tuning the money supply in the system can be controlled efficiently.

What is a Repo Rate? 
 Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.
 
What is a Reverse Repo Rate? 
How will it affect the Bank Loan interest rates? 
Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are always happy to lend money to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system. 
Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their lending or investment rates for common man. 
 
CRR Rate in India
Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.
 
Relation between Inflation and Bank interest Rates
Now a days, you might have heard lot of these terms and usage on inflation and the bank interest rates. We are trying to make it simple for you to understand the relation between inflation and bank interest rates in India.
Bank interest rate depends on many other factors, out of that the major one is inflation. Whenever you see an increase on inflation, there will be an increase of interest rate also. 

What is Inflation?
Inflation is defined as an increase in the price of bunch of Goods and services that projects the Indian economy. An increase in inflation figures occurs when there is an increase in the average level of prices in Goods and services. Inflation happens when there are less Goods and more buyers, this will result in increase in the price of Goods, since there is more demand and less supply of the goods. 

Letter of Credit (LC):

A Letter of Credit as an instrument of international trade is one of the most secure methods for a seller to be paid. Besides credit risk considerations, LCs is the customary business practice for long distance trade and a particularly important commission earning service for any bank.

The Letters of Credit (LC) module constitutes a part system comprehensive trade financing system. Together with the Bills and Collections module, it automates the entire gamut of trade financing.

The LC module supports the processing of all types of documentary and clean LCs. It can handle all activities during the lifecycle of an LC. This includes the generation of messages and advices for all the applicable events, and the update of account balances. The system also handles the collection of various commissions and charges defined for an LC.

TYPE of LC:

The Letters of Credit module supports the processing of all types of clean and documentary LCs. These include:

  • Import LCs
  • Export LCs
  • Guarantees
  • Shipping Guarantees
  • Clean LCs
  • Standby Guarantees

Operations supported on an LC

The following are the operations supported on an LC:

Open an import LC or guarantee

Open and confirm an import LC

Pre-advice an export LC

Advice an export LC

Advice and confirm an export LC

Confirm an export LC

Reimbursement claims

Thus, your bank can perform one of the following roles:

The issuing (opening) bank for an import LC or guarantee.

The advising bank or for an export LC.

The confirming bank for an export LC.

In addition to amendment of the terms of an LC such as the expiry date, the amount, the latest shipment date, etc., you can amend the operation on an LC as follows:

Open to open and confirm of an import LC

Pre-advice to advice of an export LC

Pre-advice to advice and confirm an export LC

Advice to advice and confirm an export LC

Appropriate messages, advices, and covering letters are generated for these operations. These are listed in an annexure in this manual. The SWIFT messages generated for the different types of LC are listed in this chapter.

S.W.I.F.T. messages for an import LC

The messages that are generated for an Import LC depends on the operation you perform on the LC.

The following are the S.W.I.F.T. messages supported for an Import LC:

Event

S.W.I.F.T.

Issue of a documentary credit.

MT 700 and MT 701

Pre-Advice of a documentary credit instrument.

MT 705

Amendment to a documentary credit.

MT 707

Authorization to reimburse.

MT 740

Amendment to an authorization to reimburse.

MT 747

 S.W.I.F.T. messages for an export LC

For an export LC, the Acknowledgement (MT 730) is the S.W.I.F.T. message generated.

 S.W.I.F.T. messages for a standby LC

The following are the S.W.I.F.T. messages supported for a Standby LC:

Event

S.W.I.F.T.

Issue of a documentary credit.

MT 700 and MT 701

Pre-Advice of a documentary credit instrument.

MT 705

Amendment to a documentary credit.

MT 707

Authorization to reimburse.

MT 740

Amendment to an authorization to reimburse.

MT 747

  S.W.I.F.T. messages for a clean LC

The following are the S.W.I.F.T. messages generated for a clean LC:

Event

S.W.I.F.T.

Issue of a clean credit.

MT 700 and MT 701

Pre-Advice of a clean credit instrument.

MT 705

Amendment to a clean credit.

MT 707

Authorization to reimburse.

MT 740

Amendment to an authorization to reimburse.

MT 747

S.W.I.F.T. messages for a guarantee

The following are the S.W.I.F.T. messages generated for a guarantee:

Event

S.W.I.F.T.

Guarantee instrument.

MT760

Guarantee amendment.

MT767

Acknowledgement for a guarantee issued

MT 768

 S.W.I.F.T. messages for a shipping guarantee

The following are the S.W.I.F.T. messages generated for a shipping guarantee:

Event

S.W.I.F.T.

Guarantee instrument.

MT760

Guarantee amendment.

MT767

   SWIFT message for a Reimbursement

The following are the S.W.I.F.T messages generated for reimbursement claims

Event

S.W.I.F.T.

Acknowledgement

MT730


Processing commissions and charges

In the LC module, the method of collecting commissions and levying charges is flexible.

Commissions can be collected for the initiation and amendment events of an LC. The definition of commission rules facilitate the uniform and efficient application of commission across all LCs processed under a product.

Commissions can be collected in advance or in arrears, periodically or non-periodically. You can choose to accrue commissions at a regular frequency (daily, monthly, quarterly, half-yearly or annually). Similarly, the frequency of liquidation of periodic commission can be varied.

In various charges such as handling charges, SWIFT charges, etc. can be processed.

The commissions and charges can be collected from any party, and if necessary, debited from a receivable account and liquidated subsequently.

Variations supported for an LC

An LC being a very flexible payment mechanism can be made available to the customers of your bank in a number of popular variations.

Red Clause Letter of Credit

You can process a Red Clause LC wherein you can provide for anticipatory drawings. In such a case, the confirming bank or any other bank is authorized to make advance payments to the beneficiary, before the presentation of the documents.

Revocable and irrevocable LCs

You can process both revocable and irrevocable LCs. However, irrevocable LCs is commonly used as they cannot be cancelled without the consent of the buyer, the seller and the banks that are parties to the transaction.

A revocable LC can be cancelled without any notice or consent from the parties involved in the LC.

Transferable and non-transferable LCs

While capturing the details of an LC, you can indicate whether it is transferable. This information is part of the instrument generated for an LC.

Revolving and non revolving LCs

You can open an LC and choose to make it available again in its original amount after the goods have been shipped, documents presented and credit is settled. Such an LC is a revolving LC. Under a revolving LC the amount is reinstated or renewed without any specific amendments to the LC. A revolving LC may be revocable or non-revocable, and can revolve in relation to the following:

·         Value or

·         Time.

This facility can be utilized when a supplier wishes to make repetitive shipments over a period such as a year.

The LC can have an automatic reinstatement clause, which provides for continuing the renewal of availability. You also have the option to manually reinstate an LC. The credit may require approval of the opening party before it becomes available again.

Sight and Usance LC

It allows the processing of a sight or usance payment against an LC.

·         In case of a sight LC, the negotiating bank pays the seller immediately and is later reimbursed by the issuing bank.

·         In the case of a usance LC, the drawee bank accepts the obligation to pay the seller at maturity. An LC with a time draft drawn on the opening party, calling for payment at a future date is called a time or Usance LC.

Open ended LCs

You can also process an LC without an expiry date known as an open ended LC.

 Cash collateral against an LC

An LC can be processed against a cash collateral. It provides you with the facility to calculate the cash collateral either as a percentage of the LC amount or as a fixed amount. Cash collateral advice will be generated for its collection.

When the LC amount is amended, you also have the option of adjusting the collateral amount accordingly.

Availment against an LC

You can process the availment against an LC either through the LC module or through the bills module of system. Availment charges can be levied and cash collateral adjusted, during an availment.

Reports

Information on the LCs processed and the static maintenance done for the module is available in the form of reports. These reports can be printed, spooled on to a disk file or displayed on the screen. The following are some of the reports available:

·         Accrual control report

·         Closed out LCs report

·         Commission activity report

·         Commission due report

·         Confirmed LCs report

·         Daily activity report

·         Expired LCs report

·         LCs due to be closed report

·         LCs due to expire report

·         Open ended LCs

·         Un-replied tracers report

·         Process exception report

·         Overrides

·         Product report

·         Clause report

·         Branch report


Bills and Collections (BC)

A bill, as an instrument of international trade, is the most commonly used method for a seller to be paid through banking channels. Besides credit risk considerations, bills are the customary business practice for trade and a particularly important fee-earning service for any bank.

The Bills and Collections (BC) module supports the processing of all types of bills, both domestic and international. It handles the necessary activities during the entire lifecycle of a bill once it is booked.

Features

In an effort to empower your bank in handling a high volume of credit and to enable you to provide superior services to the customers of your bank, It provides you with the following features:

·         The Bills and Collections module supports the processing of all types of international and domestic bills like:

Ø  Incoming Bills under LCs

Ø  Incoming Bills not under LC

Ø  Outgoing Bills under LCs

Ø  Outgoing Bills not under LCs

Ø  Incoming Collections

Ø  Outgoing Collections

Ø  Usance or Sight Bills

Ø  Documentary or Clean Bills

·         You can create products, templates, or even copy the details of an existing bill on to a new one and modify it to suit your requirements. This renders the input of the details of a bill faster and easier.

·         You have the flexibility to create and customize a product to suit almost any requirement under a bill. The bills associated with the product will bear characteristics that you define for it.

·         The BC module is designed to handle the interest, charges, or fees related to a bill and record amendments to the original terms of the bill.

·         The BC module actively interacts with the LC module of system. This enables easy retrieval of information for bills drawn under an LC that was issued at your bank. Most of the details maintained for the LC will be defaulted to the bill when you indicate the reference number of the LC involved in the bill. This eliminates the need to re-enter the details of the LC all over again.

·         The Central Liability sub-system automatically controls the booking of a bill against the credit lines assigned to the customer before the bookings are made. It also supports tracking your bank’s exposure for a bill to several parties.

·         You have the option to automate periodic processes such as:

Ø  The application of floating interest rates to the components of a bill as and when they change

Ø  The movement of a bill from a given status to another

Ø  Accrual of interest due to a bill

Ø  Liquidation of bills on the liquidation date that you indicate

Ø  Generation of tracers on the due date

These will be processed as part of the batch processes run at BOD or EOD. The system automatically calculates the date on which the events should take place, based on the frequency and the date specified for the bill.

·         The module also supports automated follow-up and tracer facility for payments and acceptance. Tracers can be automatically generated at an indicated frequency until a discrepancy is resolved.

·         When a repayment against the bill, is not made on the due date, you may want to do an aging analysis for the bill. You can define the number of days that the bill should remain in a given status, the sequence in which a bill should move from one status to another and also indicate the direction of movement (forward or reverse). You can follow-up on the repayment of a bill by generating reports which detail the status of aging bills.

·         Depending on the processing requirements of your bank, you can define and store the standard documents, clauses, and instructions and free format texts. These details can be incorporated and printed onto the output document of the bill, by entering the relevant code. This eliminates entering the details of standard components of a bill every time you need to use them.

·         Bills can be carried over several stages during the day. After a bill has been entered, it can be verified and authorized on-line before further processing.

·         Information services for managerial and statistical reporting such as on-line transactions, status report and the immediate retrieval of information of the bills processed at your bank can be generated.

·        Corporate's Graphic User Interface (GUI) facilitates ease of input. Picklists are provided wherever possible. This makes the module both efficient and easy to use.

·         The media supported include Mail, Telex and SWIFT

·         The BC module supports and handles the following functions:

Ø  Open/Amend a bill

Ø  The authorization of bill contracts

Ø  The reversal and liquidation of interest and charges

Ø  Customer inquiries

Ø  The generation of tracers and advices

Ø  The generation and printing of reports

·         On-line help - indicates that you can invoke global help by making use of the Help option in the Menu bar. You can also invoke on-line context sensitive help, which is made available to you, if you strike the hot key <F1> while in the application. A window pops up displaying information associated with the field from which you invoked it.

Operations you can perform on a bill

The operations that you can perform on a bill depend on the trade finance product type you are processing. Further, the messages and advices that are generated for the bill are determined by the operation you perform on the bill. The interest, charges or fees can be different for each operation that you perform on the bill.

All types of bills are classified in to two categories. They are:

·         Import Bills

·         Export Bills

All types of incoming bills (international and domestic) handled by your bank are termed Import bills. Similarly, all outgoing bills (international and domestic) handled by your bank are termed Export bills.

The operations that you can perform on a bill have been diagrammatically represented below:

Operations you can perform on a Bill (International and Domestic) – Incoming Bills:

·         Advance

·         Payment

·         Discount

·         Collection

·         Acceptance

·          

Operations you can perform on a Bill (International and Domestic) – Outgoing Bills:

·         Payment

·         Acceptance

·         Collection

·         Purchase

·         Negotiation

·         Forfaiting

·         Discount

·         Banker’s Acceptance

The system allows you to effect a change of operation for the following operation types:

·         Acceptance to Advance (automatic facility provided)

·         Acceptance to Discounting

·         Collection to Purchase

·         Discount to Collection

·         Purchase to Collection

·         Acceptance to Forfaiting

·         Discounting to Forfaiting

·         Discount to Banker’s Acceptance

For instance, while processing an acceptance bill, which needs to be discounted, you need not enter a new bill to discount the bill. You need to just amend the operation type from acceptance to discount.

The SWIFT messages that can be generated for an import bill

The messages that are generated for an Import bill depend on the operation you perform on the bill. The following are the SWIFT messages that are supported for an Import bill.

Description

SWIFT code

Acknowledgement

MT 410

Acceptance Advice

MT 412

Payment tracer

MT420

Acceptance tracer

MT 420

Advice of Payment for a Collection bill

MT 400


Advice of fate (principal and acceptance)

MT 422

Refusal Advice (payment and accept)

MT 734

Discharge Advice

MT 732

Tracers that are generated

MT 420

Authorization to pay, accept or negotiate

MT 752

Advice of Payment for import bills under LC

MT 756

The SWIFT messages that can be generated for an export bill

The messages that are generated for an Export bill depend on the operation you perform on the bill. The following are the SWIFT messages that are supported for an Export bill.

 

Description

SWIFT code

Advice of Payment for a Collection bill

MT 400

Acknowledgement

MT 410

Acceptance Advice

MT 412

Payment tracer

MT420

Acceptance tracer

MT 420

Refusal Advice (payment and accept)

MT 734

Discharge Advice

MT 732

Amendment of instruction

MT 430

Reimbursement claim

MT 742

Discrepancy Requirement

MT 750

Advice of Payment/Acceptance/Negotiation

MT 754

Interest and Charge liquidation

The BC module has a flexible mechanism for raising, tracking and controlling the interest that you collect and the charges that you levy. These may be on a cash or account receivable basis. They can be collected either in advance or in arrears and can be accrued or non- accrued.

Interest can be collected either as a rate or as a flat amount. Standard Interest rates can be defined for each bill type.

Changes that you effect to fields like the base date, exchange rate or account numbers require reversal entries The system generates reversal entries for the corrected amount, account, rate etc.


Loan (LD) / Consumer Lending:

The Loans module focuses on the corporate lending operations of a bank. It handles all types of call, notice, and fixed-tenor loans, loan commitments, prepayments, manual payments, and foreclosure.

The product definition facility

Defining services as Products

A Product is a specific service, or scheme, that you offer your customers. A Loans product is a specific Loan scheme that is offered to customers. For example, a bank may offer short-term corporate loans to software development companies. This scheme can be defined as a product in system.

When setting up the module, the bank can define the various loan schemes that it offers as products. For each product, it can also define ‘attributes’, or in other words, the terms and conditions. When a user at the bank actually processes a loan, it can be associated with a product. The loan acquires the terms defined for the product that it involves. The bank, however, can allow a user to change the inherited attributes of a loan, while processing, to suit a special customer.

The advantage of defining a product

When defining a scheme as a product, the bank can specify the following details:

·         Tenor, rollover, and interest preferences

·         The type of interest that is applicable

·         The minimum, maximum and standard rates applicable

·         Penalty interest and grace days (for loans)

·         The standards schedules applicable

·         The ledgers to which the accounting entries should be posted (at different events such as booking, amendment, rollover, etc.)

·         The advices and reminders that have to be provided to customers at different events

The product is defined only once. Therefore, you need not specify the basic details, every time a loan is entered into system. This feature drastically reduces processing time, thus allowing a bank to focus on and take advantage of, the opportunities in the market.

Methods of interest application

It is possible to define multiple interest and charges. That is, you can specify the interest and charge that you would like to levy at the different events in the life cycle of a loan.

Interest can be calculated based on a rate, or a flat amount. Interest rates may be:

·         Fixed

·         Floating – with Automatic Rate revision or revision at a pre-defined period

·         Special

You can define tier and slab structures to compute charges. You can also define a minimum and a maximum charge, as well as a penalty for defaulted schedules.

Methods of interest calculation and payment

It allows computation of interest, using both Euro and US methods.

The repayment schedules for interests can be defined, for each transaction. Depending on the mode of payment, interest will be liquidated either automatically or manually, according to the schedule defined. The standard interest payment methods that are supported are:

·         Bearing — Interest is liquidated on schedule payment date(s)

·         Discounted — In this interest payment method, the interest payable on the loan is deducted from the principal at the time of initiating the loan

·         True discounted —In this interest payment method, the interest is calculated on the principal in a manner, differing slightly, from the Discounted method. The interest rate is applied on the Principal instead of the Nominal, as is done in the Discounted method

Accrual of interest

The frequency of interest accrual, whether daily, monthly, quarterly, half-yearly, or annual, can be specified for a product during set up. This specification will apply, to the accruable components of all loans involving the product.

The system accrues interest whenever you make a backdated rate change. An accrual, to the extent of a repayment, is automatically carried out at the time of repayment.

The module supports amendments and payments for previous accrual periods. Subsequent accruals will correct any adjustments that are to be made due to these actions.

The Loans module allows you to accrue interest at the product level. Rather than accrue interest for each loan involving a product, and then update the ledgers of the accrued interest individually, the bank can accrue interest for each contract involving the product, and pass a consolidated entry to the ledgers.

Flexible repayment schedule set up

Using the Loans module, you can define flexible schedules for the payment of principle, interest, commission and fees. Schedules for the payment of the various components can be defined individually, or otherwise. The schedules can be based on one of the following types:

·         Amortized contracts (Amortization based on Reducing balances and Rule of 78)

·         Capitalized contracts (for capitalizing interests)

·         Normal contracts (Based on Reducing Balances)

Defining grace periods

A bank using this module can define a grace period for the products it offers. This specification would apply to all contracts involving the product. A penalty interest will be applied in case of default in payment, on expiry of the grace period. Penalty will not be applied if the payment is made during the grace period. In case the payment is not made, the penalty will be calculated from the day the payment is outstanding.

Rolling over a loan

Typically, you will renew or rollover a loan when the main attributes of the transaction such as the counterparty, the tenor of the contract, the applicable rate of interest and the principal amount remain the same. However, the Loans module facilitates rollover with the following flexibilities:

·         Roll-over with interest (using the original rate or interest or a totally new one)

·         Roll-over with interest but deducting withholding tax

·         Roll-over of the principal alone

·         Roll-over into a different principal amount (higher or lower than the original principal amount)

The rolled-over contract bears the same reference number as the original contract. However, the number of times the contract is rolled over is recorded and always displayed. This feature facilitates tracking. A Rollover advice is automatically generated when a loan is rolled-over.

Tracking the status of a loan

The Loans module, allows you to define the various status, into which overdue loans should move. The module allows a bank to define:

·         The number of overdue days from which a loan should be classified under a status

·         Whether accruals should be stopped on reaching a status

·         Whether accruals should be reversed for a status

·         The asset account to which defaulted loans should be transferred (if they are to be reported separately)

·         The notices to be generated for the benefit of the customer

Movement of a loan from one status to another can be either automatic, or manual. Loans, both regular and past due, can be tracked, automatically, across several user-defined status.

The tax types that are supported

It supports the processing of a Withholding and an Expense type of tax.

Tax can be computed based on either the liquidation amount or the schedule amount. The bank can define tax rates as slabs or tiers and define a minimum and maximum tax amount that could apply. The bank could bear the tax (Expense) or charge the customer for it (withholding).

Automatic processing of different ‘events’

A loan contract goes through different stages in its lifecycle. These stages are referred to as events in system. Events can be defined as Booking, Amendment, Rollover, Liquidation, etc.

Once a loan contract is initiated, system automatically processes all the events defined for it. Starting from initiation upto liquidation, or rollover. It processes the following automatically:

·         Passes the appropriate accounting entries

·         Generates the advices and messages specified for the event (including billing notices and delinquency notices to defaulters)

·         Liquidates due schedules

·         Accrues interest

·         Rolls over a loan into a new one

·         Applies penalty interest on default

In addition, you can automatically track overdue loans and classify them into various status. For each status, you can specify preferences like whether accruals should be stopped, reversed, or, if the loan should be transferred to a different asset account.

Linking loans to deposits

System offers the facility to set up lien on deposits from a customer, as security for a loan.

Loans can also be booked against commitments, deposit, and accounts. Full or partial amounts can be blocked and taken as the security for a loan.

Penalties on pre-payment

You can levy a penalty on premature loan payments. This penalty can be specified both in terms of a percentage and as a flat amount.

Value Dated amendments

Amendments (changes to the Maturity Date, the Principal amount, the Interest Rate, interest spreads, etc.) are possible on any loan contract, product, or group of contracts. These amendments can take effect as of back-value or future dates.

The zero-based interest accrual methodology ensures that interest accruals are recalculated and adjusted for back-valued amendments.

Retrieving information

During the day or at the end of the day, a user with the required authority can retrieve information on the various operations, related to loans. This information can be generated in the form of reports. The chapter Retrieval of information of this User manual details the various reports that can be generated.

The bank can also opt for the Report Writer utility that comes with system. With this utility, the bank can custom-define the reports that it would like to generate.

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