Banking

Banking Introduction
Discussion Points
The Discussion Points are as follows –
o Retail Commercial Bank Lending Process Flow
o Basel I ,II ,III and IV
o Payment Service Directive (PSB), SEPA, NPCC ( Australia), Open Banking
o Financial Ratios – DSCR, Current Ratio, Liquidity Ratio, Debt Equity Ratio, ISCR, Profitability
Ratio,
o Bank Ratios
o Trade Finance Products and Processes
o Credit Card System , Fraud Detection and Prevention

Retail Commercial Bank Lending Process
Loans have made our life easier, providing us the financial leverage that extends beyond our
earnings. Be it Credit Card, Home Loan, Personal Loan or Auto Loan etc. loans are the credit
extended to us by lenders on fulfilling certain key parameters.
Credit Process
The five C’s of credit —
o Character
o Capacity
o Capital
o Conditions
o Collateral
— are a framework used by many traditional lenders to evaluate potential borrowers.

 Character
 What it is: A lender’s opinion of a borrower’s general trustworthiness, credibility and
personality.
 Why it matters: Banks want to lend to people who are responsible and keep commitments.
 How it’s assessed: From your work experience, credit history, credentials, references,
reputation and interaction with previous/current lenders.
 Capacity/Cash flow
What it is: Your ability to repay the loan.
Why it matters: Lenders want to be assured that your income generates enough cash flow to
repay the loan in full.
How it’s assessed: From financial metrics and benchmarks (debt and liquidity ratios, cash flow
statements), credit score, borrowing and repayment history.
 Capital
What it is: The amount of money invested by the business owner or management team. In
individual loans this is demonstrated through the Down Payments that are made.
Why it matters: Banks are more willing to lend to owners who have invested some of their
own money into the venture.
How it’s assessed: From the amount of money the borrower or management team has
invested in the business.
 Conditions
What it is: The condition of your business — whether it is growing or faltering — as well as
what you’ll use the funds for.
- It also considers the state of the economy, industry trends and how these factors might affect
your ability to repay the loan.
Why it matters: To ensure that loans are repaid, banks want to lend to businesses operating
under favorable conditions. They aim to identify risks and protect themselves accordingly.
How it’s assessed: From a review of the competitive landscape, supplier and customer
relationships, and macroeconomic and industry-specific issues.
 Collateral
What it is: Assets that are used to guarantee or secure a loan.
Why it matters: Collateral is a backup source if the borrower cannot repay a loan.
How it’s assessed: From hard assets such as real estate and equipment; working capital, such
as accounts receivable and inventory; and a borrower’s home that also can be counted as
collateral.
The Loan Process Flow is as follows –
 Pre-qualification – The first step in the loan origination process is pre-qualification. During
this stage the potential borrower will receive a list of items they need to pull together to
submit to the lender. This includes:
• Current employment information ( salary)

• Total household income
• Payment history
• Bank statements
• Last 3 Years Tax returns
 Once this information is submitted to the lender, it is typically processed and a loan pre-
approval is made, allowing the borrower to continue in the process to obtain a loan.
 Loan Application –
In this stage of the loan origination process, the borrower completes the loan application.
Sometimes a paper application is completed, but more often today, an electronic version is
completed and submitted by the prospective borrower.
• New technologies allow completing the application online or through a mobile app and
collected information can be tailored to specific loan products.
 Application Processing –
• When the application is received by the credit department, the first step is to review it for
accuracy and completeness.
• All required fields must be filled in, otherwise the application will be returned to the
borrower or the credit analyst will have to reach out to the borrower to procure the
required missing information.
• Depending on the technology employed by the lender, a sophisticated Loan Origination

System (LOS) can automatically flag files with missing required fields and return it to the
borrowers to re-work. Depending on the organization, exception processing might be part
of this process, or manual loan processors can review each application for completeness.
 Underwriting Process –
When an application is deemed complete, the underwriting process begins.
• The company runs the application through a process of taking a variety of components into
account:
- credit score, risk scores, and many lenders will generate their own additional unique scoring
criteria that are unique to their business or industry.
• Sometimes this process is fully automated; other times it is manual or a combination of

both. Underwriting guidelines can be loaded into the LOS ( Loan Origination System )
 Credit Decision – Depending on the underwriting process, the file can be approved, denied
or sent back to the originator for additional information.
- A denial may be revisited if certain parameters are changed, such as a reduced loan amount
or different interest rates to lower payments.
 Quality Control – Since consumer lending is highly regulated, the quality control stage of
the loan origination process is critical to lenders.
• Typically the application would be sent to a quality control queue where the final decision
and other critical variables can be analyzed against internal and external rules and
regulations. This is essentially a last look at the application before it goes to funding.
 Loan Funding – Most consumer loans fund shortly after the loan documents are
signed. Second mortgage loans and lines of credit may require additional time for
legal and compliance reasons.
• LOS programs can track funding and ensure that all necessary documents are executed
before or together with funding.
Underwriting of Loans & the Steps
The term "underwriting" refers to the process that leads to a final loan approval or denial,
which is determined by a professional underwriter. Many factors are at play in a lender's final
decision on a mortgage loan. These factors are all analyzed during the underwriting process
through specialized software programs.
Application
Filing a formal application for the loan is the first step in the underwriting process.
• This generally includes submitting evidence of current income and current assets, along
with estimates of existing debt obligations and a current credit score.
• Next, the property's value is determined by an appraiser and a title search is completed to
ensure there are no liens against the property. After these steps, the loan can move to the
underwriting phase.
Credit Review
Your credit score and history heavily affect whether you will be approved for a mortgage loan.
Through underwriting, the complete credit report is analyzed. The type of credit you possess,
the way you use it and any red flags are considered.
• The better your credit, the more likely you are to be approved.
• Every lender is different, but some are more lenient than others when it comes to a few late
payments over the course of your credit history.
Income to Debt Ratio
Another factor analyzed in the underwriting process is your income-to-debt ratio. This is
simply the amount of monthly expenses you have divided by the amount of monthly income.
• For example, your proposed instalment payment is 25000 and additional debts -- such as
auto loans, student loans, and credit cards -- require monthly payments totaling 15000. If
you earn 100000 a month, the ratio is determined by dividing 40000 by 100000, which
equals 40 percent.
 The lower the ratio, the better. This shows the lender you have additional funds coming in
each month and are not overextending yourself.
Income Verification
You will most likely be required to provide some type of income verification to the lender, such
as an official pay slip showing your year-to-date earnings. This is generally enough proof if you
work a typical job
 If you have an unconventional job with varying income or you work on commission, you
may need other forms of verification. Accepted documents might include tax returns, bank
statements and accounting records if you are self-employed.
Approval Decision
Once the underwriter has reviewed all the necessary information and documents, he will
decide on the loan application. There are a few possible outcomes at this point.
 The loan can be approved outright, or the lender may determine that conditions must be
fulfilled before the application can be approved. For example, you might be required to
provide additional verification of income.
 The loan might be denied if the borrowers do not meet underwriting requirements. If you
are denied for loan, the lender will send an explanation of the decision.
 The Loan granted can be also reduced as compared to the Quantum desired based on
Financials
Syndication Lending Process
What is a Syndicated Loan?
A syndicated loan is offered by a group of lenders who work together to provide credit to a
large borrower.
 The borrower can be a corporation, an individual project, or a government.
 Each lender in the syndicate contributes part of the loan amount, and they all share in the
lending risk.
 One of the lenders act as the manager (arranging bank/ lead bank ), which administers the
loan on behalf of the other lenders in the syndicate.
Loan syndication occurs when a single borrower requires a large loan ( for eg - 500 Cr or more )
that a single lender may be unable to provide, or when the loan is outside the scope of the
lender’s risk exposure.
The lenders then form a syndicate that allows them to spread the risk and share in the
financial opportunity that may be too large for their individual capital base.
• The liability of each lender is limited to their share of the total loan. The agreement for all
members of the syndicate is contained in one loan agreement.
Those who participate in loan syndication may vary from one deal to another, but the typical
participants include the following:
o Arranging bank
The arranging bank is also known as the Lead manager and is mandated by the borrower to
organize the funding based on specific agreed terms of the loan. The bank must acquire other
lending parties who are willing to participate in the lending syndicate and share the lending
risks involved.
• The financial terms negotiated between the arranging bank and the borrower are contained
in the term sheet.
• The term sheet details the amount of the loan, repayment schedule, interest rate, duration
of the loan and any other fees related to the loan. The arranging bank holds a large
proportion of the loan and will be responsible for distributing cash flows among the other
participating lenders.
o Agent
The agent in a syndicated loan serves as a link between the borrower and the lenders and
owes a contractual obligation to both the borrower and the lenders.
• The role of the agent to the lenders is to provide them with information that allows them to
exercise their rights under the syndicated loan agreement. However, the agent has
no fiduciary duty and is not required to advise the borrower or the lenders.
• The agent’s duty is mainly administrative.

o Trustee
The trustee is responsible for holding the security of the assets of the borrower on behalf of
the lenders.
• Syndicated loan structures avoid granting the security to the individual lenders separately
since the practice would be costly to the syndicate.
• In the event of default, the trustee is responsible for enforcing the security under
instructions by the lenders. Therefore, the trustee only has a fiduciary duty to the lenders in
the syndicate.
Advantages of a Syndicated Loan
The following are the main advantages of a syndicated loan:
o Less time and effort involved
The borrower is not required to meet all the lenders in the syndicate to negotiate the terms of
the loan. Rather, the borrower only needs to meet with the arranging bank to negotiate and
agree on the terms of the loan.
• The arranger then does the bigger work of establishing the syndicate, bringing other lenders
on board, and discussing the loan terms with them to know how much credit each lender
will contribute.
o Diversification of loan terms
Since the syndicated loan is contributed by multiple lenders, the loan can be in different types
of loans and currencies.
• The varying loan types offer different types of interest such as fixed or floating interest
rates, which makes it flexible for the borrower.
• Also, borrowing in different currencies protects the borrower from currency risks resulting
from external factors such as inflation and government laws and policies.
o Large Amount
Loan syndication allows borrowers to borrow large amounts to finance capital-intensive

projects.
• A large corporation or government can borrow a huge loan to finance large equipment
leasing, mergers, and financing transactions in telecommunications, petrochemical, mining,
energy, transportation, etc.
• A single lender would be unable to raise funds to finance such projects, and therefore,
bringing several lenders to provide the financing makes it easy to carry out such projects.
29/08
Basel Norms
The Basel Committee on Banking Supervision (BCBS) is a group of international banking
authorities who work to strengthen the regulation, supervision and practices of banks and
improve financial stability worldwide.
• The BCBS, which was established in the 1960s to help banks deal with globalization, is
situated in Basel, Switzerland.
• BCBS activities focus on exchanging information on national, banking-related supervisory

issues, approaches and techniques. Based on that information, the BCBS develops banking
guidelines and supervisory standards.
• The BCBS does not have any formal authority, and its decisions are not backed by legal
force.
Basel I
Basel I, that is, the 1988 Basel Accord, is primarily focused on credit risk and appropriate risk-
weighting of assets.
 Assets of banks were classified and grouped in five categories according to credit risk,
carrying risk weights of
- 0% (for example cash, bullion, home country debt like Treasuries),
- 20% (securitizations such as mortgage-backed securities (MBS) with the highest AAA rating),
- 50% (municipal revenue bonds, residential mortgages),
- 100% (for example, most corporate debt), and some assets given No rating.
 Banks with an international presence are required to hold capital equal to 8% of their risk-
weighted assets (RWA).
o The tier 1 capital ratio = tier 1 capital / all RWA

o The total capital ratio = (tier 1 + tier 2 capital) / all RWA
o Leverage ratio = total capital/average total assets
Basel I
Tier 1 Capital
Tier 1 capital consists of shareholders' equity and retained earnings—disclosed on their

financial statements—and is a primary indicator to measure a bank's financial health.
• These funds come into play when a bank must absorb losses without ceasing business
operations. Tier 1 capital is the primary funding source of the bank.
• Typically, it holds nearly all of the bank's accumulated funds. These funds are generated
specifically to support banks when losses are absorbed so that regular business functions
do not have to be shut down.
Basel I
Tier 2 Capital
Tier 2 capital includes undisclosed funds that do not appear on a bank's financial statements,
revaluation reserves, hybrid capital instruments, subordinated term debt and general loan-
loss, or uncollected, reserves.
• Revalued reserves is an accounting method that recalculates the current value of a holding
that is higher than what it was originally recorded as such as with real estate.
• Hybrid capital instruments are securities such as convertible bonds that have both equity
and debt qualities.
Tier 2 capital is supplementary capital because it is less reliable than tier 1 capital. It is more
difficult to accurately measure due to its composition of assets that are difficult to liquidate.
Basel II
In June ’04, Basel II guidelines were published by BCBS, which were considered to be the
refined and reformed versions of Basel I accord. The guidelines were based on three
parameters, which the committee calls it as pillars.
 Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy

requirement of 8% of risk assets –
 Supervisory Review: According to this, banks were needed to develop and use better risk
management techniques in monitoring and managing all the three types of risks that a bank
faces, viz. credit, market and operational risks
 Market Discipline: This need increased disclosure requirements. Banks need to mandatorily
disclose their CAR, risk exposure, etc. to the central bank. Basel II norms in India and
overseas are yet to be fully implemented.
Basel III
The Basel-III guidelines were issued in 2010 as a response to global financial crisis of 2008.
The idea was to further strengthen the banking system.
 It was felt that the quality and quantity under Basel-II were insufficient to contain any
further risk; so the Basel-III norms aim at making banking activities more capital-intensive.
The objective of these guidelines is to achieve a resilient banking system by focusing on
four key banking parameters viz. capital, leverage, funding and liquidity. The ultimate aim is
to:
• Improve the banking sector's ability to absorb shocks arising from financial and economic
stress.
• Improve risk management and governance
• Strengthen banks’ transparency and disclosures.

Basel III
These guidelines were introduced in response to the financial crisis of 2008. A need was felt
to further strengthen the system as banks in the developed economies were under-
capitalized, over-leveraged and had a greater reliance on short-term funding.
 Also the quantity and quality of capital under Basel II were deemed insufficient to contain
any further risk.
 Basel III norms aim at making most banking activities such as their trading book activities
more capital-intensive.
 The guidelines aim to promote a more resilient banking system by focusing on four vital
banking parameters viz. capital, leverage, funding and liquidity.
Basel IV
In December 2017, the Basel Committee on Banking Supervision (BCBS) published a package
of proposed reforms for the global regulatory framework of our industry which is frequently
referred to as ‘Basel IV’. The Committee’s aim is to make the capital framework more robust
and to improve confidence in the system.
What is Basel IV?
The Basel Committee on Banking Supervision or BCBS has proposed reforms which are
designed to make banks more resilient and increase confidence in the banking system. The
proposals announced recently, referred to as 'Basel IV', include updates to the ways banks
calculate their capital requirements with the aim of making outcomes more comparable
across banks globally.
Basel IV
More specifically, what is being proposed?
One principal feature is the way banks calculate risk weighted assets or RWAs. The BCBS
proposes that a calculation of a bank's RWAs using internal models should not fall below
72.5% of the calculation using standardized models. This lower limit is known as an "output
floor". In addition, when computing RWAs based on internal models, input parameters must
not fall below certain minimum levels, so called “input floors”.
 The Proposals are in relation to credit risk, credit value adjustment (CVA) risk, operational
risk, output floors and leverage ratio.
The implementation date is 1 January 2022, with the output floor phased from 1 January
2022 to 1 January 2027.
Payment Service Directive
The Payment Services Directive (PSD) came into force in 2007 to help develop the Single Euro
Payments Area (SEPA) by regulating payment services payment service providers throughout
the European Union (EU) and the European Economic Area (EEA).
 PSD was aimed at increasing competition and encouraging non-banks to participate in the
payments industry, besides enhancing the security and transparency of payment
transactions for consumers across the areas.
 PSD was adopted into national legislation by all EU and EEA member states by 2009 and
was updated in 2009 and 2012. In 2013, PSD was reviewed by the European Commission
and in October 2015, PSD2 was adopted to create a safer and more innovative European
payments system.
2007-2009: PSD came into effect in 2007 and was fully implemented in 2009.
2013-2014: In 2013, the European Commission reviewed the first PSD to modernize and
take new types of payment services, such as Payment Initiation Services or PIS, into
account. PSD2 aims to improve innovation, reinforce consumer protection, improve the
security of internet payments and account access within the EU.
2015-2016: PSD2 was adopted by the European Parliament in October 2015. It was published
in the official journal of the EU on December 23, 2015 and came into force 20 days later, on
January 12, 2016.
2017-2019: PSD2 had become applicable as of January 13, 2018, except for the security
measures outlined in the Regulatory Technical Standards (RTS). Subject to the agreement of
the Council and the European Parliament, RTS is due to become applicable around September
2019.
 PSD2 will revolutionize the way customers make digital payments by allowing them to use
third-party providers to make payments.
Payment Service Directive II
What is new in PSD2?
o “The banks’ monopoly on their customer’s data disappears. This enables bank customers,
both business and consumer, to give third-party providers permission to retrieve their
account data from their banks. The third-party providers may then, for example, initiate
payments for the users directly from their bank accounts.
o “PSD2 will also require stronger identity checks of users when they are paying online.
o “The primary goal of the directive is to create a single integrated market for payment
services by standardizing the regulations for the banks and for the new payment service
providers . The PSD2 will ensure transparency and fair competition and break down the
entry barriers for new payment services, which will benefit the customers,”
Payment Service Directive II
Why could PSD2 revolutionize the payments industry?
“PSD2 will change the payments value chain and change which business models are
profitable. When bank customers can use third-party providers such as social media platforms
or messaging apps to pay bills straight from their bank accounts, banks might lose many of the
customer interactions – if the banks do not create equally attractive solutions.
o “We will see a lot of new services. For example, bank customers will be able to give third-
party providers permission to analyze their spending behavior or aggregate their account
information from several banks into one overview.
o The banks will be required to provide the third-party providers access to their customers’
accounts through open Application Program Interfaces (APIs),”
SEPA
The single euro payment area (SEPA) is a payments system created by the European Union
(EU) which harmonizes the way cashless payments transact between euro countries.
European consumers, businesses, and government agents who make payments by direct
debit, credit card or through credit transfers use the SEPA architecture. The single euro
payment area is approved and regulated by European Commission.
• Also, the system brings more competition to the payments industry by creating a single
market for payment services, thus bringing down prices. More than 520 million people live
in countries covered by the SEPA, and those customers make more than 122 billion
electronic payments per year.
• SEPA currently includes 34 countries in Europe. It encompasses the 28 EU member states

along with Iceland, Norway, Liechtenstein, Switzerland, Monaco and San Marino. The single
euro payment area remains an ongoing, collaborative process between these parties. SEPA
is in the process of harmonizing rules regarding mobile and online payments.
SEPA
SEPA is managed by the European Commission and the European Central Bank (ECB) on a
collaborative basis, through the European Payments Board. The board is chaired by the
European Central Bank, which together with representatives from government and consumer
groups, works to govern the board and steer its agenda.
It allows European consumers, businesses and public administrations to make and receive the
following types of transactions under the same basic conditions –
 Credit transfers
 Direct debit payments
 Card payments
This makes all cross-border electronic payments in euro as easy as domestic payments.
SEPA covers the whole of the EU. It also applies to payments in euros in other European
countries: Iceland, Norway, Switzerland, Liechtenstein, Monaco and San Marino.
SEPA
The advantages of a single euro payments area include
o A single system for both domestic and cross-border bank transfers allowing cross-border
transactions by direct debit, that is to charge directly an account in one country for services
provided in another country
o Allowing people working or studying in another SEPA country to use an existing account in
their home country to receive their salary or pay bills in the new country
o Ensuring cheaper, safer and faster cross-border payments and more transparent pricing
thanks to the single set of payment schemes and standards
NPP – New Payment Platform ( Australia)
The NPP is a new payments infrastructure for the Australian economy, giving consumers,
businesses, and government a platform to make fast and data-rich payments.
o It was built by the Reserve Bank of Australia (RBA) in consultation with the "big four"
banks: The Commonwealth Bank of Australia (CBA), the National Australia Bank (NAB), the
Australia and New Zealand Banking Group (ANZ), and Westpac, which hold around 95
percent market share of the entire Australian finance industry.
o There are 13 participants in the NPP, including three entities that are service providers for
smaller institutions: ANZ, Australian Settlements Limited (ASL), Bendigo and Adelaide Bank,
Citigroup, CBA, Cuscal, HSBC Bank Australia, Indue, ING Australia, Macquarie Bank, NAB,
the RBA, and Westpac.
o The NPP enables customers of different participating financial institutions to make and
receive real-time domestic payments between accounts.
Open Banking
Open banking is a concept in financial services based on several principles: the use of open
APIs allowing third party developers to build applications and services around financial
institutions, increased financial transparency options for account holders, and the use of open
source technology to achieve these principles.
• Using APIs means that banking data will be available in real-time, providing consumers with
better ways to conduct transactions, save, and invest their money.
• Consumers may also have access to better loan terms since lenders will be able to look at
historical transactional data to determine a borrower’s risk level. Open Banking also aims to
give consumers better and more personalized information for making sound financial
decisions.
----------------------------------------------------------------------------------------------------------------------------
API is the acronym for Application Programming Interface, which is a software intermediary
that allows two applications to talk to each other. Each time you use an app like Facebook,
send an instant message, or check the weather on your phone, you’re using an API.
Open Banking
ADVANTAGES OF OPEN BANKING
With Open Banking come some advantages of online banking that benefit customers and bank
owners. Some of them are:
o Helping customers in their operations: obtaining answers and services tailored to each
person’s needs becomes easier with Open Banking. This is because, due to the infinity of
APIs that exist and that can arise, everything is simpler. All you need is access to technology.
Time spent is reduced and operations are automated.
o Centralization of services: with Open Banking, banks once again have full control over the
various services their customers need: advice, loans, transfers, and financing. Thus,
everything is done with greater order and under a single administration.
o Increase in the financial market: with the arrival of more clients in Open Banking, the
diversification of APIs and services will be greater. In this way, there will be numerous offers
adapted to the needs of everyone.
Financial Ratios -DSCR
The Debt Service Coverage Ratio, usually abbreviated as DSCR or just DCR, is an important
concept in real estate finance and commercial lending. It’s critical when underwriting
commercial real estate and business loans, as well as tenant financials, and is a key part of
determining the maximum loan amount.
For example, suppose Net Operating Income (NOI) is 120,000 per year and total debt service
is 100,000 per year.
In this case the debt service coverage ratio (DSCR) would simply be 120,000 / 100,000, which
equals 1.20. It’s also common to see an “x” after the ratio.
In this example it could be shown as “1.20x”, which indicates that NOI covers debt service
1.2 times.
Financial Ratios - DSCR
What does the debt service coverage ratio mean?
o A DSCR greater than 1.0 means there is sufficient cash flow to cover debt service. A DSCR
below 1.0 indicates there is not enough cash flow to cover debt service. However, just
because a DSCR of 1.0 is sufficient to cover debt service does not mean it’s all that’s
required.
o Typically a lender will require a debt service coverage ratio higher than 1.0x in order to
provide a cushion in case something goes wrong.
o What is the minimum or appropriate debt service coverage ratio? Unfortunately, there is no
one size fits all answer and the required DSCR will vary by bank, loan type, and by property
type. However, typical DSCR requirements usually range from 1.20x-1.40x.
Financial Ratios – Current Ratio
The current ratio, also known as the working capital ratio, measures the capability of a
business to meet its short-term obligations that are due within a year.
o The ratio considers the weight of the total current assets versus the total current liabilities.
It indicates the financial health of a company and how it can maximize the liquidity of its
current assets to settle debt and payables.
o The Current Ratio formula (below) can be used to easily measure a company’s liquidity.
The Current Ratio formula is:
Current Ratio = Current Assets / Current Liabilities

Example of the Current Ratio Formula
If a business holds:
Cash = 15 million
Marketable securities = 20 million
Inventory = 25 million
Short-term debt = 15 million
Accounts payables = 15 million
 Current assets = 15 + 20 + 25 = 60 million
 Current liabilities = 15 + 15 = 30 million
 Current ratio = 60 million / 30 million = 2.0x

• The business currently has a current ratio of 2, meaning it can easily settle loan or accounts
payable twice.
• A rate of more than 1 suggests financial well-being for the company. There is no upper-end
on what is “too much,” as it can be very dependent on the industry,
• However, a very high current ratio may indicate that a company is leaving excess cash
unused rather than investing in growing its business.
Financial Ratios – Liquid Ratio
It’s a ratio which tells one’s ability to pay off its debt as and when they become due. In other
words, we can say this ratio tells how quickly a company can convert its current assets into
cash so that it can pay off its liability on a timely basis. Generally, Liquidity and short-term
solvency are used together.
o Liquidity ratio affects the credibility of the company as well as the credit rating of the
company.
- If there are continuous defaults in repayment of a short-term liability, then this will lead to
bankruptcy. Hence this ratio plays important role in the financial stability of any company and
credit ratings
Under liquidity ratio there are several more ratios, which come into the picture for checking
how financially, sound a company is:
I. Current Ratio
II. Acid Test Ratio or Quick Ratio
III. Absolute Liquidity Ratio
IV. Basic Defense Ratio
 Current Ratio
This ratio measures the financial strength of the company. Generally 2:1 is treated as the ideal
ratio, but it depends on industry to industry.
Current Ratio = Current Assets/ Current Liability

Where,
A. Current Assets = Stock, Debtor, Cash and bank, receivables, loan and advances, and other
current assets.
B. Current Liability = Creditor, Short-term loan, bank overdraft, outstanding expenses, and
other current liability
 Acid Test Ratio or Quick Ratio:
This ratio is the best measure of the liquidity in the company. This ratio is more conservative
than the current ratio. The quick asset is computed by adjusting current assets to eliminate
those assets which are not in cash. Generally 1:1 is treated as an ideal ratio.
Quick Ratio = Quick Assets/ Current Liability

Where,
Quick Assets = Current Assets – Inventory – Prepaid Expenses

 Absolute liquidity ratio:
This ratio measures the total liquidity available to the company. This ratio only considers
marketable securities and cash available to the company. This ratio only tests short-term
liquidity in terms of cash, marketable securities, and current investment.
Absolute Liquidity Ratio = Cash + Marketable Securities / Current Liability
 Basic Defense Ratio:
This ratio measures the no. of days a company can cover its Cash expenses without the help of
additional financing from other sources.
Basic Defense Ratio = (Cash + Receivables + Marketable Securities) ÷ (Operating expenses
+Interest + Taxes) ÷ 365
Financial Ratios – Debt Equity Ratio
A Company finances itself in two ways.
 The first is debt. This could take the form of bank loans or issuing a bond.
 The second is equity. This occurs through issuing equity, that is later traded on the stock
market.
 The debt equity ratio tells us how much debt a firm uses relative to its equity.
 For example, suppose a firm has equal amounts of debt and equity. Then the debt equity
ratio, or the total debt divided by total equity, is equal to one. If the debt equity ratio is
larger than one, the firm has more debt than equity, and vice versa.
 Typically, debt equity ratios vary by industry. Some industries, such as banks, tend to have
relatively more debt, and higher debt equity ratios. Other industries, such as technology
firms, tend to have less debt, and lower debt equity ratios. For this reason, it is best to
compare debt equity ratios across firms in similar industries.
 Companies with high debt equity ratios are riskier. This is because interest payments on
debt must be made at regular intervals. If the firm is unable to generate enough cash to
service its debt, it is at risk of bankruptcy. Companies with low debt equity ratios can more
easily survive periods of poor performance.
 Companies with high debt equity ratios also earn a high return on equity. This is because
the value of equity is relatively small. Whenever you see a company with a high return on
equity, it is important to check whether this is driven by high profit margins, or simply a
higher debt equity ratio.
The Debt Equity Ratio Formula
The Debt Equity ratio is the total value of debt, or total liabilities, divided by the total value of
equity. These values come from the balance sheet. Note that since no market variables (i.e.
share price) are used, the debt equity ratio does not tell us whether a stock is cheap or
expensive. An alternative calculation uses only long-term debt instead of total debt. This is the
long-term debt to equity ratio.
Debt Equity Ratio = (total liabilities / total equity)

Financial Ratios – ISCR( Interest Service Coverage Ratio)
The interest coverage ratio is a financial ratio that measures a company’s ability to make
interest payments on its debt in a timely manner.
o Unlike the debt service coverage ratio, this liquidity ratio really has nothing to do with being
able to make principle payments on the debt itself. Instead, it calculates the firm’s ability to
afford the interest on the debt.
o Creditors and investors use this computation to understand the profitability and risk of a
company.
o For instance, an investor is mainly concerned about seeing his investment in the company
increase in value. A large part of this appreciation is based on profits and operational
efficiencies. Thus, investors want to see that their company can pay its bills on time without
having to sacrifice its operations and profits.
Financial Ratios – ISCR
o A creditor, on the other hand, uses the interest coverage ratio to identify whether a
company is able to support additional debt. If a company can’t afford to pay the interest on
its debt, it certainly won’t be able to afford to pay the principle payments. Thus, creditors
use this formula to calculate the risk involved in lending.
The interest coverage ratio formula is calculated by dividing the EBIT, or earnings before
interest and taxes, by the interest expense. Here is what the interest coverage equation looks
like.
Financial Ratios – Profitability Ratios
Profitability represents final performance of company i.e. how profitable company. It also
represents how profitable owner’s funds have been utilized in the company.
Types of Profitability Ratios –
o Return on Equity
o Earnings Per Share
o Dividend Per Share
o Price Earnings Ratio
o Return on Capital Employed
o Return on Assets
o Gross Profit
o Net Profit
 Return on Equity
This ratio measures Profitability of equity fund invested the company. It also measures how
profitably owner’s funds have been utilized to generate company’s revenues. A high ratio
represents better the company is.
ROE = Profit after Tax ÷ Net worth
Where,
Net worth = Equity share capital, and Reserve and Surplus
 Earnings Per Share
This ratio measures profitability from the point of view of the ordinary shareholder. A high
ratio represents better the company is.
EPS = Net Profit ÷ Total no of shares outstanding

 Dividend Per Share
This ratio measures the amount of dividend distributed by the company to its shareholders.
The high ratio represents that the company is having surplus cash.
DPS = Amount Distributed to Shareholders ÷ No of Shares outstanding
 Price Earnings Ratio
This ratio is used by the investor to check the undervalued and overvalued share price of the
company. This ratio also indicates Expectation about the earning of the company and payback
period to the investors.
PE Ratio = Market Price of Share ÷ Earnings per share

 Return on Capital Employed
This ratio computes percentage return in the company on the funds invested in the business
by its owners. A high ratio represents better the company is.
ROCE = Net Operating Profit ÷ Capital Employed × 100
Capital Employed = Equity share capital, Reserve and Surplus, Debentures and long-term Loans
Capital Employed = Total Assets – Current Liability
 Return on Assets
This ratio measures the earning per rupee of assets invested in the company. A high ratio
represents better the company is.
ROA = Net Profit ÷ Total Assets

 Gross Profit Ratio
This ratio measures the marginal profit of the company. This ratio is also used to measure the
segment revenue. A high ratio represents the greater profit margin and it’s good for the
company.
Gross Profit ÷ Sales × 100
Gross Profit= Sales + Closing Stock – op stock – Purchases – Direct Expenses
 Net Profit Ratio
This ratio measures the overall profitability of company considering all direct as well as indirect
cost. A high ratio represents a positive return in the company and better the company is.
Net Profit ÷ Sales × 100

Net Profit = Gross Profit + Indirect Income – Indirect Expenses
Financial Ratios – Turnover Ratios
The turnover ratio can be defined as the ratio to calculate the quantity of any asset which is
used by a business to generate revenue through its sales. It is the relation between the
amount of company’s asset and the revenue generated from them. To be more precise, it is an
efficiency ratio to check how efficiently the company is using different assets to extract
earnings from them (individually as well as on a whole). A higher ratio is considered to be
better as it would indicate that the company is optimally using the resources to earn revenue
and it would imply a higher ROI and the funds invested are used the least.
TYPES OF TURNOVER RATIOS WITH FORMULA
CAPITAL EMPLOYED TURNOVER RATIO

It indicates the relation between the capital employed in a business and the sales or revenue
the business generates out of it. The capital whether used in a proper direction to generate
revenue or not and how efficiently it has been employed is measured with this ratio. The
formulae for
Capital employed turnover Ratio = Sales / Capital Employed
TYPES OF TURNOVER RATIOS WITH FORMULA
TOTAL ASSET TURNOVER RATIO

It is a ratio which determines the connection between the sales and the total asset of a
company. It checks for the efficiency with which the company’s all assets are utilized to earn
revenue. The formula for
Total Asset Turnover Ratio = Sales (Net Sales) / Total Assets of the Company
DEBTORS TURNOVER RATIO
It is the ratio which calculates the quickness of the conversion of the debtors or credit sales
amount to cash. It is also known as the receivables turnover ratio as it measures the credit
sales against the average debtors for a year. The formula for
Debtors Turnover Ratio = Net Credit Sales / Average account Receivable

Significance of Turnover Ratios
The turnover ratios analysis is important to the internal as well as the external parties of the
company.
• To the internal members like the managing body and the board of directors, they check this
ratio to evaluate their efficiency in managing the different assets and liabilities and where
to make the correction and increase their efficiency or not.
• For the external parties like the investors, creditors, they check these ratios to find out the
capabilities of the company’s management and evaluate whether their investment will reap
profit or loss. The Turnover Ratios uses to the debtors are to find how many days credit they
will receive.
Financial Ratios – Margin Ratios
The profit margin ratio, also called the return on sales ratio or gross profit ratio, is a
profitability ratio that measures the amount of net income earned with each rupee of sales
generated by comparing the net income and net sales of a company. In other words, the profit
margin ratio shows what percentage of sales are left over after all expenses are paid by the
business.
 Creditors and investors use this ratio to measure how effectively a company can convert
sales into net income. Investors want to make sure profits are high enough to distribute
dividends while creditors want to make sure the company has enough profits to pay back its
loans. In other words, outside users want to know that the company is running efficiently.
An extremely low profit margin formula would indicate the expenses are too high and the
management needs to budget and cut expenses.
 The return on sales ratio is often used by internal management to set performance goals for
the future.
Financial Ratios – Margin Ratios
 The profit margin ratio directly measures what percentage of sales is made up of net
income. In other words, it measures how much profits are produced at a certain level of
sales.
 This ratio also indirectly measures how well a company manages its expenses relative to
its net sales. That is why companies strive to achieve higher ratios. They can do this by
either generating more revenues why keeping expenses constant or keep revenues
constant and lower expenses.
 Since most of the time generating additional revenues is much more difficult than cutting
expenses, managers generally tend to reduce spending budgets to improve their profit
ratio.
Like most profitability ratios, this ratio is best used to compare like sized companies in the
same industry. This ratio is also effective for measuring past performance of a company.
Banking Ratios
 Capital adequacy ratio (CAR): A bank's capital ratio is the ratio of qualifying capital to risk
adjusted (or weighted) assets. The RBI has set the minimum capital adequacy ratio at 9% for
all banks. A ratio below the minimum indicates that the bank is not adequately capitalized
to expand its operations. The ratio ensures that the bank do not expand their business
without having adequate capital.
CAR = Tier I capital + Tier II capital / Risk weighted assets
 It must be noted that it would be difficult for an investor to calculate this ratio as banks do
not disclose the details required for calculating the denominator (risk weighted average) of
this ratio in detail. As such, banks provide their CAR from time to time.
 Tier I Capital funds include paid-up equity capital, statutory and capital reserves, and
perpetual debt instruments eligible for inclusion in Tier I capital. Tier II capital is the
secondary bank capital which includes items such as undisclosed reserves, general loss
reserves, subordinated term debt, amongst others.
Banking Ratios
o Non-performing asset (NPA) ratio:
The net NPA to loans (advances) ratio is used as a measure of the overall quality of the bank's
loan book. An NPA are those assets for which interest is overdue for more than 90 days (or 3
months).
 Net NPAs are calculated by reducing cumulative balance of provisions outstanding at a

period end from gross NPAs. Higher ratio reflects rising bad quality of loans.
NPA ratio = Net non-performing assets / Loans given

Accounting Concepts & Conventions
Accounting Concepts
o Business entity concept: A business and its owner should be treated separately as far as
their financial transactions are concerned.
o Money measurement concept: Only business transactions that can be expressed in terms
of money are recorded in accounting, though records of other types of transactions may be
kept separately.
o Dual aspect concept: For every credit, a corresponding debit is made. The recording of a
transaction is complete only with this dual aspect.
o Going concern concept: In accounting, a business is expected to continue for a fairly long
time and carry out its commitments and obligations. This assumes that the business will
not be forced to stop functioning and liquidate its assets at throwaway prices.
Accounting Concepts
o Cost concept: The fixed assets of a business are recorded on the basis of their original cost
in the first year of accounting. Subsequently, these assets are recorded minus depreciation.
No rise or fall in market price is taken into account. The concept applies only to fixed
assets.
o Accounting year concept: Each business chooses a specific time period to complete a cycle
of the accounting process—for example, monthly, quarterly, or annually—as per a fiscal or
a calendar year.
o Matching concept: This principle dictates that for every entry of revenue recorded in a
given accounting period, an equal expense entry has to be recorded for correctly
calculating profit or loss in a given period.
o Realization concept: According to this concept, profit is recognized only when it is earned.
An advance or fee paid is not considered a profit until the goods or services have been
delivered to the buyer.
Accounting Conventions
There are four main conventions in practice in accounting: conservatism; consistency; full
disclosure; and materiality.
o Conservatism is the convention by which, when two values of a transaction are available,
the lower-value transaction is recorded. By this convention, profit should never be
overestimated, and there should always be a provision for losses.
o Consistency prescribes the use of the same accounting principles from one period of an
accounting cycle to the next, so that the same standards are applied to calculate profit and
loss.
o Materiality means that all material facts should be recorded in accounting. Accountants
should record important data and leave out insignificant information.
o Full disclosure entails the revelation of all information, both favorable and detrimental to a
business enterprise, and which are of material value to creditors and debtors.
Accounting Terms
Basic Accounting Terms
Let's familiarize ourselves with basic accounting terms -
• Accounting equation: The accounting equation, the basis for the double-entry system (see
below), is written as follows:
Assets = Liabilities + Stakeholders’ equity
This means that all the assets owned by a company have been financed from loans from
creditors and from equity from investors. “Assets” here stands for cash, account receivables,
inventory, etc., that a company possesses.
Accounting Terms
• Accounting methods: Companies choose between two methods—cash accounting or

accrual accounting. Under cash basis accounting, preferred by small businesses, all
revenues and expenditures at the time when payments are actually received or sent are
recorded. Under accrual basis accounting, income is recorded when earned and expenses
are recorded when incurred.
• Account receivable: The sum of money owed by your customers after goods or services
have been delivered and/or used.
• Account payable: The amount of money you owe creditors, suppliers, etc., in return for
goods and/or services they have delivered.
Accounting Terms
• Assets (fixed and current): Current assets are assets that will be used within one year.
For example, cash, inventory, and accounts receivable (see above). Fixed assets (non-current)
may provide benefits to a company for more than one year—for example, land and
machinery.
• Balance sheet: A financial report that provides a gist of a company’s assets and liabilities
and owner’s equity at a given time.
• Capital: A financial asset and its value, such as cash and goods. Working capital is current
assets minus current liabilities.
Accounting Terms
• Cash flow statement: The cash flow statement of a business shows the balance between
the amount of cash earned and the cash expenditure incurred.
• Credit and debit: A credit is an accounting entry that either increases a liability or equity
account or decreases an asset or expense account. It is entered on the right in an
accounting entry. A debit is an accounting entry that either increases an asset or expense
account or decreases a liability or equity account. It is entered on the left in an accounting
entry.
Accounting Terms
• Double-entry bookkeeping: Under double-entry bookkeeping, every transaction is

recorded in at least two accounts—as a credit in one account and as a debit in another.
For example, an automobile repair shop that collects Rs. 10,000 in cash from a customer
enters this amount in the revenue credit side and also in the cash debit side. If the customer
had been given credit, “account receivable” (see above) would have been used instead of
“cash.” (Also see “single-entry bookkeeping,” below.)
• Financial statement: A financial statement is a document that reveals the financial

transactions of a business or a person. The three most important financial statements for
businesses are the balance sheet, cash flow statement, and profit and loss statement
Accounting Terms
• Profit and loss statement (income statement): A financial statement that summarizes a
company’s performance by reviewing revenues, costs and expenses during a specific
period.
• Types of accounting: Financial accounting reports information about a company’s

performance to investors and credits. Management accounting provides financial data to
managers for business development.
Financial Accounting
Financial statements
For meeting these objectives, financial accountants mainly prepare three types of documents,
as briefly mentioned in the introduction above—
 Balance Sheet, which reflects the assets and liabilities;
 Income statement, which shows the profit and loss; and,
 Cash flow statement, which charts the cash inflow and outflow.
• The external users of financial statements look at the balance sheet to find out how strong
the business is, financially (assets vs. liabilities), and at the income statement to find out
how well the business is doing (profit vs. loss).
Financial statements
• Creditors and other lenders would be happy to see a positive balance sheet so that they
know their investments are safe, and Investors would like to see an income sheet with
profit so that they know some money would be coming to them from the company in the
form of dividend or interest.
• All stakeholders want to see the cash flow statement to know the cash availability with the
company and whether it will be able to clear its liabilities.
• Among the internal users of financial statements are managers, who can take decisions on
the basis of the financial statements, and among the external users are government
authorities, who can initiate tax measures.
 Balance sheet: The balance sheet of a company shows its assets, liabilities, and
stockholders’ equity as on the last day of the accounts-reporting period. Assets include
cash, stocks, buildings, and machinery, while liabilities include loans, interest, and wages.
Stockholders’ equity is the difference between the assets and the liabilities.
 Income statement: The income statement (issued quarterly or annually) reports the
company’s profitability in a given period. It presents the revenues (sales and service
revenues), expenses (operating expenses, such as wages and rent, and non-operating
expenses, such as loan interest), gains, and losses.
 Cash flow statement: The cash statement shows the inflow and outflow of cash and its use
for operating, financing, and investing activities.
Principles of Financial Accounting
The rules of accounting, including financial accounting, have been standardized to achieve the
following goals:
o Objectivity: Financial statements should be free from bias, and financial accountants
should scrupulously follow the principle of objectivity.
o Usability: Users of financial documents should be able to depend on them—the

documents should facilitate decision-making.
o Materiality: Omission of data from financial statements will mislead financial decision-
makers; therefore, all important data should be recorded and misstatement of facts
avoided.
o Comparability: Financial statements should enable users to compare the performances of
companies, and the documents should follow the standards set internationally.
Comparison: Financial vs Management vs Cost Accounting
• Financial accounting: it differs from management accounting and cost accounting in that it
mainly caters to external stakeholders, such as investors.
• Management accounting, however, is intended for a company’s internal use and provides
managers with the information necessary for taking steps to improve the performance of
their company.
• The objective of Cost accounting, which is also an internal tool, is to calculate the cost of
production and help managers come up with cost-reduction ideas.
Trade Finance Products
Trade finance represents the financial instruments and products that are used by companies to
facilitate international trade and commerce. Trade finance makes it possible and easier for
importers and exporters to transact business through trade. Trade finance is an umbrella term
meaning it covers many financial products that banks and companies utilize to make trade
transactions feasible.
The function of trade finance is to introduce a third-party to transactions to remove the
payment risk and the supply risk. Trade finance provides the exporter with receivables or
payment according to the agreement while the importer might be extended credit to fulfill the
trade order.
The parties involved in trade finance are numerous and can include:
o Banks
o Trade finance companies
o Importers and exporters
o Insurers
o Export credit agencies and service providers
Below are a few of the financial instruments used in trade finance: -
o Lending lines of credit can be issued by banks to help both importers and exporters.
o Letters of credit reduce the risk associated with global trade since the buyer's bank
guarantees payment to the seller for the goods shipped. However, the buyer is also
protected since payment will not be made unless the terms in the LC are met by the seller.
Both parties have to honor the agreement for the transaction to go through.
----------------------------------------------------------------------------------------------------------------------------
A letter of credit is a document that guarantees the buyer’s payment to the sellers. It is Issued
by a bank and ensures the timely and full payment to the seller. If the buyer is unable to make
such a payment, the bank covers the full or the remaining amount on behalf of the buyer. A
letter of credit is issued against a pledge of securities or cash. Banks typically collect a fee, i.e.,
a percentage of the size/amount of the letter of credit.
o Factoring is when companies are paid based on a percentage of their account's receivables.
o Export credit or working capital can be supplied to exporters.
o Insurance can be used for shipping and the delivery of goods and can also protect the
exporter from nonpayment by the buyer.
Below are a few of the financial instruments used in trade finance: -
o Trade Credit
Normally the seller requires payment of goods 30- or 60-days post shipment. Trade credit,
which is probably the easiest and cheapest arrangement is based mainly on trust directly
between the buyer and the seller. When the two parties are less well known to each other, or
if the creditworthiness of the buyer is not known, a bank backed bill of exchange can be issued
and guaranteed by the buyer’s bank.
o Cash Advances
A cash advance is a payment of funds (unsecured) to the exporting business prior to the
shipment of goods. It’s often based on trust; a cash advance is usually favorable and sought by
the exporters so that they are able to manufacture or produce goods following an order.
Factoring and Forfaiting
Factoring and Forfaiting have gained immense importance, as one of the major sources of
export financing. For a layman, these two terms are one and the same thing. Nevertheless,
these two terms are different, in their nature, concept, and scope.
 Factoring is a financial affair which involves the sale of firm’s receivables to another firm or
party known as a factor at discounted prices.
 On the other hand, forfaiting simply means relinquishing the right. In this, the exporter
renounces his/her right due at a future date, in exchange for instant cash payment, at an
agreed discount, to the forfaiter.
FACTORING FORFAITING
 Forfaiting is relinquishing the right (selling
 Factoring is a financial arrangement
the claim) on trade receivables by an
whereby a supplier of goods sells its trade
exporter to a forfeiter at discounted price
receivables to the factor at discounted
for immediate cash payment.
price for immediate cash payment.
 Although discounted receivables often have
 Factoring refers to discounting of trade maturities over medium terms of 1 to 3
receivables of short maturities. years they can be as short as 1 month or as
long as 10 years.
 Forfaiting usually takes place on trade
receivable on capital goods, but it can be
 Factoring involves trade receivable on
applied to a wide range of trade related and
ordinary goods.
even purely financial receivables and
payment instruments.
FACTORING FORFAITING
 Factoring transaction does not set up in  Forfaiting establishes on negotiable
Negotiable Instrument. instrument.
 Forfaiting may involve dealing in secondary
 Factoring does not deal in secondary
market
market.
 The exporter gets 100 percent financing ,
and also escapes from various types of
 Factor disburses payment of the invoices
risks involved in export business viz.
immediately to the customer, which will be
interest rate risk, currency risks, credit risk
usually up to 80% of their value,
and political risk etc. involved in deferred
payments.
Trade Finance Process
Trading intermediaries such as banks and other financial institutions oversee and facilitate
different financial transactions between a buyer (importer) and a seller (exporter). These
financial institutions step in to finance the business transactions between the buyer and seller.
These transactions can take place domestically or internationally. The availability of trade
financing has spawned huge growth in international trade.
Trade finance covers different types of activities such as issuing letters of credit, lending,
forfaiting, export credit and financing, and factoring.
• The trade financing process involves several different parties, including the buyer and seller,
the trade financier, export credit agencies, and insurers.
 Trade Finance Reduces Payment Risk
During the early days of international trade, many exporters were never sure whether, or
when, the importer would pay them for their goods. Over time, exporters tried to find ways to
reduce the non-payment risk from importers. On the other hand, the importers were also
worried about making prior payments for goods from an exporter since they had no guarantee
whether the seller would actually ship the goods.
Trade finance has evolved to address all of these risks by accelerating payments to exporters
and assuring importers that all the goods ordered have been shipped.
• The importer's bank works to provide the exporter with a letter of credit to the exporter's
bank as payment once shipment documents are presented.
 Trade Finance Reduces Payment Risk
Alternatively, the exporter's bank may give a business loan to the exporter while still
processing the payment made by the importer as a way to keep the supply of goods active
instead of keeping the exporter waiting for the importer's payment. The loan extended to the
exporter will be recovered by the trade financier when the importer's payment is received by
the exporter's bank.
 Reducing Pressure on Both Importers and Exporters
Trade finance has led to enormous growth of economies across the globe because it has
bridged the financial gap between importers and exporters. An exporter is no longer afraid of
an importer's default in payments, and an importer is sure that all the goods ordered have
been sent by the exporter as verified by the trade financier.
 Various Trade Finance Products and Services
Trade financiers such as banks and other financial institutions offer different products and
services to fit the needs of various types of companies and transactions:
• Letter of Credit: This is a promise undertaken by the importer's bank to the exporter, saying
that once the exporter presents all the shipping documents as spelled out by the importer's
purchase agreement, the bank will immediately make the payment to the exporter/seller.
• Bank Guarantee: A bank acts as a guarantor in case the importer or exporter fails to fulfill
the terms and conditions of the contract. The bank takes an initiative to pay a sum of
money to the beneficiary.
These two products have many different variations to accommodate different types of
transactions and circumstances.
 Factoring in Trade Finance
This is a very common method used by exporters as a way to accelerate their cash flow. In this
type of agreement, the exporter sells all of his open invoices to a trade financier ( the factor) at
a discount. The factor then waits until the payment is made by the importer. This relieves the
exporter from the risk of bad debts and provides working capital for them to keep trading. The
factor, or trade financier, then make a profit when the importer pays the full agreed-upon
price for the goods since the exporter sold the account receivables at a discount to the
factoring company.
 Forfaiting
This is a form of agreement whereby the exporter sells all of his accounts receivable to a
forfaiter at a certain discount in exchange for cash. By so doing, the exporter transfers the debt
he owes to the importer to the forfaiter. The receivables bought by the forfaiter must be
guaranteed by the importer's bank. This is due to the fact that the importer takes the goods on
credit, and sells them before paying any money to the forfaiter.
Credit Card Systems
Three types of credit card payment systems are widely available to merchants, including:
• Standalone terminals
• Cellphone processing solutions
• Virtual terminals
These payment systems allow merchants to process a variety of transactions, such as credit
card and gift card payments. Customers are more likely to shop from a merchant if they offer a
variety of payment options at checkout.
Standalone Terminals
Standalone terminals are the type seen at retail stores. The customer, or the merchant, slides
the card through a magnetic strip reader. The information is then sent to the credit card
processor and is either accepted or declined. Accepted transactions are credited to the
merchant's account at the time of sale.
Credit Card Systems
Standalone Terminals
The standalone terminal payment system transmits information in a variety of ways.

Transmission is via a phone line or high-speed cable system, using ethernet wiring. Terminals
are typically plug-and-play, meaning once they are plugged into a computerized system, they
are immediately recognized as part of the system.
The standalone terminal is designed to process:
- Credit cards
- Gift cards
- Loyalty cards
Credit Card Systems
 Virtual Terminals
Virtual terminals are designed to process online credit and debit cards payments. Virtual
terminals are very useful for recurring payments, such as monthly installments or membership
fees.
- The virtual terminal payment system is also a mobile system; it can be used anywhere there
is an Internet connection. Merchants benefiting from a virtual terminal, include merchants
that operate online auction sites, sales via a Web site or who charge recurring fees.
Credit Card Frauds
Card Fraud
Banks are under pressure to detect and prevent card related fraud losses at the point-of-sale
without sacrificing customer service, loyalty, and retention.
Card related fraud types are:
 APPLICATION FRAUD
This type of fraud occurs when a person falsifies an application to acquire a credit card.
Application fraud can be committed in three ways:
- Assumed identity, where an individual illegally obtains personal information of another

individual and opens accounts in his or her name, using partially legitimate information.
- Financial fraud, where an individual provides false information about his or her financial
status to acquire credit.
Credit Card Frauds
LOST/ STOLEN CARDS
A card is lost/stolen when a legitimate account holder receives a card and loses it or someone
steals the card for criminal purposes.
ACCOUNT TAKEOVER
This type of fraud occurs when a fraudster illegally obtains a valid customers’ personal
information. The fraudster takes control of (takeover) a legitimate account by either providing
the customers account number or the card number.
FAKE AND COUNTERFEIT CARDS

The creation of counterfeit cards, together with lost / stolen cards pose highest threat in credit
card frauds. Fraudsters are constantly finding new and more innovative ways to create
counterfeit cards.
Credit Card Frauds
FAKE AND COUNTERFEIT CARDS
Some of the techniques used for creating false and counterfeit cards are
• Erasing the magnetic strip,
• Creating a fake card,
• Altering card details
• Skimming (a process where genuine data on a card’s magnetic stripe is electronically copied
onto another).
Frauds
Merchant Related Frauds
Merchant related frauds are initiated either by owners of the merchant establishment or their
employees. The types of frauds initiated by merchants are described below:
 MERCHANT COLLUSION
This type of fraud occurs when merchant owners and/or their employees conspire to commit
fraud using their customers’ (cardholder) accounts and/or personal information. Merchant
owners and/or their employees pass on the information about cardholders to fraudsters.
 Triangulation
The fraudster in this type of fraud operates from a web site. Goods are offered at heavily
discounted rates and are also shipped before payment. The fraudulent site appears to be a
legitimate auction or a traditional sales site. The customer while placing orders online provides
information such as name, address and valid credit card details to the site. Once fraudsters
receive these details, they order goods from a legitimate site using stolen credit card details.
The fraudster then goes on to purchase other goods using the credit card numbers of the
customer.
Frauds
 Internet Related Frauds
The Internet has provided an ideal ground for fraudsters to commit credit card fraud in an easy
manner. Fraudsters have recently begun to operate on a truly transnational level. With the
expansion of trans-border or 'global' social, economic and political spaces, the internet has
become a New World market, capturing consumers from most countries around the world.
The most commonly used techniques in internet fraud are described below:
o Site cloning: Site cloning is where fraudsters clone an entire site or just the pages from
which you place your order. Customers have no reason to believe they are not dealing with
the company that they wished to purchase goods or services from because the pages that
they are viewing are identical to those of the real site. The cloned or spoofed site will
receive these details and send the customer a receipt of the transaction via email just as the
real company would. The consumer suspects nothing, whilst the fraudsters have all the
details they need to commit credit card fraud.
Frauds
o False merchant sites: These sites often offer the customer an extremely cheap service. The
site requests a customer’s complete credit card details such as name and address in return
for access to the content of the site. Most of these sites claim to be free, but require a valid
credit card number to verify an individual’s age. These sites are set up to accumulate as
many credit card numbers as possible. The sites themselves never charge individuals for the
services they provide. The sites are usually part of a larger criminal network that either uses
the details it collects to raise revenues or sells valid credit card details to small fraudsters.
o Credit card generators: Credit card number generators are computer programs that
generate valid credit card numbers and expiry dates. These generators work by generating
lists of credit card account numbers from a single account number.
Frauds
FRAUD PREVENTION AND MANAGEMENT
With all the negative impacts of fraudulent credit card activities – financial and product losses,
fines, loss of reputation, etc., and technological advancements in perpetrating fraud – it's easy
for merchants to feel victimized and helpless. However, technological advancements in
preventing fraud have started showing some promise to combat fraud.
 Merchants and Acquirers & Issuers are creating innovative solutions to bring down on
fraudulent transactions .
 One of the main challenges with fraud prevention is the long-time lag between the time a
fraudulent transaction occurs and the time when it gets detected, i.e., the cardholder
initiates a charge-back. Analysis shows that the average lag between the transaction date
and the charge-back notification could be as high as 72 days. This means that, if no fraud
prevention is in place, one or more fraudsters could easily generate significant damage to a
business before the affected stakeholders even realize the problem.

Banking

Caricato da

Informazioni sul documento

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Banking

Caricato da

Copyright:

Formati disponibili

Banking Introduction

o Retail Commercial Bank Lending Process Flow

o Basel I ,II ,III and IV

o Payment Service Directive (PSB), SEPA, NPCC ( Australia), Open Banking

o Trade Finance Products and Processes

o Credit Card System , Fraud Detection and Prevention

The five C’s of credit —

— are a framework used by many traditional lenders to evaluate potential borrowers.

What it is: Assets that are used to guarantee or secure a loan.

• Current employment information ( salary)

• Depending on the technology employed by the lender, a sophisticated Loan Origination

When an application is deemed complete, the underwriting process begins.

• Sometimes this process is fully automated; other times it is manual or a combination of

 The borrower can be a corporation, an individual project, or a government.

• The agent’s duty is mainly administrative.

o Less time and effort involved

o Diversification of loan terms

Loan syndication allows borrowers to borrow large amounts to finance capital-intensive

• BCBS activities focus on exchanging information on national, banking-related supervisory

o The tier 1 capital ratio = tier 1 capital / all RWA

Tier 1 capital consists of shareholders' equity and retained earnings—disclosed on their

 Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy

• Improve risk management and governance

• Strengthen banks’ transparency and disclosures.

What is Basel IV?

• SEPA currently includes 34 countries in Europe. It encompasses the 28 EU member states

The Current Ratio formula is:

Current Ratio = Current Assets / Current Liabilities

 Current assets = 15 + 20 + 25 = 60 million

 Current liabilities = 15 + 15 = 30 million

 Current ratio = 60 million / 30 million = 2.0x

Current Ratio = Current Assets/ Current Liability

 Acid Test Ratio or Quick Ratio:

Quick Ratio = Quick Assets/ Current Liability

Quick Assets = Current Assets – Inventory – Prepaid Expenses

Absolute Liquidity Ratio = Cash + Marketable Securities / Current Liability

 Basic Defense Ratio:

Debt Equity Ratio = (total liabilities / total equity)

Types of Profitability Ratios –

 Earnings Per Share

EPS = Net Profit ÷ Total no of shares outstanding

DPS = Amount Distributed to Shareholders ÷ No of Shares outstanding

 Price Earnings Ratio

PE Ratio = Market Price of Share ÷ Earnings per share

ROCE = Net Operating Profit ÷ Capital Employed × 100

ROA = Net Profit ÷ Total Assets

Gross Profit= Sales + Closing Stock – op stock – Purchases – Direct Expenses

 Net Profit Ratio

Net Profit ÷ Sales × 100

TYPES OF TURNOVER RATIOS WITH FORMULA

CAPITAL EMPLOYED TURNOVER RATIO

TOTAL ASSET TURNOVER RATIO

DEBTORS TURNOVER RATIO

Debtors Turnover Ratio = Net Credit Sales / Average account Receivable

CAR = Tier I capital + Tier II capital / Risk weighted assets

 Net NPAs are calculated by reducing cumulative balance of provisions outstanding at a

NPA ratio = Net non-performing assets / Loans given

Let's familiarize ourselves with basic accounting terms -

Assets = Liabilities + Stakeholders’ equity

• Accounting methods: Companies choose between two methods—cash accounting or

• Double-entry bookkeeping: Under double-entry bookkeeping, every transaction is

• Financial statement: A financial statement is a document that reveals the financial

• Types of accounting: Financial accounting reports information about a company’s

 Balance Sheet, which reflects the assets and liabilities;