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FAQ

Frequently Asked Questions

Q : Please discuss your views about the changes in banking scenario?

A: banking sector has successfully been adding new products and innovative services to its basket of products being offered to retail customer and institutional customers. I think the banking sector will keep its goal to accelerate the growth. Secondly each bank would like to optimize its costs of marketing and distribution so as to keep its overheads low without affecting its reach or quality of services.
With regards to changes, i feel that there would be marketing strategy which would be “socially engaging”. The leading banks would adopt “intelligent multichannel” approach over their brick and mortar branch banking

Q : What is ILOC (irrevocable letter of credit)?

A: It is a letter of credit or a contractual agreement between financial institute (bank) and the party to which the letter is handed. The iloc letter cannot be cancelled under any circumstance and, guarantees the payment to the party. It requires the bank to pay against the drafts meeting all the terms of iloc. It is valid upto the stated period of time. For example, if a small business wanted to contract with an overseas supplier for a specified item they would come to an agreement on the terms of the sale like quality standards and pricing, and ask their respective banks to open a letter of credit for the transaction. The buyer’s bank would forward the letter of credit to the seller’s bank, where the payment terms would be finalized and the shipment would be made.

 

Q : What are the non performing assets of a company?

A: A NPA is an obligation payable to the bank which has not been made or the interest and principal amount has not been paid on the due time. Npa is the loan or credit provided by the bank to its customers which could not be recovered in due time. Npa is also known as “bad debts”

Q : Why should a company prefer equity finance to debt finance?

A: Equity financing is less risky (you won’t have to pay it back). You’ll have more cash on hand. You won’t have to channel profits into loan repayment. Your equity investors will have a longer term view. Your company will have more credibility. And you might get to tap your investors’ network to help you develop the business.

Q : What ‘libor’ stands for?

A: ‘libor’ stands for london inter-bank offered rate. As the name suggest, it is an average interest rate offered for u.s dollar or euro dollar deposited between groups of london banks. It is an international interest rate that follows world economic condition and used as a base rate by banks to set interest rate. Libor comes in 8 maturities from overnight to 12 months and in 5 different currencies. Once in a day libor announces its interest rate.

Q : What is ‘balloon payment’?

A: The ‘balloon payment’ is the final lump sum payment that is due. When the entire loan payment is not amortized over the life of the loan, the remaining balance is due as the final repayment to the lender. Balloon payment can occur within an adjustable rate or fixed rate mortgage.

 

Q : When should a company consider issuing debt instead of equity?

 

A: A company should always optimize its capital structure. If it has taxable income, then it can benefit from the tax shield of issuing debt.  If the firm has immediately steady cash flows and is able to make the required interest payments, then it may make sense to issue debt if it lowers the company’s weighted average cost of capital.

 

Q : Which is cheaper, debt or equity?

A: Debt is cheaper because it is paid before equity and has collateral backing it. Debt ranks ahead of equity on liquidation of the business. There are pros and cons to financing with debt vs equity that a business needs to consider. It is not automatically better to use debt financing simply because it’s cheaper.  A good answer to the question may highlight the tradeoffs, if there is any followup required. Learn more about the cost of debt and cost of equity.

 

Q : Is it possible conversion of ECB into equity?

A: Conversion of ecb into equity is permitted subject to the following conditions:
(a) the activity of the company is covered under the automatic route for foreign direct investment or government
approval for foreign equity participation has been obtained by the company,
(b) the foreign equity holding after such conversion of debt into equity is within the sectoral cap, if any,
(c) pricing of shares is as per sebi and erstwhile cci guidelines / regulations in the case listed / unlisted companies as the case may be.

Q : What is term repo?

A: under term repo, rbi lends to banks through auction of funds. The minimum interest charged has to be above the repo rate and there is no limit for maximum interest rate because auction is made on the rate of interest.

Q : What is repo rate and reverse repo rate?

A: Repo rate is the rate :at which banks borrow from rbi during shortage of funds. This is a short term loan provided for upto 90 days by selling securities to rbi and receiving money in lieu of it. Reverse repo rate :is the rate at which banks deposit their excess liquidity with the rbi. In other words, the rate at which rbi borrows from banks by selling securities in order to control excess liquidity in the market is reverse repo rate.

Q : What is the difference between fii and fdi?

A: Fdi or foreign direct investment is an investment that a parent company makes in a foreign country. Fii or foreign institutional investor is an investment made by an investor in the markets of a foreign nation. Fii can enter the stock market easily and also withdraw from it easily. But fdi cannot enter and exit that easily as fdi only targets a specific sector.

Q : What is overdraft protection?

 

A: Overdraft protection is a service that is provided by a bank to their customer. For instance, if you are holding two accounts, saving and credit account, in the same bank. Now if one of your accounts does not have enough cash to process the cheques, or to cover the purchases. The bank will transfer money from one account to another account, which does not have cash so to prevent check return or to clear your shopping or electricity bills.

 

Q : What does negative working capital mean?

A: Negative working capital is common in some industries such as grocery retail and the restaurant business.  For a grocery store, customers pay upfront, inventory moves relatively quickly, but suppliers often give 30 days (or more) credit.  This means that the company receives cash from customers before it needs the cash to pay suppliers.  Negative working capital is a sign of efficiency in businesses with low inventory and accounts receivable.  In other situations, negative working capital may signal a company is facing financial trouble if it doesn’t have enough cash to pay its current liabilities.

 

Q : What is a loan against property? How is it different from a home loan?

A: The two loans are poles apart. A loan against property is a multi-purpose loan. The end-use could be funding your elder child’s marriage, your younger child’s education abroad, expanding your business. The collateral (secured asset) for this loan is a property which is already in existence or a plot of land.  A home loan on the other hand is taken only for the purpose of buying a residential property.

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Possible Risks

Market risk, or “principal risk” is the chance that a downturn (or a bad investment) chews up your money. It’s there for both stocks and bonds — when interest rates rise, bondholders will see the market value of their paper shrink — and for most people it’s the big bugaboo.

Inflation or purchasing-power risk for most people is the “risk of avoiding risk” — the opposite end of the spectrum from market risk — the possibility that you are too conservative and your money can’t grow fast enough to keep pace with inflation

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