ASSIGNMENT ONE ( Module 1, 2 & 3)

P.V.N.W.PERERA NO.

1. What are the basic principals of Banking? Discuss briefly Principle of Intermediation The word intermediary means someone who carries messages between people who are unwilling or unable to meet personally. Banks are called financial intermediaries because they invest or lend funds of depositors who themselves are unable to lend their funds, due to risk and other factors involved in direct lending. Banks assume the credit risk (arising from default by the borrower) involved in direct lending to those who need funds (borrowers). They have expertise and abilities to manage such risk. Thus, banks mediate between the depositors (savers of money) and borrowers (users of money) and earn interest spread as a reward for risk taking, meeting the administrative expenses and making provision for some portions of loans that may turn bad of difficult to recover (termed as Non Performing Advances)
As long as there are market imperfections, there are intermediaries. As soon as markets are perfect, intermediaries are redundant; they have lost their function because savers and investors dispose of the perfect information needed to find each other directly, immediately and without any impediments, so without costs, and to deal at optimal prices. This is the general equilibrium model la Arrow-Debreu in which banks cannot exist. Obviously, this contrasts with the huge economic and social importance of financial intermediaries in highly developed modern economies. Empirical observations point at an increasing role for financial intermediaries in economies that experience vastly decreasing information and transaction costs. Our essay goes into this paradox and comes up with an amendment of the existing theory of financial intermediation. As the main source of external funding, banks play important roles in corporate governance, especially during periods of firm distress and bankruptcy. The idea that banks monitor firms is one of the central explanations for the role of bank loans in corporate finance. Bank loan covenants can act as trip wires signaling to the bank that it can and should intervene into the affairs of the firm. Unlike bonds, bank loans tend not to be dispersed across many investors. This facilitates intervention and renegotiation

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of capital structures. Bankers are often on company boards of directors. Banks are also important in producing liquidity by, for example, backing commercial paper with loan commitments or standby letters of credit. Consumers use bank demand deposits as a medium of exchange, that is, writing checks, using credit cards, holding savings accounts, visiting automatic teller machines, and so on. Demand deposits are securities with special features. They can be denominated in any amount; they can be put to the bank at par (i.e., redeemed at face value) in exchange for currency. These features allow demand deposits to act as a medium of exchange. But, the banking system must then clear these obligations. Clearing links the activities of banks in clearinghouses. In addition, the fact that consumers can withdraw their funds at any time has, led to banking panics in some countries, historically, and in many countries more recently

Principle of Liquidity The simultaneous operations of acceptance of deposits (repayable on demand or on certain maturity periods) and lending these funds to borrowers in a manner such that the bank would be able to arrange for the funds demanded by its depositors at any point of time, is called liquidity management or asset liability management. In line with the liquidity principle a bank must keep a certain position of its deposit liabilities in liquid form so as to be able to repay the same on demand or maturity dates to the depositors. This principle is reinforced by the regulatory requirements of the Central Bank of each country, that every bank has to maintain deposits with the relevant Central Bank as cash reserve.
A bank needs to have adequate cash or assets in the form of near cash to meet the demand for withdrawals from its depositors. On the other hand keeping too much cash will reduce the funds that are available for lending and investments which in turn will reduce the bank profitability. Hence if a bank has too much of cash it will have to compromise on profits while if the bank cash holding is insufficient it will not be able to meet the demands of customers. Therefore the banks confronted with this dilemma of balancing two conflicting objectives of higher profitability and liquidity. Central Bank regulates the liquidity position of the banking sector through the implementation of following ratios. Statutory Reserve Requirement (SRR) It is mandatory that all commercial banks deposit a certain percentage of their customer deposits with the Central Bank. Currently the SRR rate is 7% which means all commercials banks need to deposit 7% of the value of all customer deposits with Central Bank Liquid Asset Ratio (LAR) It is mandatory that banks maintain 20% of the value of their deposits in cash and other liquid assts such as government securities and inter bank advances. The Central Bank closely monitor whether banks comply with this direction.

Principle of Profitability Banking business, like any other, has to be profitable in order to sustain the required growth. Interest income which represents the interest differential (spread) between its loans and deposits rates, is the main source of profit for a bank. The interest earned by a bank. On its lending operations should be higher than the interest paid by it on its deposits operations. The interest spread, along with the volume of its deposits and loans determines the total net interest income of a bank. Interest income along with non-interest or fee-based income (e.g. Commission on letters of credit, fund remittance and exchange on, issuance of bank draft and foreign exchange business) contributes to the bulk of a banks profit. (Return on Assets-ROA, and Return on Capital-ROC are the true financial indicators of a banks profit)
Profitability is an important objective of a bank like for any other organization in order to give an adequate return to its shareholders. Importance of providing an adequate return to shareholders For a bank to continue its business of lending it needs to be adequately capitalized. As per the guidelines of Basel 2 accord, all banks need to have a percentage of their loans, advances and investments supported by capital. Hence in order to attract capital into the bank it needs to offer an attractive return to its shareholders. 21 Key Performance Indicators (KPI) for a bank to assess its profitability 1. Net Interest Margins This ratio gives an indication of the difference between the interest rate charge from customer for loans and the interest rate paid to deposit customers. Higher interest margin will enable the bank to be more profitable. 2. Non interest income to net income This ratio gives an indication as to what percentage of the banks income is generated from fees, commissions and foreign exchange gains (non funded income). If this ratio is above 30%, it will reduce adverse impact a bank will have due to reduction in interest margins 3. Cost to Income ratio This measures the overhead cost of the bank as a percentage of net income. Banks that has low cost to income ratio has a competitive advantage over other banks. 4. Non performing Assets (NPA) NPA is a ratio which gives the percentage of loans that have more than three installments outstanding to total loans. This ratio gives an indication of the asset quality of the bank and the quality of its earnings. If a bank has a high net NPA ratio it is likely that the bank will have to increase its provisioning in future years, which will reduce future profits. 5. Return on Assets (ROA) Return on assets is calculated as profit after tax of the bank divided by average assets. A bank which has a higher ROA will be more attractive to investors compared to a bank with a low ROA. 6. Return on Equity (ROE) Return on equity is computed as profit after tax of the bank divided by average shareholder funds. This gives an indication of the return the bank gives to its shareholders. Investors will compare the ROE of a bank with the Treasury bill interest rates prevailing in the country. Investors will prefer to invest in a bank that has a higher ROE compared to the Treasury bill interest rate. 22

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7. Capital Adequacy Ratio Each bank is required that a certain percentage of their loans, advances, investments and other assets (risk weighted assets) are supported by capital (shareholders funds and long term debt). In Basel 2 accord capital is divided in to two parts as tier 1 and tier 2. As per current Central Bank requirement each bank should have a minimum of 5% of its risk weighted assets in tier 1 capital and at least 10% in both tier 1 and tier 2 capital combined.

Principle of Solvency Solvency connotes long term financial soundness of a bank, achieved by adherence to prudent policies in lending, retention of some part of profit for business growth, implementation of professional management system and following the mandatory rules and procedures in day-to-day operations. A banks financial soundness is judged by analyzing its financials of couple of years and comparing the relevant ratios (e.g. capital adequacy ratio and provisions to non-performing assets ratio) with other banks. Principle of Trust The trust that customers-existing and potential repose in a bank is its hallmark as it connotes dependability in the opinion of its customers. Trustworthiness is a function of a banks good track record over a fairly long period of time, in terms of liquidity, profitability, financial soundness and its record of meeting of commitments to all concerned parties. It also reflects the governance quality of the bank. The magnitude of trust reposed in a bank by its customers, by other banks in the country and globally, would vary, according to the parameters of evaluation applied by each. However, for customers and public, trust indicates dependability and safety as they perceive while lodging their deposits with bank and it is reflected in the rate of growth of its deposits and profits on a sustained basis. Bank has played an integral part in society for hundreds perhaps thousand of years. They are the cornerstones of economics. They provide the backbone to many peoples lives; they obtain their funds from customer of all walks of life and backgrounds. As such they have a special responsibility in relation to society. That responsibility is to act fairly; to not abuse their special position of power but to pay special attention when they are dealing with people who may be in an unequal bargaining position in relation to themselves.

2. Discuss and distinguish between the different types of financial Institutions in Sri Lanka using examples where appropriate
1. Monetary sector - Central Bank and Commercial Banks 2. Non-Monetary Sector Financial Institutions Savings Banks (NSB) Finance Companies, Development Banks (DFCC), Merchant Banks, Leasing Companies,

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Pension and Provident Funds (EPF,ETF ), Insurance Companies Housing Finance Institutions (SMIB,NHDA, HDFC), Rural Banks COMMERCIAL BANKS At the end of 2009, there were 22 Commercial Banks operating in Sri Lanka.( 11 Local & 11, Foreign). They mainly collect funds by way of various deposits and lend it at short, medium and long term. Most Commercial Banks also have Foreign Currency Banking Units offering services to the BOI approved enterprises. These funds collected by the Commercial Banks are mainly used for the development of the economy. SAVINGS BANKS National Savings Bank is the premier Savings institution in Sri Lanka. Ceylinco Savings Bank was a new private sector entering into this field. The bulk of the investments are in Government papers and investment in corporate debt such as debentures, commercial paper, shares, and unit trusts. FINANCE COMPANIES 35 Finance companies are registered with Central Bank of Sri Lanka DEVELOPMENT BANKS There is only one Development Financing Institutions namely DFCC (Development Finance Corporation of Ceylon) The main objectives of DFCC are to assist in the promotion, establishment, expansion and modernization of private industrial, agricultural and commercial enterprises in Sri Lanka and to encourage and promote the participation of private capital, both internal and external, in such enterprises. 9 MERCHANT BANKS Merchants Banks modelled on the British system are engaged in deposit banking and provide loans, acceptance of credit and other short term facilities. They are also engaged in capital market operations and act as financing advisors to the corporate clients. Some Merchant Banks are involved in underwriting, security trading and financial consultancy services. Their main sources of income are interest on discounting trade bills, financing and marketing consultancy services, underwriting commission, insurance commission, interest on margin trading, profit on investment in shares and interest on Treasury Bills. LEASING COMPANIES Leasing as an instrument of finance has become popular since its introduction in 1981. LOLC (Lanka Orix Leasing Company) Merchant Leasing Ltd and many others including our bank have undertaken this type of financing. A lease is a contract between a lessor, who gives on hire and a lessee, who takes on hire, a specific asset selected from a manufacturer or vendor of such assets by the lessee. The lessor remains at all times the owner of the asset but the lessee has the possession and use of it for a period on payment of specified rentals.

3. What are the economic functions of a Bank?

Commercial banks play an important role in the financial system and the economy. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. They provide specialized financial services, which reduce the cost of obtaining information about both savings and borrowing opportunities. These financial services help to make the overall economy more efficient.

6 Banks operate by borrowing funds-usually by accepting deposits or by borrowing in the money markets. Banks borrow from individuals, businesses, financial institutions, and governments with surplus funds (savings). They then use those deposits and borrowed funds (liabilities of the bank) to make loans or to purchase securities (assets of the bank). Banks make these loans to businesses, other financial institutions, individuals, and governments (that need the funds for investments or other purposes). Interest rates provide the price signals for borrowers, lenders, and banks. Through the process of taking deposits, making loans, and responding to interest rate signals, the banking system helps channel funds from savers to borrowers in an efficient manner. Savers range from an individual with a $1,000 certificate of deposit to a corporation with millions of dollars in temporary savings. Banks also service a wide array of borrowers, from an individual who takes a loan of $100 on a credit card to a major corporation financing a billion-dollar corporate merger. The table below provides a June 2001 snapshot of the balance sheet for the entire U.S. commercial banking industry. It shows that the bulk of banks' sources of funds comes from deposits - checking, savings, money market deposit accounts, and time certificates. The most common uses of these funds are to make real estate and commercial and industrial loans. Individual banks' asset and liability composition may vary widely from the industry figures, because some institutions provide specialized or limited banking services.

The economic functions of banks include: 1. Issue of money, in the form of banknotes and current accounts subject to cheque or payment at the customer's order. These claims on banks can act as money because they are negotiable and/or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a cheque that the payee may bank or cash. 2. Netting and settlement of payments banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economise on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them. 3. Credit intermediation banks borrow and lend back-to-back on their own account as middle men 4. Credit quality improvement banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital

7 which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. 5. Maturity transformation banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. Accepting deposits and issuing banknotes) and redemptions (e.g. Withdrawals and redemptions of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. Wholesale cash markets and securities markets). 4. Give short answers for the following a) what is central Bank of Sri Lanka The Central Bank of Sri Lanka is the Monetary Authority of Sri Lanka which was established in 1950 under the Monetary Law Act No.58 of 1949 by founder Govener John Exter to replace the countrys then existing Currency Board system . The Central Bank of Sri Lanka is responsible for the efficient Monetary Policy in Sri Lanka

b) Why do we need a Central Bank? We need the Central Bank to maintain the economic and price stability and financial system stability and to support sustainable growth through policy stimulus, advice, commitment and excellence c) Who owns the Central Bank? The Government of Sri Lanka owns the Central Bank d) How does the Central Bank differs from Commercial Banks? Central Bank is the Apex of the financial system of Sri Lanka. It is the sole issuer of currency, regulator of the monetary and banking system, supervisor of banking institutions, and banker to banks and the Government. It has been assigned certain functions as agent for the Government, in particular, the management of the public debt and the administration of exchange control. Whereas the Commercial Banks functions under the supervision of the Central Bank and mainly collect funds by way of various deposits and lend it at short medium and long term. Most Commercial Banks also have foreign currency Units offering services to the BOI Enterprises. These funds collected by the Commercial banks are mainly used for the development of the economy

8 A commercial bank, also known as a retail bank in Namibia, provides cheque, savings and money market accounts to its customers. Furthermore, it raises funds by accepting deposits from businesses and individuals who invest their savings. Commercial banks then lend these funds to those that need money to buy goods and services. Most commercial banks are privately owned. Namibia has four licensed commercial banks namely:Bank Windhoek, First National Bank of Namibia, Nedbank Namibia and Standard Bank Namibia. It usually includes: opening and providing bank accounts; lending money; dispensing cash over branch counters or through ATMs; buying and selling foreign currency; executing the estates of deceased persons and safekeeping of documents and items in safety deposit boxes. A central bank is also known as a reserve bank or monetary authority. Its main aim is to promote and maintain a sound monetary, credit and financial system in the country. It does not provide direct banking facilities to the public, but serves as a bank for commercial banks and the Government. Bank of Namibia operates in accordance with the Bank of Namibia Act, No.15 of 1997. It usually includes: printing and issuing of the Namibia Dollar banknotes and coins; regulating commercial banks; serving as the banker of Government and commercial banks; formulating and implementing monetary policy; overseeing the National Payment System; providing advice on economic policies to the Government and managing and issuing Government Securities or Bonds. e) What are the core functions of the Central Bank? Formulating and conducting monetary policy Issuing currency notes and coins Acting as a banker to the Government Acting as a banker to commercial banks Managing the Public Debt Managing the countrys foreign assets Supervising bank and non-bank financial institutions Implementing exchange control regulations Providing credit guarantee facilities Implementing special credit schemes Providing research and policy advisory services Providing clearing house facilities Publishing reports on economic and financial matters Collection, investment and repayment of EPF Funds

5. What are the two main objectives of Central Bank?

1. Maintaining economic and Price stability One of the core objectives of the Central Bank of Sri Lanka is economic and price stability. The Central Bank formulates and implements its monetary policy, i.e. actions to influence cost and availability of money, to attain this objective. The Monetary Law Act (MLA), the legislation under which the Central Bank has been established and operates, has provided a wide range of instruments for monetary

9 management. At present, the monetary policy framework of the country places greater reliance on market based policy instruments and the use of market forces to achieve the desired objectives. Today, the Central Bank follows a monetary targeting policy framework in conducting monetary policy to attain economic and price stability, i.e., to achieve a sustainable, low and predictable level of inflation. Such an outcome, among others, is a prerequisite to achieving sustainable economic growth and development. The key policy instrument used in this endeavour is the establishment of policy interest rates for borrowing (Repurchase Rate) and for lending (Reverse Repurchase Rate) that operates through the Bank`s Open Market Operations. The Central Bank conducts Open Market Operations to keep the level of Reserve money `in the system at an appropriate level, while it uses the Statutory Reserve Ratio (SRR) on commercial bank deposit liabilities to further support the monetary policy. 2. maintaining financial system stability Financial system stability means a safe and secure financial system which is able to withstand external and internal shocks. A stable financial system creates a favourable environment for depositors and investors, encourages financial institutions and markets to function effectively and efficiently, and hence, promotes investment and economic growth. Financial system stability requires a stable financial and economic environment within an effective regulatory framework and a safe and robust payment and settlement system. The maintenance of financial system stability entails identifying and addressing potential vulnerabilities and risks to the financial system. creating a trust-worthy and enabling environment favourable to savers and investors helping the transmission of monetary policy, thereby assisting the attainment of price stability encouraging efficient financial intermediation, which eventually promotes investment and growth, and encouraging effective and efficient operation of markets and improving distribution of resources in the economy Financial System Stability, the other core objective of the Central Bank, is achieved through the regulation and supervision of financial institutions, the overseeing of the financial infrastructure which includes critical payment and settlement systems as well as keeping a close watch on the financial markets as a whole. To achieve this objective, the Central Bank employs a series of prudential and regulatory measures. 6.What do you understand by monetary policy and what are the main Instuments of Monetary Policy

10 Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest to attain a set of objectives oriented towards the growth and stability of the economy. [1] These goals usually include stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. Monetary policy is one of the tools that a national Government uses to influence its economy. Using its monetary authority to control the supply and availablity of money, a government attempts to influence the overall level of economic activity in line with its political objectives. Usually this goal is "macroeconomic stability" - low unemployment, low inflation, economic growth, and a balance of external payments. Monetary policy is usually administered by a Government appointed "Central Bank", the Bank of Canada and the Federal Reserve Bank in the United States.

The Central Bank conducts monetary policy to attain price stability in the domestic economy. Monetary policy operates primarily by influencing the cost and availability of money. This is done through the interest rate and credit availability mechanism.The Central Bank sets the policy interest rates for its own dealings with commercial banks and these rates then affect the whole range of interest rates set by commercial banks and other financial institutions for borrowers and savers. This in turn influences spending, investment and output decisions in the economy, and eventually the cost of production and the prices of goods and services.

The changes in money supply are a primary causal factor affecting price stability. In general, three definitions of monetary aggregates are used in analyzing monetary developments in Sri Lanka. The first is 'reserve money' consisting of currency issued by the Central Bank and commercial banks' deposits with the Central Bank. This is also called base money or highpowered money, as commercial banks can create deposits based on reserve money which are components of a broader definition of money supply, through their process of creating credits and deposits. The second is narrow money, defined as the sum of currency held by the public and demand deposits held by the public with commercial banks. The third is broad money defined as the sum of currency held by the public and all deposits held by the public with commercial banks. Studies have shown that the most appropriate monetary variable to analyse the relationship between the money supply and the general price level is the broad money supply. Monetary Policy Framework At present, monetary management in Sri Lanka is based on a monetary targeting framework. In this framework, the final target, price stability, is to be achieved by influencing changes in broad money supply which is linked to reserve money through a multiplier. Reserve money is the operating target of monetary policy. The monetary targeting framework is operated through a monetary programme. The monetary programme is prepared by the Central Bank taking into account economic factors such as the expected fiscal and balance of payments

11 developments, economic growth, desired levels of growth in credit and inflation. Based on these factors, the monetary programme sets out the desired path for monetary growth and determines the path of quarterly reserve money targets necessary to achieve this monetary growth. The Bank would then conduct its Open Market Operations (OMO) within a corridor of interest rates formed by its policy rates i.e. the repurchase rate and the reverse repurchase rate, to achieve the reserve money target. Policy rates are periodically reviewed and adjusted appropriately, if necessary, to bring the reserve money to the targeted path.
The Central Bank possesses a wide array of instruments with which to conduct monetary policy. The main instruments of monetary policy are : _ Open market operations: These operations involve the purchase or sale in the open market of Government securities (Treasury Bills/Bonds) or the sale or retiring of Central Bank securities to affect the liquidity in the banking system. The Central Bank sets the policy interest rates i.e. the Repo rate (selling/borrowing rate) and the Reverse Repo rate (buying/lending rate), for standing facilities and expects the open market operations to take place within this interest rate corridor. Currently, the Repo Rate is 7.5 % and the Reverse Repo Rate is 9%. _ Statutory reserve requirements on commercial bank deposits: This is the proportion of deposits that commercial banks are required to keep as a cash deposit with the Central Bank. At present, demand, time and savings deposits of commercial banks denominated in Rupees are subject to a reserve ratio of 10%. _ Bank Rate: This is the interest rate at which the Central Bank lends money to commercial banks that have liquidity difficulties. The Bank Rate is much higher than the Reverse Repo rate and is a penal interest rate. The current Bank Rate is 15 %. _ Foreign exchange operations _ Quantitative restrictions on credit _ Ceilings on interest rate _ Refinance facilities _ Moral suasion

7.Explain Briefly a) What are the types of customers for a Bank? a.) Individuals b. Sole proprietorships c Partnerships d Limited Liability Companies e) Associations ,Clubs and Societies

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b) How many parties are involved in a trust agreement /What are the fiduciary duties of a Trustee

1. Duty of Loyalty The Trustee has the duty of undivided loyalty to the beneficiaries. The Trustee must administer the trust solely for the benefit of the beneficiaries. No Trustee selfdealing is allowed and is considered a wrongful act. The Trustee cannot take advantage of his/her position for his/her own personal gain. 2. Duty to Collect and Protect Trust Assets The Trustee has the duty to obtain possession of the trust assets without unnecessary delay and to keep them under his/her control throughout the term of the trust. The Trustee must use reasonable care to protect and preserve the assets of the trust. The Trustee should examine any assets received from the Personal Representative to make sure it is what the Trustee expected to receive. 3. Duty to Identify Assets as Trust Property The Trustee must identify (inventory) trust assets in the name of the trust. 4. Duty Not to Commingle Trust Funds The Trustee must keep trust assets separate from the Trustees own personal assets and from the funds of any other trusts. 5. Duty Not to Delegate The Trustee must personally perform the responsibilities of the trusteeship, except when delegating those responsibilities to others would be in the best interest of the trust, i.e., delegating duties to an accountant or a tax advisor. When deciding whether and how to delegate duties, the Trustee must exercise fiduciary discretion and act as a prudent person would act in similar circumstances. 6. Duty of Impartiality The Trustee has the duty to deal impartially with both the income beneficiary (recipient of income from the trust for a predetermined situation) and the remainder beneficiary (recipient of any remaining principal upon the expiration of the trust). The trust should produce reasonable income while at the same time being preserved for the remainder beneficiary.

7. Duty to Inform and Account to the Beneficiaries The Trustee must keep the beneficiaries reasonably informed about the administration and the status of the trust. An annual report is standard with an accounting of gains, losses, expenses and income. The Trustee must give the beneficiary, upon request and at reasonable times, complete and accurate information as to the nature and amount of the trust property and to permit the beneficiary to inspect the accounts and other documents related to the trust. 1. It is the Trustees duty to collect all assets of the trust estate and title them in the

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name of the trust. The Trustee should create a trust inventory of all assets held in the trust, identifying the assets, their current fair market value and their tax basis. A professional appraiser may be needed to determine the value of trust property. 2. The Trustee must administer and distribute the trust estate according to the provisions of the trust. Trust assets need to be invested prudently, properly diversified and invested impartially for the beneficiaries. Assets should remain invested, unless they are retained for only a very short period of time. 3. The Trustee must pay all trust expenses, including taxes, as required by the trust document or by law after verification that the expenditures are proper and valid. All expenses paid must be deemed reasonable. 4. The Trustee must distribute the trust assets in accordance with the trust document. Distribution can be based on a particular date, but sometimes the Trustee must exercise discretion as to when and how much to distribute to a particular beneficiary. The Trustee may need to obtain information before making discretionary distributions, such as the funds available to a beneficiary from sources other than the trust. 5. The Trustee must file trust income tax returns on a calendar year. Trust income tax returns are due on April 15th. 6. The Trustee must keep a record of all receipts, expenditures, distributions and income. The Trustee must also document sales, loans or other dispositions of the trust assets. On an annual basis, the Trustee should prepare an accounting all trust activities and make this document available to the trust beneficiaries. 7. The Trustee may retain (at reasonable fees) advisors to assist with the accounting, investing and legal issues of the trust. 8. The Trustee is entitled to receive reasonable compensation for his/her services rendered to the trust. This must be reported as taxable income to the Trustee and as a deduction for the trust.

c) What is the difference between the non-profit organization and notfor-profit organization?

An incorporated organization which exists for educational or charitable reasons, and from which its shareholders or trustees do not benefit financially. Any money earned must be retained by the organization, and used for its own expenses, operations, and programs. Many non-profit organizations also seek tax exempt status, and may also be exempt from local taxes including sales taxes or property taxes. Well-known nonprofit organizations include Habitat for Humanity, the Red Cross, and United Way. A not-for-profit corporation is an incorporated organization created by statute, government or judicial authority and registered at the Registry of Commerce, that is not intended to provide a profit to the owners or members. It differs from a for-profit corporation substantially as this is organized to provide profits to its owners or members. A non-profit corporation is always organized as a non-stock corporation.
d) Who is an executor?

the person appointed to administer the estate of a person who has died leaving a will which nominates that person. Unless there is a valid objection, the judge will appoint

14 the person named in the will to be executor. The executor must insure that the person's desires expressed in the will are carried out. Practical responsibilities include gathering up and protecting the assets of the estate, obtaining information in regard to all beneficiaries named in the will and any other potential heirs, collecting and arranging for payment of debts of the estate, approving or disapproving creditor's claims, making sure estate taxes are calculated, forms filed, and tax payments made, and in all ways assist the attorney for the estate e) Who is an Administrator? A person appointed by the court to manage and take charge of the assets and liabilities of a decedent who has died without making a valid will. When such a person is a male, he is called an administrator, while a woman is called an administratrix. An administrator c.t.a. (cum testamento annexo, Latin for "with the will annexed") is appointed by the court where the testator had made an incomplete will without naming any executors or had named incapable persons, or where the executors named refuse to act. A public administrator is a public official designated by state law to perform the duties of administration for persons who have died intestate. An executor differs from an administrator in that he or she is named in the decedent's will to manage the estate. If an executor dies while performing these duties, a court will appoint an administrator de bonis non cum testamento annexo (Latin for "of the goods not (already) administered upon with the will annexed") to complete the distribution of the decedent's estate. This term is often abbreviated: administrator d.b.n.c.t.a.

8 Describe what is meant by banker,s lien and the principals governing banking liens

A lien is the right of a creditor in possession of goods, securities or any other assets belonging to the debtor to retain them until the debt is repaid, provided that there is no contract express or implied, to the contrary. It is a right to retain possession of specific goods or securities or other movables of which the ownership vests in some other person and the possession can be retained till the owner discharges the debt or obligation to the possessor. It is a legal claim by one person on the property of another as security for payment of a debt.

15 A legal claim or attachment against property as security (right) for payment of an obligation. In Halsburys Laws of England ,it is stated: "Lien is ,in its primary sense ,a right in one man to retain that which is in his possession belonging to another until certain demands of the person in possession are satisfied. In its primary sense, it is given by law and not by contract." In Chalmers on Bills of Exchange ,the meaning of the Bankers Lien is stated : "A bankers lien on negotiable securities has been judicially defined as an implied pledge. A banker has, in the absence of agreement to the contrary ,a lien on all bills received from a customer in the ordinary course of banking business in respect of any balance that may be due from such customer." it should be noted that the lien extends only to negotiable instruments which are remitted to the banker from the customer for the purpose of collection .When collection has been made the process may be used by the banker in reduction of the customers debit balance unless otherwise earmarked. We can also refer to Pegets Laws of Banking ,8th Edn. at page 498 where speaking about the Bankers lien the learned author has stated that apart from any specific security ,the banker can look to his general lien as a protection against loss on loan or overdraft or other credit facility. The general lien of bankers is part of law merchant and judicially recognised as such. In Chitty on Contracts, it is explained. "The lien is applicable to negotiable instruments which are remitted to the banker from the customer for collection. When the collection has been made, the proceeds may be used by the banker in reduction of the customers debit balance ,unless otherwise earmarked." In Byles on Bills of Exchange 26th Edn, by Frank Ryder and Antonio Bueno Sweet & Maxwell 27.- (3) Where the holder of a bill has a lien on it arising either from contract or by implication of law, he is deemed to be a holder for value to the extent of the sum for which he has a lien. A banker has lien on all securities and valuables of his customer, which come into his hands in his capacity as banker in the ordinary course of business. Currie v. Misa (1867) App. Cas.554(H.L.) Where therefore, the customer is indebted to the banker, the lien arises immediately a cheque is paid in for collection -presumably by implication of law. On the other hand if the banker agrees either impliedly, as the result of a course of action, or expressly, that a customer may draw against uncleared effects, the banker has a lien on those effects arising from contract. So far as the legal requirements are concerned there is no need of any special agreement, written or oral to create the right of lien, but it arises only by operation of law for, under the Indian Law, such an agreement is implied by the terms of Section 171 of the Indian Contract Act, 1872 so long as the same is not expressly excluded .In order that the lien should arise the following requirements are to be fulfilled: (1) the property must come into the hands of the banker in his capacity as a banker in the ordinary course of business ;

16 (2) there should be no entrustment for a special purpose inconsistent with the lien (3) the possession of the property must be lawfully obtained in his capacity as a banker; and (4)There should be no agreement inconsistent with the lien. Lien an implied pledge Bankers lien is a general lien recognized by law. The general lien on the banker is regarded as something more than an ordinary lien; it is an implied pledge. This right coupled with rights u/s 43 of the Negotiable Instruments Act, 1881 permits bills, notes and cheques, of the banker, being regarded as a holder for value to the extent of the sum in respect of which the lien exists can realize them when due; but in the case of the other negotiable instruments e.g. bearer bonds, coupons, and share warrants to bearer, coming into the bankers hands and thus becoming liable to the lien, the character of a pledge enables the banker to sell them on default, if a time is fixed for the payment of the advance ,or, where no time is fixed ,after request for repayment and reasonable notice of intention to sell and apply the proceeds in liquidation of the amount due to him .The right of sale extends to all properties and securities belonging to a customer in the hands of a banker ,except title deeds of immovable property which obviously cannot be sold. The law gives inter alia, a general lien to the bankers - Lloyds Bank v. Administrator General of Burma ,AIR 1934 Rangoon 66. To claim a lien, the banker must be functioning qua banker under Section 6 of the Banking Regulation Act-State Bank of Travencore v. Bhargavan ,1969 Kerela .572. It is now well settled that the Banker lien confers upon a banker the right to retain the security, in respect of general balance account. The term general balance refers to all sums presently due and payable by the customer, whether on loan or overdraft or other credit facility.(Re European Bank (1872) 8 Ch App 41) In other words ,the lien extends to all forms of securities deposited ,which are not specifically entrusted or to be appropriated.

Priinciples

of

governing

1) It has been held in Chettinad Mercantile Bank Ltd. v/s PL.A.Pichammai Achi and Anr.AIR 1945 Mad. 445 that bankers lien is the right of retaining things delivered into his possession as a banker if and so long as the customer to whom they belonged or who had the power of disposing of them when so delivered is indebted to the banker on the balance of the account between them provided the circumstances in which the banker obtained possession ,do not imply that he has agreed that this right shall be excluded .Bankers lien can properly be said to arise only in respect of any of the securities held by the bank ,the bank has a lien over these securities and it could hold them against the amount due by the customer.

17 2) It is necessary that the ownership of a thing, which is in possession of the bank, must be with the customer and held by the bank as a security otherwise the bank can exercise no right of lien. PNB Ltd.v. Arura Mal Durga Dass and another (AIR 1960 Pun.632.) 3) A bank may not be able to exercise any right of lien over the money deposited by the customer inasmuch as by itself becomes the owner of the money deposited ,but still it has the right to adjust such amounts against any debts due to from the customer. The purpose of lien in such cases is attained by the application of the principle of set off.(AIR 1945 Mad.447) 4) The bankers lien is subject to any contract to the contrary and one alleging it must prove the existence of such a contract. 5) An insight into the matter of City Union Bank Ltd.v.Thangarajan (2003)46 SCL 237 (Mad) it is pertinent to state certain principles with respect to Bankers lien that was observed. a) The bank gets a general lien in respect of all securities of the customer including negotiable instruments and FDR s, but only to the extent to which the customer is liable. If the bank fails to return the balance, and the customer suffers a loss thereby, the bank will be liable to pay damages to the customer. In the present matter the Court has based its decision on the principle that in order to invoke a lien by the bank, there should exist mutuality between the bank and the customer i.e. when they mutually exist between the same parties and between them in the same capacity. Retaining the customers properties beyond his liability is unauthorized and would attract liability to the bank for damages. 9) What is the relationship between Bankers Lien and Set off?

What is set-off? The right of set off is also known as the right of combination of accounts .A bank has a right to set off a debt owing to a customer against a debt due from him. "A legal set-off is where there are mutual debts between the plaintiff and defendant, or if either party sue or be sued as executor or administrator one debt may be set against the other "(S.13 Insolvent Debtors Relied Act 1728) From a commercial standpoint, a right of set-off is a form of security (right) for a lender. It is an attractive security because its realization does not involve the sale of an asset to a third party. A set-off must be in the form of a cross claim for a liquidated amount and it can be pleaded only in respect of a liquidated claim. Both the claim and the set-off must be mutual debts, due from and to the same parties, under the same right A claim by a person in a representative capacity cannot be set off against a personal claim. Even a claim against the estate of a deceased customer cannot be set off against a debt, which was due to the customer from his banker, during the formers lifetime, whether the accounts are with one or more offices of the banker, it does not materially affect the position in any way.

18
A bankers right of set off cannot be exercised after the money in his hands has been validly assigned or in any case after he has been notified of the fact of an assignment. (Official Liquidator ,Hanuman Bank Ltd. v. K.P.T. Nadar and Others 26 Comp.Cas .81) Judgments indicating certain essentials to the exercising of the right of set off. Punjab National Bank v. Arunamal Durgadas ,AIR 1960 Punj.632 State Bank of India v. Javed Akhtar Hussain ,AIR 1993 Bombay ,87 where it has been established that : (1) Mutuality is essential to the validity of a right of exercising set-off (2) It must be between the same periods. Relationship Between Lien And Set-Off The bankers right of lien can attach to the money so long as it is earmarked. Where it has ceased to be such a separate earmarked sum, the bank has not the right of set off. ( Radha Raman Choudhary v. Chota Nagpur Banking Association Ltd.(1945) 15 Comp.Cas.4(Pat). There is a distinction between a bankers lien and the banks right to set-off. A lien is confined to securities and property in banks custody. Set-off is in relation to money and may arise from a contract or from mercantile usage or by operation of law.

10 What is meant by EFT and discuss the benefits of this to banker and customers

An electronic funds transfer (also known as EFT) is a system for transferring money from one bank to another without using paper money. Its use has become widespread with the arrival of personal computers, cheap networks, improved cryptography and the Internet. Since it is affected by financial fraud, the electronic funds transfer act was implemented. This federal law protects the consumer in case a problem arises at the moment of the transaction. The history electronic funds transfer originated from the common funds transfer of the past. Since the 19th century, and with the help of telegraphs, funds transfers were an usual thing in commercial transactions. Finally, it migrated itself to computers and became the electronic money transfers of today. Where Do I Find EFT's One of the most common EFT's is Direct Deposit. It is used by employers for depositing their employees' salary in a bank account. Other kind of EFT is the automatic charge to your check or savings account. For example, when you are paying a mortgage, the bank will discharge the monthly payment from a pre-accorded bank account. The benefit is that you won't have to go to the bank to do it. It's automatic. Another kind of EFT is a cash card. With this type of card you can spend a prepaid amount of money until the balance is zero. So, if you wish to make a gift certificate without tying up your beneficiary with one store, you can buy a cash card from your favorite bank. ATM's are also used for EFT's. Since an automatic teller machine is much cheaper than a group of bank tellers, it has helped to bring costs down and beneficiate the

19 costumer. Points of sale (also known as POS) are also part of this group. Those little blue or dark blue machines in which you pass your card are doing an electronic fund transfer from your account to the retail account. Imagine how the world without them was. Slow, wasn't it? What Are The Pros?

The main advantage of an electronic funds transfer is time. Since all the transaction is done automatically and electronically, the bank doesn't need to pay a person to do it, a person to drive the loans to the other bank, the cost of the transport, the cost of the maintenance of the transport, online auto insurance and the gas of the transport. EFT's have revolutionized modern banking. EFT payments are safer than checks, and should eliminate more than $60 million annually in forged, counterfeit, and altered checks. EFT eliminates lost or stolen checks. EFT payments are faster than checks, with funds available on the date the payment is due. EFT payments are easy and convenient. EFT payments eliminate the need to obtain and deposit your paycheck or cash your paycheck each payday. EFT payments facilitate on-line banking at your bank or credit union.

Interes