Episode: 02 (Interesting Interests and Banking Regulations)
Professor Birendranath Banik:- Hello, everyone. I am Professor Birendranath Banik. Today, we will discuss about Interests. Whenever you take any loan from a Bank, an interest is charged. Am I right or wrong?
Harsha:- Right, Sir!
Professor Banik:- What’s your name, gentleman?
Harsha:- My name is Harsha.
Professor Banik:- Ok! Let us assume that Harsha is an employee of a PSU Bank and has taken Staff Housing Loan of 20 lakhs INR at a simple interest of 8% per annum for a period of 20 years. So, what will be the total simple interest on that loan? To solve this problem, we first need to learn the formula of calculating the simple interest. Simple Interest (S.I) = Principal amount (P) * Interest Rate of loan in percentage(R) * Loan Period (T). Madam, please solve this problem now.
Suhasini:- The total simple interest for this staff housing loan = Rs.20,00,000 * 0.08 * 20 = Rs. Rs. 32,00,000/-
Professor Banik:- So, what is the total repayment amount of this staff housing loan?
Suhasini:- It is Rs. 20,00,000 + Rs. 32,00,000 = Rs. 52,00,000/-
Professor Banik:- So, for the next 20 years, Harsha will have to pay a total sum of Rs.52,00,000/- to the PSU Bank. Let us assume, that Harsha’s take home salary is Rs. 40,000/- per month at present. So, how much money, Harsha has to pay per month to the Staff Housing loan account to get his home loan repaid fully after 20 years of his service.
Suhasini:- Sir, per year, Harsha has to pay back Rs.52,00,000 / 20 = Rs. 2,60,000/-. As there are 12 months in a year, so, he has to pay Rs. 2, 60,000 / 12 = Rs. 21, 666.66/- which is approximately Rs. 22,000/-
Professor Banik:- Now, had Harsha been given the Housing Loan at 8% compound interest, what would have happened?
Suhasini:- Harsha had to pay much more interest than this Rs. 22,000/- per month.
Professor Banik:- Good answer. Now, let us focus on Compound Interest. Simple Interest is paid on original loan amount throughout the loan period, but, Compound Interest is paid not only on the original amount of the loan but also on the accumulated or cumulative total of the periodic simple interest of the loan.
Arindam:- Oho! Everything is going above my head. Simple Interest was very simple to understand, but, this Compound Interest is very complex.
Professor Banik:- Nothing is complex in this case. Compound Interest (C.I) = P * [1 +(r/ n)] n*t, where P = Loan Amount, r=Interest rate of loan in percentage, t = Loan period and n= Number of times the loan has been compounded in a year. If I want to repay the loan in monthly instalments, then n=12. If I want to repay the loan in quarterly instalments, then n=4 and if on a yearly basis, then n=1. Now, I have a question to the anchor of RBTV. Arindam, assume that you have taken a car loan of 4.5 lakhs to buy a Mahindra Xylo car at a base rate and assume that you are a staff of a PSU Bank. So, you got the loan in a simple rate of interest. What’s the current base rate now?
Arindam:- It is 10.20% only.
Professor Banik:- So, after how many years, your loan amount will get doubled?
Arindam:- Well, give me some time to calculate the simple interest and then the total repayment amount.
Professor Banik:- You don’t need to do any calculations for this particular problem. Just apply the traditional ‘RULE OF 72’. Divide 72 by the simple rate of interest to know the number of years after which your principal amount will get doubled. In this problem, your loan amount will get doubled in 72/10.20 = 7.05 years which is approximately 7 years. Now, I want to ask a very basic question. What is the full form of EMI?
Dinesh:- Equated Monthly Instalments.
Professor Banik:- Correct! Is it calculated on a simple interest rate basis or compound interest rate basis?
Dinesh:- On a compound interest rate basis.
Professor Banik:- Yes! You are right. The formula of EMI is (Pr) * {(1+r) nt / (1+r) n*t -1} where P = Loan amount, R=Interest rate of loan, t= Loan period and n= Number of times the loan has compounded in a year.
Bhuvan:- Sir, what is the difference between a fixed rate of interest and floating rate of interest?
Professor Banik:- In a floating rate of interest, the rate of interest changes according to fluctuations of interest rate in the market. Say, you have a taken a car loan for buying a Maruti car last year at a base rate. Last year, the base rate was 10.50%. Now, if the base rate gets reduced to 10.20%, then this year, your car loan is charged at 10.20% only, not at the existing rate of 10.50%. Had your car loan be charged in a fixed rate of interest, then your car loan would have been charged at 10.50% only devoid of any increase or decrease in base rate. Ok! Is there any person here who has joined in any PSU Bank after 1st April 2010?
Meghdoot:- Yes! Sir! I joined Allahabad Bank in 2012 as a Single Window Operator –A. My name is Meghdoot.
Professor Banik:- Oh! That’s a nice name. So, you are under the NPS. Every month, 10% of your (BASIC + DA) is getting deducted from your gross salary and getting deposited in the National Pension Scheme (NPS) Contributory Fund. Say, for example, every month, Rs. 1500/- is getting deducted from your salary under NPS. Another Rs. 1500/- is getting contributed by your Allahabad Bank under NPS. So, Rs. 3,000/- is getting contributed in PRAN (Permanent Retirement Account Number). That means, per year, you are investing Rs. 3000*12= Rs. 36000/- in your PRAN. What is your age now?
Meghdoot:- I am 20 years old, Sir!
Professor Banik:- So, you will serve Allahabad Bank for another 40 years. The entire NPS contributory fund of yours are getting invested in the SBI Capital Mutual Fund whose NAV is around 10.5 on an average. So, let us assume that for another 40 years, your NPS fund will get an average rate of return of 10%. Generally, statistics have always proved that if you play for the long run in any PSU oriented Mutual Fund; at least, you will get a rate of return of 8%. Here, let me assume the rate of return as 10%. Now, you tell me, Meghdoot, after 40 years, how much money will get accumulated in that PRAN as your pension amount?
Meghdoot:- I have no idea about it.
Professor Banik:- In this case, you have to calculate the Future Value of Cash, i.e. Future value of an ordinary Annuity.
Arindam:- Annuity? What’s that!
Professor Banik:- Annuities are a series of fixed payments required to be paid at a specific frequency over the course of a fixed period of time. Underline the words, ‘fixed payments’, ‘specific frequency’ and ‘fixed period of time’. EMI is a perfect example of Annuity. In this problem, we will apply the formula, Future Value of Cash (FV) = P * [{(1+r) n – 1} / r] where P=Total invested amount, r= Interest rate in percentage and n=Number of payments or instalments in investments. So, in this problem, Meghdoot will have a pension amount of Rs. 36000 * [{(1+.10)40 – 1} / .10] = Rs. 36000* [{(1.10)40 – 1} / .10] = Rs. 36000 [{45.25-1} / .10] = Rs. 36000 (44.25/.10) = Rs. 36000* 442.59 = Rs. 1,59,33,332/- i.e. Meghdoot will have Rs. 1,59,33,332/- in his Pension Account after 40 years of service in Allahabad Bank if he does not get any salary increment and any promotion from his present designation as SWO-A. The calculation for PF Account can be made in a similar fashion. Now, there is another concept known as Present Value of Ordinary Cash. Before entering in any lease agreement, you must calculate the Present Value of Cash (PV) = P* [{(1+r) n – 1} / {r (1+r) n}] where P=Total invested amount, r= Interest rate in percentage and n=Number of payments or installments in investments. So, here we end our session on Interesting Interests. Now, we will have some idea about Banking Regulations. Take a break for 5 minutes and come back.
Anchor Arindam:- Really, Professor Banik is so good in Mathematics. He was using the scientific calculator application software in his Apple i-phone to solve all these mathematical problems. Anyway, give me a break as I need to freshen up in the wash room like other guys are doing it right now. There will be some advertisements in your TV screen for 5 minutes. Go and freshen up within this 5 minutes break. No need to waste your time in watching those advertisements for 5 minutes.
Sain Director:- Cut! Cut! Arindam, you need to utter those dialogues only which you have been told to utter.
Anchor Arindam:- Oho! I will try to do that. Let me freshen up now. It’s an emergency.
Professor Banik:- Sorry! I took the break a little bit longer than 5 minutes. Anyway, where were we?
Vikash:- Sir! We are about to start a session on Banking Regulation.
Professor Banik:- Oh! Yeah! Of course! There are two Acts which govern the Banking System in India. One is Banking Regulation Act of 1949 and another one is the Reserve Bank of India Act of 1934. Recently, after the Cobra Post Sting operation, almost all the banks in India have been forced to pay some monetary penalties for violating the KYC norms. What is KYC?
Debarati:- KYC means Know Your Customer. But, I don’t know the inherent details about it.
Professor Banik:- The KYC guidelines were issued by the RBI to ensure that all the banks will follow strict customer identification procedures while opening any types of accounts at branch level to prevent the bank from fraudsters, criminals and terrorists. Due to KYC violations, so many terrorist groups got funds in their accounts, many anti-money laundering cases took place, black money became white money in the name of donations to fake NGO accounts and etc.
Arindam:- Can any firm form a bank anywhere at any time?
Professor Banik:- No, not possible. To open a bank, first of all, a firm has to obtain a banking license from Reserve Bank of India under Section 22 of the Banking Regulation Act of 1949. RBI will not give banking license to a firm unless that firm fulfil all the mandatory criteria. No firm or business entity is allowed to use the word, ‘Bank’ in its name, unless it gets a banking license from RBI. The Public Sector Banks are actually constituted under a special statutory power under Section 3 of Acquisition and Transfer of Undertakings Act of 1970 and/or 1980, out of which, especially, State Bank of India got formed under State Bank of India Act of 1955 and SBI subsidiaries got formed under State Bank Subsidiary Banks Act of 1959. RRBs are formed under Regional Rural Banks Act of 1976.
Dinesh:- Is HDFC or ICICI Bank not having any statutory power?
Professor Banik:- No, they don’t have that kind of power because all the private banks are treated by RBI as the Indian companies which are registered under the Companies Act of 1956 or the foreign companies which have been allowed to do business on Indian soil. On the other hand, there are some big co-operative societies which got registered as co-operative banks by the RBI. Point to be noted here that the co-operative banks operating in one state are registered under the State Co-operative Societies Act and the co-operative banks operating in more than one state are registered under the Multi-State Co-operative Societies Act of 2002.
Lalchand:- RBI regulates the issue of bank notes. RBI keeps the reserve funds to ensure monetary stability in Indian economy. RBI also supervises the currency and credit system in India. Is RBI is the supreme authority to control the Indian economy?
Professor Banik:- No, RBI is not. That’s why; the current RBI Governor of RBI, Mr. D. Subbarao demanded for more autonomy to RBI. The entire capital reserves of RBI are held by the Indian Government. Head office of RBI is at Mumbai but it is controlled by the Central Government Office of New Delhi. RBI functions under Central Board of Directors. The Central Board consist of a RBI Governor and not more than four Deputy Governor of RBI whose appointments are done by the Indian Government and other directors in the Central Government.
Meghdoot:- Accha! Sir! There was one question in our competitive exam that in a one rupee note, whose signature can be seen? Later, I came to know that RBI issues notes of denominations from Rs. 2/- to Rs. 10,000/-, but not the 1 rupee note. Anyway, Sir! Who is more powerful; RBI or Central Government?
Professor Banik:- Are you asking questions or telling answers. You asked a question and then you answered it yourself only and then you asked another question. Strange! Anyway, let me make it very clear that RBI works under Indian Government only. Central Government is more powerful.
Suhasini:- In the Cobra Post sting operation, both Axis Bank and ICICI Bank were under the scanner. Had RBI cancelled the banking license of both Axis Bank and ICICI Bank, were there any chance for these 2 private banks to start the banking business again?
Professor Banik:- On cancellation of license of any bank , an appeal lies with the Central Government. Any Bank after losing its banking license can appeal to the Central Government to have a review of the case. Always remember one thing that the Indian Government has the power to suspend the operations of the Banking Regulation Act of 1949 or to give exemption from any of the provisions of the said Act. But, Central Government may give directions to the Reserve Bank when considered necessary in public interest only after consulting with the Governor of Reserve Bank of India. Anyway, it has been a long session for you all. For today, we end our session here only. Goodbye.
Anchor Arindam:- Viewers! If your head is paining after attending this session on your Television set, then just go outside your house and have a walk. When your mind needs a fresh air, just keep on walking on a park or field which is full of greeneries.
Sain Director:- Cut! Cut! Oh! Arindam! You are now uttering philosophical dialogues like Navjot Singh Sidhu. Wait, I will deduct some money from your salary this month. Anyway, bid goodbye to the viewers for this episode. Action!
Anchor Arindam:- Viewers! I am having a little tough time out here. See you all in the next episode. For the time being; goodbye to you all!
