Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Management of Financial Institutions - II - Question Paper

An example of Insurer-MFI partnership model is that of American Insurance Group (AIG) which works with almost every MFI in Uganda covering over 2.7 million lives.

In India too a number of NGOs have tied in with the Life Insurance Corporation of India (LIC) for life insurance of their clients; LIC has designed a scheme called “Janashree Bima Yojana” for low-income households. For non-life insurance, several NGOs have tied in with 1 or the other of the 4 subsidiaries of the General Insurance Corporation of India. The most common non life insurance in the microinsurance field is cattle insurance.

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5. A contingent liability is a facility provided by the banker under non-fund based limits and in the bank’s balance sheet, it is reflected on both the sides as asset and liability. At the time of providing the non-fund based facility to the customers, the banker believes that the customer is competent enough to keep up his promise or performance or obligation. The banker earns commission, processing fee etc. for such facilities. If for any cause the customer fails to keep up promise or performance or obligation it becomes a real liability in future and the facility is crystallized in to a liability on 1 hand and it is recovered with interest immediately on the other hand. The objective of providing the non-fund based limits is to earn more fee based income without exposing the bank’s resources to any risk. Contingent liability arises on account of LCs (Inland and Foreign), guarantees including deferred payment basis, forward contracts, and co-acceptance of bills etc.

A significant component of the bank’s balance sheet is the contingent liability. Banks undertake certain fee based activities without directly affecting their balance sheets. Non fund based services extended by the banks are in the nature of

i. Guarantees

ii. Letters of credit (Inland and Foreign)

iii. Co-acceptance of bills on behalf of its customers.

Other contingent liabilities include claims against the bank not acknowledged as debts, liability for partly paid up investments, liability on account of outstanding forward foreign exchange contracts, underwriting commitments bills rediscounted etc. The guarantees can be classified under financial and performance guarantees. Guarantees are issued for capital goods/project exports on DP (deferred payment) terms. Usually banks collect cash margin ranging from 20% to 100% for LCs and guarantees. For the unsecured portion, collateral securities to the extent of 200% by way of mortgages are insisted. These activities give ample scope to earn income in the form of commission, exchange. Further the cash margins collected by the bank will become resources for the bank to lend which in turn increases the interest income. Thus a few non-fund based services come under the head ‘contingent liability’. The contingent liability may become a real liability or true liability if the portfolio of guarantees or LCs is not handled with adequate care. It is in this back drop, bank has to take up these facilities by studying the credit worthiness and other financial indicators of the clients. Banks also problem solvency certificates for their clients with a condition that they do not accept any responsibility or liability for such certificates.

Earning:   Approval pending.