WHAT IS INSURANCE The business of insurance is related to the protection of the economic values of assets. Every asset has a value. The asset would have been created through the efforts of the owner. The asset is valuable to the owner, because he expects to get some benefits from it. It is a benefit because it meets some of his needs. The benefit may be an income or in some other form. In the case of a factory or a cow, the product generated by it is sold and income is generated. In the case of a motor car, it provides comfort and convenience in transportation. There is no direct income. Both are assets and provide benefits. BRIEF HISTORY OF INSURANCE Insurance has been known to exist in some form or other since 3000 BC.V The Chinese traders, traveling treacherous river rapids would distribute their goods among several vessels, so that the loss from any one vessel being lost, would be partial and shared, and not total. The Babylonian traders would agree to pay additional sums to lenders, as the price for writing off the loans, in case of the shipment being stolen. The inhabitants of Rhodes adopted the principle of ‘general average’, whereby, if goods are shipped together, the owners would bear the losses in proportion, if loss occurs, due to jettisoning during distress. (Captains of ships caught in storms, would throw away some of the cargo to reduce the weight and restore balance. Such throwing away is called jettisoning) The Greeks had started benevolent societies in the late 7th century AD, to take care of the funeral and families of members who died. The friendly societies of England were similarly constituted. The Great Fire of London in 1666, in which more than 13000 houses were lost, gave a boost to insurance and the first fire insurance company, called the Fire Office, was started in 1680. Purpose and Need of Insurance Assets are insured, because they are likely to be destroyed or made nonfunctional before the expected life time, through accidental occurrences. Such possible occurrences are called perils. Fire, floods, breakdowns, lightning, earthquakes, etc, are perils. If such perils can cause damage to the asset, we say that the asset is exposed to that risk. Perils are the events. Risks are the consequential losses or damages. The risk to a owner of a building, because of the peril of an earthquake, may be a few lakhs or a few crores of rupees, depending on the cost of the building, the contents in it and the extent of damage. How insurance works People facing common risks come together and make their small contributions to a common fund. The contribution to be made by each person is determined on the assumption that while it may not be possible to tell beforehand, which person will suffer, it is possible to tell, on the basis of past experiences, how many persons, on an average, may suffer losses. Human Asset A human being is an income generating asset. One’s income generating ability depends on one’s skills, (manual, professional, problem solving, entrepreneurial, etc). These are the assets. The value of the asset can be measured by considering the income that is generated by the person concerned. The concept of Human Life Values, provides scientific ways to determine the asset value of the human life and therefore, the amount of life insurance required.. These techniques, like other techniques related to selling, will have to be learnt on the job Funds and Investment CASA Deposit:- Deposit in bank in current and Savings account. High Cost Deposit:- Deposits accepted above card rate (for the deposits) of the bank. Liquid Assets:- Liquid assets consists of: cash, balances with RBI, balances in current accounts with banks, money at call and short notice, inter-bank placements due within 30 days and securities under “held for trading” and “available for sale” categories excluding securities that do not have ready market. Capital Funds Equity contribution of owners. The basic approach of capital adequacy framework is that a bank should have sufficient capital to provide a stable resource to absorb any losses arising from the risks in its business. Capital is divided into different tiers according to the characteristics / qualities of each qualifying instrument. For supervisory purposes capital is split into two categories: Tier I and Tier II. Tier I Capital A term used to refer to one of the components of regulatory capital. It consists mainly of share capital and disclosed reserves (minus goodwill, if any). Tier I items are deemed to be of the highest quality because they are fully available to cover losses Hence it is also termed as core capital. Tier II Capital Refers to one of the components of regulatory capital. Also known as supplementary capital, it consists of certain reserves and certain types of subordinated debt. Tier II items qualify as regulatory capital to the extent that they can be used to absorb losses arising from a banks activities. Tier IIs capital loss absorption capacity is lower than that of Tier I capital. Non Performing Assets (NPA) In simple words, The assets of banks which do not perform (means do not brings any return) are called NPA. In more general sense it known as bad loan. According to RBI: Any amount to be recived remains overdue for the period of more than 90 days. So 90 days is a thumb rule for deciding NPA. For agriculture loan (For deciding NPA): 1- If 6 month crop than, 2 crop seasons. 2- If one year crop , than 1 crop season. Classification Of NPA SUBSTANDARD ASSETS:- 12 month DOUBTFUL ASSETS :- Next 12 month LOSS ASSETS:- Next 12 month (But uncertain time) SARFAESI ACT (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act-2002 This Act use for recovery of Bad Loans The Act provides three alternative methods for recovery of non-performing assets, namely: - Securitization Asset Reconstruction Enforcement of Security without the intervention of the Court. NPA loans with outstanding above Rs. 1lakh NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act. It is not use for agricultural loan. Reselling of NPA Asset Reconstruction Company (ARC) * NPAs are subjected to resold but the puchaser can only be ARC. A company which is set up with the objective of taking over distressed assets (NPA) from banks or financial institutions and to reconstruct or re-pack these assets to make those assets saleable. To buy out troubled loans from banks and make special efforts at recovering value from the assets, if necessary by special legislation, with special powers for recovery. Restructuring of weak banks to divest the bad loan portfolio. India’s first ARC with an initial equity of Rs.10 crore with ICICI bank, IDBI and SBI. Incorporated as a public limited company on February 11, 2002. LOK ADALAT To settle disputes involving account in “doubtful” and “loss” category. Outstanding balance of Rs.20 lakhs for compromise settlement. Proved to be quite effective for speedy justice and recovery of small loans. Progress through this channel is expected to pick up in the coming years. Debt Recovery Tribunal (DRT) To recover their bad Debt quickly and efficiently. 33 Debt Recovery Tribunal and 5 Debt Recovery Appellate Tribunal It is the special court established by central government for the purpose of bank or any financial institutions recovery. The judges of this court are the retired judges of high court. In this court only the recovery cases of Rs.10 lakhs and above can be filed. Non Performing Assets (NPA) In simple words, The assets of banks which do not perform (means do not brings any return) are called NPA. In more general sense it known as bad loan. According to RBI: Any amount to be recived remains overdue for the period of more than 90 days. So 90 days is a thumb rule for deciding NPA. For agriculture loan (For deciding NPA): 1- If 6 month crop than, 2 crop seasons. 2- If one year crop , than 1 crop season. Classification Of NPA SUBSTANDARD ASSETS:- 12 month DOUBTFUL ASSETS :- Next 12 month LOSS ASSETS:- Next 12 month (But uncertain time) SARFAESI ACT (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act-2002 This Act use for recovery of Bad Loans The Act provides three alternative methods for recovery of non-performing assets, namely: - Securitization Asset Reconstruction Enforcement of Security without the intervention of the Court. NPA loans with outstanding above Rs. 1lakh NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act. It is not use for agricultural loan. Reselling of NPA Asset Reconstruction Company (ARC) * NPAs are subjected to resold but the puchaser can only be ARC. A company which is set up with the objective of taking over distressed assets (NPA) from banks or financial institutions and to reconstruct or re-pack these assets to make those assets saleable. To buy out troubled loans from banks and make special efforts at recovering value from the assets, if necessary by special legislation, with special powers for recovery. Restructuring of weak banks to divest the bad loan portfolio. India’s first ARC with an initial equity of Rs.10 crore with ICICI bank, IDBI and SBI. Incorporated as a public limited company on February 11, 2002. LOK ADALAT To settle disputes involving account in “doubtful” and “loss” category. Outstanding balance of Rs.20 lakhs for compromise settlement. Proved to be quite effective for speedy justice and recovery of small loans. Progress through this channel is expected to pick up in the coming years. Debt Recovery Tribunal (DRT) To recover their bad Debt quickly and efficiently. 33 Debt Recovery Tribunal and 5 Debt Recovery Appellate Tribunal It is the special court established by central government for the purpose of bank or any financial institutions recovery. The judges of this court are the retired judges of high court. In this court only the recovery cases of Rs.10 lakhs and above can be filed.
Posted on: Sat, 20 Dec 2014 15:10:09 +0000
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