Last Session on Fundamentals of Banking

8/8/2019 Last Session on Fundamentals of Banking

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Last Session on Fundamentals of

Banking

1. Narsimham Committee I and II

2. Recovery of advances and NPA norms

3. Corporate Debt Restructuring4. Bank Investments

5. Remittances


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Narsimham Committees on Banking

Reforms In August 1991, the Government appointed a committee

under the chairmanship of M. Narasimham, which workedfor the liberalization of banking practices. The aim of thisCommittee was to bring about operational flexibility and

functional autonomy so as to enhance efficiency,productivity and profitability of banks.

The Committee submitted its report in November, 1991.

The Government also appointed another committee onbanking sector reforms under the Chairmanship of M.N

arasimham which submitted its report in April 1998. Thecommittee focused on bringing about structural changes soas to strengthen the foundations of the banking system tomake it more stable.


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Recommendations ofNarsimham

Committee - I Reduction in CRR to 8.5 percent and SLR to 25 percent over a period of about fiveyears.

Deregulation of interest rates structure and decreasing the emphasis laid ondirected credit and phasing out the concessional rates of interest to priority sector.

To raise fresh capital through public issue by the profit making banks.

Transparency in Balance sheets Establishment of Special Tribunals to speed up the process of debts recovery

Establishment of an Assets Reconstruction Fund with special power of recovery

Bank restructuring through evolving a system of a broad pattern consisting of 3 or4 large banks including SBI, 8-10 national Banks engaged in Universal Bankingwith a network of branches, local banks confined to a specific region and RRBsconfined to the rural areas engaged in financing of agriculture and allied activities.

Abolishment of branch licensing and leaving the matter of opening and closing ofbranches to the commercial judgment of individual banks


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Contd

Progressive reduction in pre-emptive reserves.

Introduction of prudential norms to ensure capital adequacy norms,proper income recognition, more stringent recognition ofNPAs,classification of assets based on their quality and provisioning against badand doubtful debts by constituting the special debt recovery tribunals

Introduction of greater competition by entry of private sector banks andforeign banks and permitting them to access capital market

Partial deviation from directed lending

Strengthening the supervisory mechanism by creating a separate Boardfor Banking and Financial supervision

Up gradation of technology through the introduction of computerized

system in banks. Freedom to appoint chief executive and officers of the banks and changes

in the constitutions of the board

BringingNBFCS under the ambit of regulatory framework.


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Recommendations ofNarsimham

Committee - II Need For Stronger Banking System: The narasimham committee

has made out a stronger banking system in country, especially inthe context of capital account convertibility (CAC) which wouldinvolve large amount of inflow and outflow of capital andconsequent complications for exchange rate management and

domestic liquidity. To handle this India would need a strongresilient banking and financial system.

Experiment With The Concept of Narrow Banking: Thenarasimham committee is seriously concerned with therehabilitation of weak public sector banks which have

accumulated a high percentage of non-paying assets (N

PA), andin some cases, as high as 20% of their total assets. Theysuggested the concept of narrow banking to rehabilitate suchweak banks.


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Contd..

Small Local Banks: The narasimham committee has arguedthat While two or three banks with an internationalorientation and 8 to 10 of larger banks should take care oftheir needs of the large and medium corporate sector ad

larger of the small enterprises, there will still be a need fora large number of local banks. The committee hassuggested the setting up of small local banks which shouldbe confined to states or clusters of districts in order toserve local trade, small industry etc.

Capital Adequacy Ratio: The narasimham committee hasalso suggested that the government should consider raisingthe prescribed capital adequacy ratio to improve theinherent strength of banks and to improve their risk takingability.


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Contd.

Public Ownership And Real Autonomy: The narasimhamcommittee has argued that government ownership andmanagement of banks does not enhance autonomy andflexibility in working of public sector banks. Accordingly, the

committee has recommended a review of functions ofbanks boards with a view to make them responsible forenhancing shareholder value through formulation ofcorporate strategy.

Review And Updating Banking Laws: The narasimhamcommittee has suggested the urgent need to review andamended the provisions of RBI Act, Banking Regulation Act,State Bank of act etc so as to bring them on same line ofcurrent banking needs.


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The main recommendations of the

Committee were: -

Reduction of Statutory Liquidity Ratio (SLR) to 25 per centover a period of five years

Progressive reduction in Cash Reserve Ratio (CRR) to 3-5%

Phasing out of directed credit programmes and redefinitionof the priority sector

Stipulation of minimum capital adequacy ratio of 8 per centby March 1996.(Capital adequacy ratios ("CAR") are ameasure of the amount of a bank's capital expressed as a

percentage of its risk weighted credit exposures.) Adoption of uniform accounting practices in regard to

income recognition, asset classification and provisioningagainst bad and doubtful debts


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Contd

Setting up of special tribunals to speed up the recovery process ofloans

Setting up of Asset Reconstruction Funds (ARFs) to take over frombanks a portion of their bad and doubtful advances at a discount

Abolition of branch licensing

Liberalizing the policy with regard to allowing foreign banks to openoffices in India

Giving freedom to individual banks to recruit officers

Revised procedure for selection of Chief Executives and Directors ofBoards of public sector banks

Speedy liberalization of capital market Enactment of a separate legislation providing appropriate legal

framework for mutual funds and laying down prudential norms forsuch institutions, etc.


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Need for stronger banking system

The committee has made clear the need of a strongerbanking system , which would involve large inflows andoutflows of large capital and consequent complications forexchange rate management and domestic liquidity. So

committee recommended the merger of strong bankswhich would have a multiplier effect on industry.

But has rejected the merger of weak banks with strongbanks as it may have a negative impact on the asset qualityof the stronger bank.

The committee has also supported that two or three largeIndian banks be given international or global character.


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Small Local Banks

The committee has suggested setting up ofsmall, local banks which would be confined tostates or clusters of districts in order to serve

local trade, small industry, and agriculture.

Small Local Banks :

At the same time, these banks should havestrong corresponding relationship with thelarger and international bank.


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Experiment with concept of narrow

banking

Serious concern for rehabilitation of weak PSBswhich have accumulated a high percentage ofNPAs in some cases as high as 20% of the total

assets. Committee suggested the concept of narrow

banking to rehabilitate weak banks.

Narrow banking means that the weak banks place

their funds only in the short term in risk-freeassets- these banks try to match their demanddeposits with safe liquid assets


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Capital Adequacy Ratio

The committee has also suggested that thegovernment should consider raising the prescribedcapital adequacy ratio to improve inherent strength ofbanks and to improve their risk absorption capacity

Review and update banking laws:

Committee has suggested an urgent need to review

and amend the provisions of RBI Act, BanksNationalization Act, etc so as to bring them in line withthe current needs of the banking industry.


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Other recommendations

Other recommendations relate to the need for

automation of PSBs; professionalizing and

depoliticizing bank boards; review of

recruitment procedures; training and

remuneration policies; real autonomy etc


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Non Performing Assets-

DEFINITIONS Non performing Assets

An asset, including a leased asset, becomes non performing when it ceases togenerate income for the bank.

A non performing asset (NPA) is a loan or an advance where; i. interest and/ orinstalment of principal remain overdue for a period of more than 90 days inrespect of a term loan, ii. the account remains out of order in respect of anOverdraft/Cash Credit (OD/CC), iii. the bill remains overdue for a period of morethan 90 days in the case of bills purchased and discounted, iv. the instalment ofprincipal or interest thereon remains overdue for two crop seasons for shortduration crops, v. the instalment of principal or interest thereon remains overduefor one crop season for long duration crops, vi. the amount of liquidity facilityremains outstanding for more than 90 days, in respect of a securitisationtransaction undertaken in terms of guidelines . vii. in respect of derivative

transactions, the overdue receivables representing positive mark-to-market valueof a derivative contract, if these remain unpaid for a period of 90 days from thespecified due date for payment.

Banks should, classify an account as NPA only if the interest due and chargedduring any quarter is not serviced fully within 90 days from the end of the quarter.


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NPA norms in respect of Agricultural

AdvancesA loan granted for short duration crops will be treated as NPA, if theinstalment of principal or interest thereon remains overdue for two cropseasons. A loan granted for long duration crops will be treated as NPA, ifthe instalment of principal or interest thereon remains overdue for onecrop season. For the purpose of these guidelines, long duration cropswould be crops with crop season longer than one year and crops, whichare not long duration crops, would be treated as short duration crops.The crop season for each crop, which means the period up to harvestingof the crops raised, would be as determined by the State Level BankersCommittee in each State. Depending upon the duration of crops raised byan agriculturist, the above NPA norms would also be made applicable toagricultural term loans availed of by him. The above norms should bemade applicable to all direct agricultural advances. Where naturalcalamities impair the repaying capacity of agricultural borrowers, banksmay decide on their own as a relief measure conversion of the short-termproduction loan into a term loan or re- schedulement of the repaymentperiod; and the sanctioning of fresh short-term loan


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Contd.

Out of Order status

An account should be treated as 'out of order'if theoutstanding balance remains continuously in excess of thesanctioned limit/drawing power. In cases where the

outstanding balance in the principal operating account isless than the sanctioned limit/drawing power, but there areno credits continuously for 90 days as on the date ofBalance Sheet or credits are not enough to cover theinterest debited during the same period, these accountsshould be treated as 'out of order'.

Overdue

Any amount due to the bank under any credit facility isoverdue if it is not paid on the duedate fixed by the bank.


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Income Recognition Policy

Income from nonperforming assets (NPA) is not recognisedon accrual basis but is booked as income only when it isactually received. Therefore, the banks should not chargeand take to income account.

If any advance, including bills purchased and discounted,becomes NPA, the entire interest accrued and credited toincome account in the past periods, should be reversed ifthe same is not realised. This will apply to Governmentguaranteed accounts also.

Interest realised onN

PAs may be taken to income accountprovided the credits in the accounts towards interest arenot out of fresh/ additional credit facilities sanctioned tothe borrower concerned.


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ASSET CLASSIFICATION

Categories of NPAsSubstandard Assets

With effect from 31 March 2005, a substandard assetwould be one, which has remained NPA for a periodless than or equal to 12 months. In such cases, the

current net worth of the borrower/ guarantor or thecurrent market value of the security charged is notenough to ensure recovery of the dues to the banks infull. In other words, such an asset will have welldefined credit weaknesses that jeopardise the

liquidation of the debt and are characterised by thedistinct possibility that the banks will sustain someloss, if deficiencies are not corrected.


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Contd.

Doubtful Assets

With effect from March 31, 2005, an asset would be classified as doubtfulif it has remained in the substandard category for a period of 12 months. Aloan classified as doubtful has all the weaknesses inherent in assets thatwere classified as substandard, with the added characteristic that the

weaknesses make collection or liquidation in full, on the basis ofcurrently known facts, conditions and values highly questionable andimprobable.

Loss Assets

A loss asset is one where loss has been identified by the bank or internalor external auditors or the RBI inspection but the amount has not beenwritten off wholly. In other words, such an asset is considereduncollectible and of such little value that its continuance as a bankableasset is not warranted although there may be some salvage or recoveryvalue.


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Contd

Accounts where there is erosion in the value ofsecurity/frauds committed by borrowers

In respect of accounts where there are potentialthreats for recovery on account of erosion in the valueof security or non-availability of security and existenceof other factors such as frauds committed byborrowers it will not be prudent that such accountsshould go through various stages of asset classification.In cases of such serious credit impairment the assetshould be straightaway classified as doubtful or lossasset as appropriate


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PROVISIONING NORMS

Loss assets :

Loss assets should be written off. If loss assets are permitted to remain inthe books for any reason, 100 percent of the outstanding should beprovided for.

Doubtful assets

i. 100 percent of the extent to which the advance is not covered by therealisable value of the security to which the bank has a valid recourse andthe realisable value is estimated on a realistic basis.

ii. In regard to the secured portion, provision may be made on thefollowing basis, at the rates ranging from 20 percent to 100 percent of thesecured portion depending upon the period for which the asset hasremained doubtful:

Up to one year : 20%

One to three years : 30%

More than three years: 100%


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Contd..

Substandard assets :

(i) A general provision of 10 percent on total outstanding should bemade without making any allowance for ECGC guarantee cover andsecurities available.

(ii) The unsecured exposures which are identified as substandardwould attract additional provision of 10 per cent, i.e., a total of 20per cent on the outstanding balance. However, in view of certainsafeguards such as escrow accounts available in respect ofinfrastructure lending, infrastructure loan accounts which areclassified as sub-standard will attract a provisioning of 15 per centinstead of the aforesaid prescription of 20 per cent. To avail of this

benefit of lower provisioning, the banks should have in place anappropriate mechanism to escrow the cash flows and also have aclear and legal first claim on these cash flows. The provisioningrequirement for unsecured doubtful assets is 100 per cent.


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Contd.

The provisioning requirements for all types ofstandard assets stands :

Banks should make general provision for standard

assets at the following rates for the fundedoutstanding on global loan portfolio basis:

(a) direct advances to agricultural and SMEsectors at 0.25 per cent;

(b) advances to Commercial Real Estate (CRE)Sector at 1.00 per cent;

(c) all other loans and advances not included in(a) and (b) above at 0.40 per cent


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Corporate Debt Restructuring

Companies sometimes are found to be in financial troubles for

factors beyond their control and also due to certain internal

reasons. For the revival of such businesses, as well as, for the

security of the funds lent by the banks and FIs, timely support

through restructuring in genuine cases was required. With this view,a CDR system was established with the objective to ensure timely

and transparent restructuring of corporate debts of viable entities

facing problems, which are outside the purview of BIFR, DRT and

other legal proceedings. In particular, the system aimed at

preserving viable corporate/businesses that are impacted by certaininternal and external factors, thus minimising the losses to the

creditors and other stakeholders.


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Contd..

Eligibility criteria

The CDR mechanism will cover only multiple banking accounts /syndication / consortium accounts with outstanding exposure ofRs.10 crore and above by banks and institutions.

In terms of the extant instructions, in no case, requests of anycorporate indulging in wilful default, fraud or misfeasance even in asingle bank will be considered for restructuring under the CDRmechanism. As a general principle therefore, wilful defaultersshould not be entertained under the CDR mechanism. However, indeserving cases, the Core Group may review the reasons forclassification of the borrower as wilful defaulter and satisfy itself

that the borrower is in a position to rectify the wilful defaultprovided he is granted an opportunity under the CDR mechanism.


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Contd.

The accounts where recovery suits have been filed by the lenders against the company, may

be eligible for consideration under the CDR mechanism provided, the initiative to resolve the

case under the CDR mechanism is taken by at least 75% of the lenders (by value) and 60% of

lenders in number.

Category 2 CDR System

For the second category of CDR where the accounts have been classified as doubtful in thebooks of lenders, a minimum of 75% (by value) and 60% of the lenders in number should

satisfy themselves of the viability of the account and consent for such restructuring.

Legal Basis

In order to ensure discipline in the CDR mechanism, members of CDR may jointly or

severally decide that those banks that have not joined the mechanism as members would not

be eligible for future consortium / syndication arrangements for lending. For this purpose, a

collective action clause may be incorporated in the loan agreements involving multiplelenders whereby all lenders agree to abide by the majority decision for restructuring of the

account in case of need. If 75 per cent of creditors by value and 60% of the creditors in

number, approve a restructuring package of an existing debt (i.e., debt outstanding) under

CDR mechanism, it shall be binding on the remaining creditors.


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Stand-Still Clause

During pendency of the case with the CDR mechanism, the usual assetclassification norms continue to apply and the process of reclassification of anasset does not stop merely because the case is referred to the CDR Cell. Ifrestructuring under the CDR mechanism is approved and the approvedpackage is implemented within three months from the date of approval by theEmpowered Group, the asset classification status would be restored to the

position, which existed when the reference to the Cell was made.Consequently, any additional provisions made by banks towards deteriorationin the asset classification status during the pendency of the case with the CDRmechanism may be reversed.

If an approved package remains unimplemented even three months after thedate of approval by the Empowered Group, it would indicate that the success

of the package is uncertain. Therefore, the asset classification status of theaccount should not be restored to the position as on the date of reference tothe CDR Cell. This will ensure that banks which delay implementation of thepackage will not be allowed to enjoy the regulatory concessions


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Additional finance

Additional finance, if any, is to be provided by all lenders irrespective ofwhether they are working capital or term lenders on a pro-rata basis. Theadditional finance may be treated as standard asset up to a period of one yearafter the first interest/ principal payment whichever is earlier falls due underthe approved restructuring package. The income in this period may berecognized only on cash basis. If restructured asset does not qualify for up

gradation at the end of the above period, additional finance shall be placed inthe same asset classification category as the restructured debt.

In case for any internal reason, any creditor (outside the minimum 75 and 60per cent) does not wish to commit additional financing, that creditor will havethe option to either (a) arrange for his share of additional financing to beprovided by a new or existing creditor, or (b) agree to deferment of the first

years interest due to him after the CDR package becomes effective. The firstyears deferred interest as mentioned above, without compounding, will bepayable along with the last instalment of the principal due to the creditor


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Exit Option

The proposals for restructuring package should provide for option to aparticular lender or lenders (outside the minimum 75 and 60 per cent whohave agreed for restructuring) who for any internal reason, does/do notfully abide by the CDR Empowered Group's decision on restructuring. Thelenders who wish to exit from the package would have the option to selltheir existing share to either the existing lenders or fresh lenders, at anappropriate price, which would be decided mutually between the exitinglender and the taking over lender. The new lenders shall rank on par withthe existing lenders for repayment and servicing of the dues since theyhave taken over the existing dues to the exiting lender. In addition, the'exit option' will also be available to all other lenders within the minimum75 and 60 per cent, provided the purchaser agrees to abide by therestructuring package approved by the Empowered Group.

In order to bring more flexibility in the exit option, One Time Settlementcan also be considered, wherever necessary, as a part of the restructuringpackage.


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Contd

Conversion option

Equity acquired by way of conversion of debt / overdue interestunder the CDR mechanism is allowed to be taken up withoutseeking prior approval from RBI even if the capital market ceiling isbreached, subject to reporting such holdings to RBI every monthalong with the regular statement.

Acquisition of non-SLR securities by way of conversion of debt areexempted from the guidelines on non-SLR securities subject to

periodical reporting to RBI


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Contd

Treatment ofstandard accounts restructured under CDR

A rescheduling of interest element either before commencement of commercial production or aftercommencement of commercial production but before the asset has been classified as substandard providedconditions (i) to (iv) of Para 5.1 are complied with would not cause an asset to be downgraded to sub-standardcategory on writing off/providing for the amount of sacrifice, if any, in the element of interest measured in presentvalue terms. For this purpose, the sacrifice should be computed as the difference between the present value offuture interest income reckoned based on the current BPLR as on the date of restructuring plus the appropriateterm premium and credit risk premium for the borrower category on the date of restructuring and the interestcharged as per the restructuring package discounted by the current BPLR as on the date of restructuring plus

appropriate term premium and credit risk premium as on the date of restructuring

Treatment ofsub-standard / doubtful accounts restructured under CDR

A rescheduling of interest element would render a sub-standard / doubtful asset eligible to be continued to beclassified in sub-standard / doubtful category for the specified period provided the conditions (i) to (iv) of Para5.1 are complied with and the amount of sacrifice, if any, in the element of interest, measured in present valueterms computed as per the methodology described in Para 5.2.1 is either written off or provision is made to theextent of the sacrifice involved.

Banks/ FIs may recalculate the amount of sacrifice at each balance sheet date so as to capture the changes in thefair value on account of changes in BPLR, term premium and the credit category of the borrower and the amountof excess provision, if any may be reversed.

Economic sacrifice must necessarily be provided for by debit to the Profit & Loss account. In the event a zerocoupon bond is taken against the sacrifice, it should be valued at Re1/- till the maturity of the bond. This willensure that the effect of charging off the economic sacrifice to the Profit & Loss account is not negated.


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Recovery of advances

Recovery through recovery agents

Recovery through SERFAESI Act

Recovery through filing a suit against theborrower and guarantor

Recovery through Lok Adalat

Recovery through Debt Recovery Tribunal Recovery through Local Recovery Acts


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Recovery through Recovery agents

RBI has issued guidelines on recovery through agents:

(i) Banks should have a due diligence process in place for engagement ofrecovery agents, which should be so structured to cover, among others,individuals involved in the recovery process.

(ii) To ensure due notice and appropriate authorization by the banks, they

should inform the borrower the details of recovery agents engaged for thepurpose, while forwarding default cases to the recovery agents. Thedetails should include their telephone numbers etc. The recovery agentsshould call the borrowers only from telephone numbers notified to theborrower.

(iii) Each bank should have a mechanism whereby the borrowers' grievanceswith regard to the recovery process can be addressed.

(iv) Contracts with the recovery agents do not induce adoption of uncivilized,unlawful and questionable behaviour or recovery process.


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Contd.

(v) Indian Institute of Banking and Finance (IIBF) has started a certificate course for DirectSales Agents / Direct Marketing Agents / Recovery Agents with minimum 100 hours oftraining. Banks should ensure that all their Recovery Agents undergo the above trainingand obtain the certificate from the above institute. Further, the service providersengaged by banks should also employ only such personnel who have undergone theabove training and obtained the certificate from the IIBF.

In the matter of recovery of loans:

(a) the lenders should not resort to undue harassment viz. persistently bothering theborrowers at odd hours, use of muscle power for recovery of loans, etc. (b) the banksshould ensure that agents engaged by them for debt collection refrain from action/sthat could damage the integrity and reputation of the bank (c) their agents should notresort to intimidation or harassment of any kind, either verbal or physical, against anyperson in their debt collection efforts, including acts intended to humiliate publicly orintrude into the privacy of the borrowers'/ credit card holders' family members,referees and friends, making threatening and anonymous calls or making false andmisleading representations.


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Recovery through SARFAESI Act

The Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002 (SARFAESI) empowers Banks / Financial Institutions

to recover their non-performing assets without the intervention of the Court.

Methods:

The Act provides three alternative methods for recovery of non-performing

assets.

Securitisation,

Asset Reconstruction,

Enforcement of Security without the intervention of the Court

Provisions:

The provisions of this Act are applicable only for NPA loans with outstanding

above Rs. 1.00 lac. 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. Non-

performing assets should be backed by securities charged to the Bank by way

of hypothecation or mortgage or assignment. Security Interest by way of Lien,

pledge, hire purchase and lease not liable for attachment under sec.60 of CPC,are not covered under this Act


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Contd.

Asset Reconstruction:

The SCs/ARCs for the purpose of asset reconstruction shouldprovide for any one or more of the following measures: the proper management of the business of the borrower, bychange in, or take over of, the management of the business of the

borrower the sale or lease of a part or whole of the business of theborrower rescheduling of payment of debts payable by the borrower enforcement of security interest in accordance with the provisionsof this Act

settlement of dues payable by the borrower taking possession of secured assets in accordance with theprovisions of this Act.


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Enforcement of Security without the

intervention of the Court

This act gives the following powers to the affected Banks

To issue demand notice to the defaulting borrower andguarantor, calling upon them to discharge their dues in

full within 60 days from the date of the notice. To give notice to any person who has acquired any of

the secured assets from the borrower to surrender thesame to the Bank.

To ask any debtor of the borrower to pay any sum dueor becoming due to the borrower.

Any Security Interest created over Agricultural Landcannot be proceeded with.


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Contd..

Procedure:

If on receipt of demand notice, the borrower makes any representation or

raises any objection, Authorised Officer shall consider such representation

or objection carefully and if he comes to the conclusion that such

representation or objection is not acceptable or tenable, he shall

communicate the reasons for non acceptance within One Week of receipt

of such representation or objection.

A borrower / guarantor aggrieved by the action of the Bank can file an

appeal with DRT and then with DRAT, but not with any civil court. The

borrower / guarantor has to deposit 50% of the dues before an appeal

with DRAT. If the borrower fails to comply with the notice, the Bank may take

recourse to one or more of the following measures:

Take possession of the security

Sale or lease or assign the right over the security

Manage the same or appoint any person to manage the same


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Recovery through Debt Recovery

TribunalsWhat are the Debts Recovery Tribunals?

The Debts Recovery Tribunals have been established bythe Government of India under an Act of Parliament(Act 51 of 1993) for expeditious adjudication and

recovery of debts due to banks and financialinstitutions.

Who can file cases before the DRTs?

Where a bank or financial institution has to recover anydebt from any person, it makes an application calledOriginal Application (OA) to the Tribunal against suchperson.


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Fee Structure

fee for Interlocutory Application?

The fee for filing Interlocutory Application (IA) is Rs.250/-.

fee for Vakalatnama?

The fee for filing Vakalatnama is Rs.5/-.

fee for an appeal against the order of the Recovery Officer?

Rs.12,000/- if the amount appealed against is less than Rs.10 lakhs.

Rs.20,000/- if the amount appealed against is Rs.10 to 30 lakhs.

Rs.30,000/- if the amount appealed against is more than 30 lakhs.

fee for perusal of documents?

Rs.100/- per case.

fee payable for certified copies of documents?

Rs.5 per page.


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Recovery through Lok Adalats

Term loans, personal loans, credit card loans and housing loans withless than Rs.10 lakh can be referred to Lok Adalats.

It is a non-formal forum organised by public spirited social workerslike retired judges, public spirited lawyers, and law teachers forbringing about settlement of disputes between the parties through

conciliatory and mediatory efforts. One important condition is thatboth parties in dispute must agree for settlement through LokAdalat and abide by its decision.

There is no court fee and no rigid procedural requirement (i.e. noneed to follow process given by Civil Procedure Code or Evidence

Act), which makes the process very fast. Parties can directly interactwith the judge, which is not possible in regular courts.


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Bank Investments

Investments by banks may be categorised as follows :

(a) Investment in SLR securities

(b) Investment in Non- SLR securities

RBI has directed banks that the entire investmentportfolio of the banks (including SLR and non-SLRsecurities) should be classified under the followingthree categories:

Held to maturity Available for sale

Held for trading


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Contd

Held to Maturity

The securities acquired by the banks with the intention to holdthem to maturity will be classified under held to maturity. Theinvestments included under this head should not exceed 25 percent of the banks total investments. Profit on sale of investments in

this category should be first taken to the profit and loss account andthereafter be appropriated to the capital reserve account. Loss onsale will be recognised in the profit and loss account. securitiesunder HTM category are intended to be held till maturity and henceare not required to be marked to market.

Banks are allowed to shift investments to/from HTM with the

approval of the Board of Directors once a year. Such shifting isnormally allowed at the beginning of the accounting year and nofurther shifting to/from HTM is allowed during the remaining partof that accounting year.


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Contd..

Available for Sale and held for Trading

The securities acquired by banks with the intention to trade bytaking advantage of the short -term price/ interest rate movementswill be classified under held for trading. The securities which donot fall under the above categories will be classified under

available for sale. The banks will have the freedom to decide onthe extent of holdings under available for sale and held for tradingcategories. This will be decided by them after considering variousaspects such as basis of intent, trading strategies, risk managementcapabilities, tax planning, manpower skills, capital position. Theinvestments classified under held for trading category would be

those from which the bank expects to make a gain by themovement in the interest rates/ market rates. These securities areto be sold within 90 days.

Profit or loss on sale of investments in both the categories will betaken to the profit and loss account.


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Contd..

Investment Fluctuation Reserve

With a view to building up of adequate reservesto guard against any possible reversal of interestrate environment in future due to unexpecteddevelopments, banks are to build up investmentfluctuation reserve (IFR) of a minimum of 5 percent of the investment portfolio. IFR should becomputed with reference to investments in two

categories, viz, held for trading and available forsale. Banks are free to build up higher percentageof IFR up to 10 per cent.


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Remittances

Now-a-days, the following three types of modes

are used for remitting funds:

(a) Bank Draft

(b) RTGS

(c) NEFT

Besides the above, fund transfers can bedone through internet banking and mobile

banking.


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Bank Drafts

A bankers draft (or demand draft) is a payment orderissued by one branch of a bank upon other branch,instructing the drawee branch to pay the specified sum ofmoney to the specified person. A demand draft is alwaysdrawn, payable to order. A demand draft resembles a bill ofexchange, the only difference being that in the former, thedrawer (bank) and the drawee (bank) are same. Thedefinition of bill of exchange in NI Act does not state thatthe drawer and drawee have to be different. It merelystates a bill of exchange should be signed by the maker and

that the drawee should be a certain person. A bank draftcan therefore be treated as a bill of exchange and also acheque since it is payable on demand and is drawn on abanker.


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Issue of Duplicate Demand Draft

Duplicate draft, in lieu of lost draft, upto and including Rs. 5,000/-may be issued to the purchaser on the basis of adequate indemnityand without insistence on seeking non payment advice fromdrawee office irrespective of the legal position obtaining in this

regard. Banks should issue duplicate Demand Draft to the customerwithin a fortnight from the receipt of such request. Further, for thedelay beyond this stipulated period, banks were advised to payinterest at the rate applicable for fixed deposit of correspondingmaturity in order to compensate the customer for such delay.

Stop payment of a draft is not allowed. When a draft is reported

lost, the bank will simply put a caution note in their record so as toavoid fraudulent payment


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National Electronic Funds Transfer

(NEFT) System

National Electronic Funds Transfer (NEFT) systemwhich was launched in November 2005 isbecoming a very popular mode for nationwidetransfer of money from one branch to any other

bank branch participating in the NEFT system. Inthe month of January 2010 alone, more than 6million transactions were processed through theNEFT system. The coverage has also increased

substantially with participation of over 63,000bank branches spread across the length andbreadth of the country.


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The operating hours would be from 9 am to 7pm on weekdays and from 9 am to 1 pm onSaturdays.

Originator of a NEFT transaction would nowbe receiving through a mobile SMS or an e-mail a positive confirmation in the form of anacknowledgement containing the date and

time of credit, immediately after the credit isafforded to the beneficiary account.


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Charges

NEFT Rs.15 per transaction

RTGS Rs.25 per transaction

InN

EFT amount upto Rs.2 lacs can beremitted. For amounts Rs.2 lacs and above

RTGS will be used

Documents

Last Session on Fundamentals of Banking