Latest Banking Dev

7/17/2019 Latest Banking Dev

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Disclosures in the Balance Sheet

With a view to bring out more transparency in the balance sheets of thebanks, Reserve Bank of India has decided to introduce more disclosures in

the banks annual reports. As a result, banks now disclose in their balancesheets, (a percentage of shareholding of the !overnment of India innationali"ed banks. (b percentage of net non#performing assets to netadvances (c the amount of provision made towards $%As (d towardsdepreciation in the value of investments and (e provision made towardsincome ta&, (f amount of sub#ordinated debt raised as 'ier II apital, (ginterest income as percentage to working funds (h non#interest income aspercentage to working funds (i operating profit as percentage to workingfunds () return on assets (k business per employee (l net profit per employee etc.

FLEXIBLE BANK FINANCE

*ince the Bank +inance is to bridge the gap between urrent Assets andurrent iabilities, this method is based fundamentally on the -%B+ formula.'he assessment procedure in our Bank is for assessing the Working apitalfinance of Rs. .// crore and above other than those class of accounts wheredifferent methods have been prescribed.

0nder the system, +und Based Working apital re1uirement will be assessedas the difference between Working apital !ap and %ro)ected $et Workingapital. 'hough the benchmark for urrent Ratio will continue to be .223,

we may accept some deviation in the same provided the urrent Ratio is notless than .43. In ases where the urrent Ratio has deteriorated onaccount of diversions taking place because of short term funds flow to +i&ed Assets, we may correct the position by giving a 'erm oan to be repaid within5 to 26 months provided the 7ebt *ervice overage Ratio, 7ebt 81uity and*ecurity coverage are at acceptable levels.

0nder this method, the assessment though akin to -%B+ will be morefle&ible. A more liberal approach would also be adopted in working out urrent Assets by including cash margin deposits for etters of redit and !uaranteesand treating +i&ed 7eposits with Banks and temporary investments like

-oney -arket -utual +unds, ommercial %aper, ertificate of 7eposit etc. asurrent Assets. 'he collection of data, analysis of financial statements etc.will be generally as per the -%B+ formula but the classification of currentassets and current liabilities will be more customer friendly.



'he following details relating to Working apital assessment and +B+ will bepresented under the head Working apital Assessment in lieu of -%B+alculation in the revised redit Appraisal +ormat.

(Rs. in lacs

%revious urrent $e&t

9ear 9ear 9ear

'otal urrent Assets ('A

:ther urrent iabilities

(8&cluding Bank Borrowings

Working apital !ap

$et Working apital ($W

(Actual;%ro)ected

+le&ible Bank +inance (+B+

$W to 'A (<

+B+ to 'A (<

*;reditors to 'A (<

$et *ales,

Inventories to $et *ales (days

Inventories to ost of *ales (days

Receivables to !ross *ales (days

*;reditor to %urchases (days



CASH MANAGEMENT SERVICE CMS!

"R#D$CT C#NCE"T%

-* is fee based Banking product to orporates as also other organistionshaving re1uirement to collect che1ues and instruments from several centresand collate funds at a single business point. It can also be e&tended as apayment service for orporates through which their payments to upcountrylocations can be serviced efficiently through the system."R#D$CT ATTRIB$TES ollection of che1ues ; instruments from specified centres and remittance

to the main account of the orporate. 7ay : (transaction date collections at any centre to be credited on 7ay

(ne&t working day to 7ay /.ADVANTAGES T# CLIENTS

8nables management of their receivables and payments efficiently. 8nsures efficient cash flows by accelerating collections.

8liminates idle floats and lowers the net cost of funds.

Aids in building predictability of cash inflows ; outflows resulting in superior

cash flow ; treasury management.&H' CMS( -* is a product in heavy demand for clients with several collection

points. 8ssential for Bank to have the product to retain e&isting orporate clients

and also e&pand the client base.

-* opens up a new avenue to generate fee based income. -* also opens up cross#selling opportunities.

KE' FACT#RS F#R S$CCESS 7edicated marketing effort.

A competitive pricing strategy.

8fficient I' systems.

8fficient courier service.

A consistent and focussed approach across the Bank for maintaining

operational efficiency. Wide coverage to leverage e&isting branch network.

Bank=s ability to gear up to the new process capture additional informationand process it centrally.

ADVANTAGES T# THE BANK 'he product will ensure retention of the orporate clientele in our fold and

thereafter e&pansion of our orporate lient base. :ur large network will facilitate wider coverage which will result in larger

volumes. :ver a period of time, the fee based income of the Bank will be boosted by

this product.



CA"ITAL ADE)$AC' N#RMS

Meanin* o+ Ca,ital A-e.uac/%

apital Ade1uacy means# a bank must maintain a minimum level of capitalwhich is e1ual to >< of the 'otal Risk Weighted Assets of the Bank by 2 st

march ?6, ?< by 2st -arch 5///. It is likely to be enhanced to /< soon.

Ca,ital Fun-

It may consist of 'ier I @ 'ier II capital.

Tier I ca,ital Core Ca,ital!

It consists of paid up apital and +ree Reserves and *urplus.

Tier II ca,ital Su,,le0entar/ Ca,ital!

It may consist of, undisclosed reserves, revolution reserves, sub#ordinateddebts and cumulative perpetual preferential shares. It is also prescribed bythe RBI that

• 'ier II capital will be limited to ma&imum //< of 'ire I capital.

• *ub#ordianted debts should be limited to /< of 'ier I apital

• Revaluation reserves should be considered at discount < for including

in 'ier II capital.

A! Ris1 &ei*ht +or on the Balance sheet Assets%2ero Ris1 &ei*ht# ash @ RBI Balance, *R Assets, RecapitalisationBonds, Advances to staff, advances against BankCs 'erm 7eposits I%olicy. $* etc and Advances guaranteed by the !overnment of India and*tate !overnment.

3456 Ris1 7ei*hte- % All investments in securities for market risk inaddition to the risk weights assigned towards credit risk.

386 Ris1 &ei*ht9 Bank balance @ due from other banks and Advancesguaranteed by other banks.

586 Ris1 &ei*ht# 8!;7I!;!'*I guaranteed advances.

:886 Ris1 &ei*ht# Investment in other *ecurities, Investment in 81uities,+oreign Investment, all other oans and Advances, +i&ed Assets and other Assets. In addition to //< risk weight 5.< additional risk weight for allcategories of investments in securities including !ovt. *ecurities.

B! Ris1 &ei*ht +or o+ the Balance Sheet Ite0s%

+or such assets (ike @ !, we notionally convert them to fund basedfacility by multiplying them with Credit conversion factorC. 'hen the



resultant product is multiplied by the risk weight assigned to relevantcounter party in the balance sheet to find out the Risk Ad)usted value.

Cre-it con;ersion Factor%

5/< for documentary credit .

/< for all guarantees other than financial and Bid Bond and,

//< for financial !uarantees, Acceptance, 8ndorsements,0nderwriting @ *tandby ommitments, undrawn committed redit linesand liability on account of partly paid shares.

Ris1 &ei*ht

Dero when the govt. is obligant, 5/< when other banks are obligant and

//< for all others.Contracts an- Deri;ati;es Fore< contract=currenc/ o,tions =Currenc/Futures =Crosses Currenc/ #,tion!

• Dero for +ore& contracts with original maturity period of E days.

• 5< for +ore& ontracts;:ption;+utures for original maturity less than

year.

• < for those for period of one year and above but less than 5 years.

• >< for 5 years and less than 2 years and,

• >< F 2< per each additional year for contracts of 2 years and above.

Ris1 &ei*ht

Dero when the !ovt is obligant, 5/< when the bank is obligant and //< for others.

Nettin*

• Incase of advances backed by deposits;cash margin the net amount to be

taken into account.

• Where provision for B77 is already made, the net, amount to be

considered.• In case of off the balance sheet items, the cash;deposit margin should be

deducted before applying credit conversion factor.



ASSET9LIABILIT' MANAGEMENT

Asset#iability -anagement is a recent phenomenon in India. 'heimplications of deregulation on the balance sheets of banks are multifacet.

+or e&ample, in ??> G ?? , the average cost of deposits of 0nion Bank of India was >.4<, which came down marginally to >.//< in ???#5///.'herefore, the fall in average cost of deposits was /.4<. 7uring the sameperiod, the yield on advances declined from 5.4E< to 5.5<, a fall of /.65<. Both the above phenomena were generally due to general fall ininterest rates in the economy. However, this also gives an insight that in afalling interest rate scenario, fall in yield on advances could be steeper thanfall in costs of deposits. Why is it so 'he reasons can be traced tomismatches in the maturity and re#pricing profile of deposits and advances.While deposits of the bank would generally re#priced over a period of time, theadvances would get re#priced fre1uently as most of the advances are floatingin nature, anchored to the %R of the bank. 'herefore, greater volatility ininterest rates poses challenges to a bank to manage its spread G $et InterestIncome or $et Interest -argin and preserve its economic value, which can beaddressed only through a robust Assets G iability -anagement *ystem.

Asset iability -anagement involves planning, directing and controlling theflow, mi&, cost and yield of the consolidated funds of banks. Alternatively, A-is defined as the process of strategic positioning of balance sheet whichinvolves ensuring the linkages between asset side with liability side andenhancing the linkages through off#balance sheet activities. 'he goals of

A- can be articulated as follows 3

• Accurate determination of market risk.

• 8nhancement of long#term profitability for a given 1uantity of risk.

• Appropriate structuring of hedging positions.

• Raising total return.

• 8nhancing the -arket Jalue of 81uity (-J8.

Total Ris1 Mana*e0ent A,,roach

'he two ma)or risks in the balance sheet of a financial institution are G marketand credit risks. 'hese risks are currently managed and mitigated under aparallel two G track approach. In leading institutions, there are two separatecommittees to address the issues of credit and market risks. While the creditrisk is managed by redit Risk ommittee, Asset G iability ommittee(A: addresses the market risk. 'he credit risk triggered by market risk isalso managed by A:. 'he recent events of market risk G triggered creditrisk calls for effective steps towards integration of both the ommittees.



A: is one of the key components of A- system in a bank, A: isconstituted by the Board of 7irectors and it is in overall command of the A-system in a bank. A: is also responsible for various functions like pricing of assets and liabilities, funding, optimal deployment of resources, capital

planning , etc. 7ue to comple&ities of its tasks, A: is constituted bydrawing e&pertise from various business lines, like 'reasury, %lanning, redit,8conomic Research, etc. Head of information technology is an invitee to thecommittee to supplement the efforts of the A: to generate credible and1uality -I*.

'he ma)or ob)ective of A- in any institution is to manage and mitigate thefollowing types of market risk 3

a. i1uidity risk

b. Interest rate risk

c. +oreign e&change rate risk

d. 81uity price risk

a4 Li.ui-it/ ris1

'here are two approaches for measuring li1uidity risk namely stockapproach and flow approach. *tock approach is used for measuring li1uidityon the basis of certain ratios like loans to assets, loans to core deposits,

purchased funds to li1uid assets, large liabilities minus temporary investmentsto earning assets minus temporary investments, etc. However, these ratios donot reflect true li1uidity of institution in as much as some of the assets may notbe having ade1uate li1uidity and securitisation has )ust made a beginning inthe Indian market. 'herefore, the alternative approach i.e. the flow approachis an effective tool in such a situation. 0nder this approach, various items of assets and liabilities and off G balance sheet items are placed under variousmaturity bands like #E days, #5> days, etc. A bank can fi& prudential capson mismatches under each time band based on the maturity profile and mi& of its assets and liabilities. i1uidity can also be measured and managed byassessing it on a dynamic basis. 'his re1uires pro)ecting cash flows based on

behaviour of e&isting assets and liabilities as well as factoring the impact of e&ternal factors like volatility in stock;money market conditions, macro#economic factors, etc on the behaviour of future cash flows. 'he cash flowsarising out of off#balance sheet items are also factored in the dynamic li1uiditypro)ection.

Interest rate ris1

Interest rate risk has arisen in Indian market mainly due to de#regulation of interest rates. Abolition of administered interest rates has given opportunity toIndian banks to price their assets and liabilities in the most competitive

manner. At the same time, it has e&posed them to various types of interestrate risks like basis, yield curve, embedded option, price risks, etc. +or



e&ample, a bank financing a / year bond through 2 months deposit may facethe following risks 3

. Re#investment risk arising at the time of reinvestment of coupons from the

bond.

5. Interest rate risk, as the bank has to fund the investment by raisingdeposits at the end of every three months. In case of rising interest ratescenario, the funding cost will increase, affecting the margin adversely.

*imilarly, when a bank funds floating rate assets like %R linked cash creditand demand loans through fi&ed rate liabilities like 2 yearsC deposits, it isagain e&posed to interest rate risk. 'he margins are e&pected to decline in afalling interest rate scenario.

'he other risk faced by a bank in volatile interest rate scenarios is embeddedoption risk. 8mbedded options are typically in built in both deposits andadvances. In a rising interest rate scenario, a customer can e&ercise, withoutmany penalties, the option of pre#mature withdrawal of his deposits. *imilarly,in a falling interest rate scenario pre#payment can take place in advanceaccounts that are contracted on fi&ed rate basis. 'he options e&ercised bycustomers#depositors and borrowers pose significant challenges to a bank inmanaging its li1uidity profile and $et Interest margin.

'he other variants of interest rate risks are 3

• !ap or mismatch risk G risk arising due to holding of assets andliabilities of varying maturities.

• Basis risk G risks that the interest rate of different assets, liabilities and

off#balance sheet items may change in different magnitude.

• 9ield curves risk G risks arising due to non#parallel movements in yield

curves.

• %rice risk G risk arising due to distress sale of assets and distress

pricing of liabilities.

• Reinvestment risk G uncertainty with regard to interest rate of which

future cash flows could be re#invested is known as reinvestment risk.

Mana*in* Interest rate ris1

Interest rate risk should be managed by segmenting the balance sheet into'rading Book and Banking Book. Assets in 'rading book are held primarily for generating profit on short#term movements in price;yield. Banking bookcomprises assets and liabilities G customer deposits, loans and advances,*R investments, $on#*R investments, etc which are contracted basically

for maintaining relationship or for steady income and statutory obligations.



!enerally assets and liabilities in the Banking Book are held till maturity. 'heprice risk is the primary concern for a bank in its 'rading Book. 'he likelychanges in $et Interest Income ($II or changes in the market value of e1uityare the primary focus for Banking Book.

'he following methodologies are adopted by a bank for managing interest raterisk 3

• -arking to market on a daily basis and holding period clearly defined.

• %rice risk is measured by adopting internally developed Jalue at Risk

model or BasleCs ommittee on Banking *upervisionCs standardi"edapproach is followed.

• 'he cut#loss limits and duration and composition of the portfolio

stipulated Banking Book.

• In the short#term the earnings impact is 1uantified by !ap Analysis.

• In the long#term, the market values of assets and liabilities and off balance sheet positions are estimated with the help of 7uration !apanalysis.

• *imulation analysis is performed to accommodate the dynamic

behaviour of balance sheet.

It is a general understanding in the banks that crystalli"ation of credit risk i.e.generation of $on %erforming Assets is only the factor that is affecting theprofitability in view of provisioning implications. But, the mismatched assetsand liabilities, in a volatile interest rate scenario, could also trigger losses andthe severity of which could be far deeper than the effects of $%As. 'o

conclude, the potential for profitability or losses due to mismatches issignificant. 'hus, the magnitude of market risk should be clearly understood,identified, measured, monitored and managed.

C#R"#RATE G#VERNANCE

+or long, the orporate *ector in India has been dominated by certainfamilies who cannot hold together after the demise of the heads of thefamilies. 'he investors in the e1uity capital of such companies tend to losebecause they are not running on professional basis. onse1uently, orporate!overnance is now being insisted so that the change at the top does notaffect the working of an enterprise.'oday, global concerns are e&pressed towards increasing long#termshareholdersC value. *ince the shareholders are residual claimants, in a well#performing capital;financial markets, what ma&imises shareholdersC valuemust necessarily ma&imise corporate value and best satisfy suppliers,creditors, customers and public#all stakeholders, governance practices.orporate !overnance includes well#defined systems @ processes to protectshareholdersC interest. In short, orporate !overnance refers to the )ointresponsibility imposed on the Board of 7irectors and management to protectthe rights ; interest of shareholders @ inhance shareholdersC value.

!ood orporate !overnance has the potential to shape the economy and thecapital market of a country. 8mpirical studies corroborate the fact that markets



react positively to well#managed companies, *o with the adoption of goodgovernance practices, companies can take appropriate decisions for thebenefits of owners as well as shareholders @ other stakeholders.'he increasing number of scams taking place in Indian orporate *ector and

being e&posed to internal @ e&ternal competition due to economicliberalisation have left no choice but to go for improving orporate!overnance practices.&hat is Cor,orate Go;ernance A credible and professionally managed8fficient Business *ystem.The nee- +or Cor,orate Go;ernance% When we globalise, need to followglobal standards (post liberalisation.+7I in *econdary market.adbury committee came up in 0K for orporate !overnance."recursor >e+ore i0,le0entation in In-ia4II Ape& body ommittee whether industry can evolve voluntary code of

conduct.*8BI appointed Kumaramanagalam Birla ommittee what is happeninginternationally and how we can adopt. 'hese recommendations were studiedand *8BI introduced clause E? in listing agreement.&hat is clause ?@(-odification in isting, 'ransparency, -ore disclosures, egal framework, code of conduct."ur,oseode of Best %ractices(redibility, 'ransparency, 8fficiency, Responsibility and Accountability of -anagement to Board, Board to *hareholders.The in*re-ients %Board of 7irectors, Audit ommittee , Remuneration of 7irector, Boardprocedures, -anagement, *hareholders, Report of orporate !overnance,ompliance. Di0ensions o+ Cor,orate Go;ernanceLuality of performance, 81uity 3'ransparency, *ocial Responsibility 3 Accountability, Luality of %erformance, -anagement, Appointee of *hareholders, to take care of shareholders interest, -ake shareholdershappy.,*hareholdersC delight (Happiness 'hrough ustomersC delight(Happiness'hrough 8mployee delight.

Hence, -anagement#A $oble %rofession spreads happiness.• *hareholder delight G shareholder Jalue.

• *hareholder Jalue G -arket apitalisation.

Hence -anagement Responsibility 8nhance -arket apitalisation.&hat is Mar1et Ca,italisation(

• -arket apitalisation depends on R:8 (Return on 81uity.

• !rowth G business#8arnings.

• Industry profile G !rowth prospects %erpetuality.

• Luality of -anagement G ompetency, 'ransparency, 8thics.

• Intangible Assets G Brand 81uity others.

• -anagement G a multi#dimensional task, challenging task.



Role o+ Mana*e0ent

• Board of 7irectors obviously must ensure -anagement, which can

perform. %erform well when market is good. %erform well when market isbad. %erform when the market is good or bad.

Rele;ant ,ro;isions o+ clause ?@Board of 7irectors.Board procedures.-anagement.&hat is E.uit/(

• 81uity transparency G ob)ective. $o privileged investor. $o privileged

shareholders. Accurate G transparent information. *ingle large holder cancall the shots .Widely dispersed shareholders G -anagement can call theshots. $eed is to protect small shareholdersC interest.. Independent non8&ecutive 7irector. Audit ommittee. ompensation. urbs on insidetrading. 'imely, accurate and sufficient price sensitivity information. Accounting *tandards. *mall shareholder 7irector. ritical factor#trulyindependent 7irectors.

Social res,onsi>ilit/ o>ecti;es

• !ood orporate citi"ens G compliance of various laws. Interest of

secondary shareholders G depositors creditors, etc. How independent areIndependent 7irectors G appointment procedure. Role of Institutional7irectors. +irewall between +und -anagers and $ominee 7irectors.

Ho7 -o 7e -i++erentiate >et7een accounta>ilit/ o+ non9e<ecuti;e an-e<ecuti;e -irector (- Ade1uate compensation of non#e&ecutive director.

B/ K 4K4 Nohria CMD Cro0,ton Grea;es Lt-4!

C#R"#RATE G#VERNANCE IN"$BLIC SECT#R BANKS

'he !overnment ownership of a bank has a potential to alter the strategiesand ob)ectives of the bank as well as the internal structure of the governance.onse1uently, the general principle of sound corporate governance is alsobeneficial to !overnment owned banks.

'o enhance corporate governance, it is of importance that banks are able toarticulate their corporate values, code of conduct and standards of appropriate behaviour. 'he issues that emerge in promoting corporategovernance in the Indian banking system will include role and composition of the Board, disclosure re1uirements, integrity of the accounting practices andthe control systems.

I will e&amine areas for ma)or initiatives under two categories G one relating tosome basic issues to be addressed for promoting corporate governance inpublic sector banks and the other on resetting of the Board of 7irectors.

'he Basic issues are 3



• +irstly, it is a pre#re1uisite to have strategic ob)ectives, if sound

corporate governance practices are to be promoted in an organisation. Arising from this, it is imperative that the !overnment as owners of thepublic sector banks, which dominate the Indian Banking *ystem, spell#

out strategic ob)ectives while continuing !overnment ownership.

• At the stage of nationalisation, the ob)ective of promoting social

banking was well set out and has resulted in the success achievedover the past three decades. Having achieved, a stable framework andinfrastructure for supporting social ob)ective, it is perhaps, time to re#look at the working arrangement. A fresh working arrangement needsto be put in place to clearly demarcate the social and commercial roleof the banking, as the two will have to work on different reward andrecognition system in view of varying nature of risk and responsibility.While, banks may continue to e&tend network support, lending to socialbanking areas can be increasingly channelled through institutions likeKJI, 7istrict Industries entre as well as through $!:s. !overnmentsponsored schemes can be increasingly channelled through suchinstitutional mechanism, with bank funding the same through bonds.

• *econdly, the e&tended ownership of banks arising from public

shareholding on dilution of !overnmentCs stake will need a frameworkfor constitution and functions of the Board. 'his will have to be built intothe scheme of dilution. It has to provide for ade1uate representation onthe Board and through A!-, an effective say in the areas concerning

the shareholders interest. 'his has to precede further public issues of %*Bs so as to find acceptance in the market and a better pricing too.

'hat said, I would now look into the issue of corporate governance throughrestructuring the Board of 7irectors. 'he crucial issues in this area will be 3

• 'o ensure that optimal strength of the Board of 7irectors are available

at all times, through a process of retirement on rotation basis. ongspells of truncated board, followed by over stretched tenure of fullBoards is not conducive for adopting best practices.

•

'o create a database of professional directors at national level for appointments to the banks board.

• 'o redraw the composition of functional and non#e&ecutive directors on

the board. 'his will include delinking the role of hairman of the boardand the 8: of the bank. Additional positions at the board level mayinclude functional heads of credit, treasury and technology areas.

• 'o recast the committee of directors, to address more focused issues

on critical areas including 3

- Articulating corporate strategies.



- redit risk management practices.

- Remuneration and recognition system.

-Internal control and audit systems.

- Approving documented policies and procedures on Asset andiability -anagement, redit Risk -anagement, 'echnology and:perational Risk -anagement.

• At the functional level, the board will oversee the discharge of

management responsibilities and delegated powers throughappropriate reporting mechanism and practices and procedures, whichare duly approved by the Board.

• redit decisions will be controlled more through reporting on creditconcentrations and adherence to e&posure norms, in place of delegated powers for credit sanctions.

CA"ITAL ACC#$NT C#NVERTIBILIT'

'he 'arapore committee on capital account convertibility has recommended athree#year timeframe for full convertibility by ???#5///. 'he five#member panel headed by former RBI 7eputy !overnor, *. *. 'arapore, presented itsreport to RBI !overnor in Mune ?4. Highlighting the preconditions for achieving a full float of the rupee, the committee called for3 (I A reduction of

the gross fiscal deficit to 2. per cent by ???#5///, (II An average mandatedinflation rate of 2# per cent, (III total deregulation of interest rates by the endof this fiscal itself, (IJ a reduction in the cash reserve ratio (RR of banks tothree per cent and (J reduction of $%A to < by the year 5///.

If these signposts are not sighted along the way both the timetable and scopeof capital convertibility would have to be alerted.

'he committee has recommended the phased liberalisation of capital inflowsand outflows.

'he panel has recommended that in 5///, a stock taking of the progress onthe preconditions as well as the impact of the measures outlined in the reportshould be undertaken. 'he timing and se1uencing of convertibility measureswould be facilitated by the proposed changes in the legislative frame workgoverning foreign e&change transactions as envisaged in the +oreign8&change -anagement Act (+8-A.

'he most important precondition for convertibility, according to the committee,is a stable macro#economy including sustainable fiscal deficit. It hasrecommended a reduction in the centers= gross fiscal deficit to !7% ratio froma budgeted E. per cent in ??4#?> to E per cent in ??>#?? and further to 2.per cent in ???#5/// accompanied by a reduction in the states deficit as well

as a reduction in the 1uasi#fiscal deficit. Any slackening in the pace of fiscal



ad)ustment would render the task of opening up the capital account difficultwith accompanying dangers of slippages, rollbacks and reversals of capitalflows.

'he ommittee has warned that the practice of financing the amoritisation of !overnment borrowings out of fresh borrowings is unsustainable and stronglyendorsed the 'enth +inance ommission recommendations for the institutionof a consolidated sinking fund for the public debt.

RISK INV#LVED IN BANKING B$SINESS

Banking is primarily a business of accepting and managing risk. BankCs mainrole is intermediation between those having resources and those re1uiringresources, investors do not want to accept the risk of default on the parts of users. 'herefore, Banks came into the scene and assured prompt repayment

of funds and accepted the risk of default. As a compensation, they earninterest margin between what they pay to the investors and what they chargefrom the borrowers.

I0,ortant Ris1s%

Cre-it Ris1

'he risk of erosion of value due to simple default or non# payment by theborrower.

Strate*ic Business Ris1

'his is the risk that entire lines of business may succumb to competition or

obsolescence. e.g. .%. is a CsubstituteC product for large corporate loans. 'hisrisk also occurs when a bank is not ready or able to compete in a newlydeveloping line of business. ate entry makes sometimes, difficult to achievecompetitive advantages.

Re*ulator/ Ris1

Banks are licensed to do business. 'his license may be revoked, whichrenders significant capital investment worthless, e.g. apital Ade1uacyRe1uirement.

#,eratin* Ris1

When the systems simply do not function properly resulting in losses of funds.In ??/s several investment banks lost significant sums due to trading errors,which could not be detected i.e. system malfunction.

Co00o-it/ Ris1

'he value of stocks and bonds of various companies are sub)ect to this risk.

Hu0an Resource Ris1

8N# 7eparture of an employee with specialised knowledge can bring certainsystem to halt due to lack of proper incentive.

Le*al Ris1



'he risks are difficult to be anticipated as they may be unrelated to prior events.

"ro-uct Ris1

When a financial services product may become obsolete or uncompetablee.g. A'-s developed by banks and improved version brought out later bymanufacturers.

Interest Rate Ris1

It can create a li1uidity crisis.

Li.ui-it/ Ris1

Inability to pay desired withdrawals due to asset liability mismatch.

Currenc/ Ris1s

It is the risk of e&change rate volatility .Settle0ent Ris1

It is a particular form of default risk which involves bankCs competitors.

Mana*e0ent o+ Ris1

• Intelligent lending decisions

• 7iversification

• 'hird %arty !uarantee

• 7erivative market through the use of swaps and forward contracts

STRATEGIES F#R S$RVIVAL

• %ublic *ector Banks should be given greater autonomy with respect to

recruitment and promotion of personnel and in determining organisationalstructure.

• 'o adopt more general approach for Asset iability -anagement3

In respect of rate, yield, volume and maturity.

• oncentration on management of credit risk.

• While high level of $%A has come down volume still remains large.

• Better management needed to e1uip @ operate in deregulated

environment.

• 8&pertise needed for developing necessary treasury management while

managing investment portfolio.

#THER IM"#RTANT AREAS

• ustomer *ervice.

• Housekeeping through upgradation of technology for increasing

productivity.



• 7iversification of Business.



$NIVERSAL BANKING

!lobalisation, liberalisation and deregulation of financial markets in manydeveloped and developing countries have resulted in increased

disintermediation and has made commercial banks vulnerable to interest raterisk. Rela&ing e&change controls, adopting uniform accounting practices inregard to income recognition, asset classification and provisioning norms andprescribing capital ade1uacy norms has further aggravated the position. $owthe developments in information technology and telecommunications areallowing international pooling of financial resources thereby spreading the riskacross more than one market. As a result, there is severe strain on interestspread and bottom line of banks.

Amidst all the above said development banks in the developed countriesstarted emphasising on new sources for non#interest income to arrest thepressure on their bottom lines. 'he efforts of many foreign banks have yieldedgood results as their income from non#fund based business to total incomehas increased manifold. However, this process has led to diversification intheir e&isting activities. In many developed countries, besides traditionalactivities like accepting deposits and making advances, the banks are nowundertaking the following activities G

• +inancing fi&ed investments in industrial pro)ects by way of making

loans and advances on a longer term

• *ecuritising debt

• 'rading in financial instruments, foreign e&change and its derivatives

• reating;financing venture capital funds

• 0nderwriting new debt and e1uity issues

• %roviding corporate advisory services including advice on mergers and

ac1uisitions

• -aking investment management and providing depository services

• *elling insurance products

• Holding e1uity of non#financial firms.

0ndertakings so many activities by commercial banks in various countries haschanged the face of banking from O:mni#present banking facilitiesO to O:mni#potent bankingO having multifarious functions and selling;marketing their newproducts and many modern banking services. 'his development has broughtto the fore the concept of 0$IJ8R*A BA$KI$!.



0niversal banking means providing diverse kind of banking services by banks.0nder universal banking, world#over, commercial banking and investmentbanking activities with both e1uity ad debt are integrated and these servicesare provided by the same institution under one roof.

Bene+its o+ $ni;ersal Ban1in* S/ste0

. 8nables a bank to diversify its risk profile and also its income streams.

5. :ffers national competitive advantage at the systemic level by reducingcapital cost.

2. 'he risk of bankCs failure and therefore the cost thereof is reasonablyhedged when a bank is performing diversified activities.

E. Bank has the benefit of economies of scale and scope.

. 'he customer is also benefited as he gets one stop banking facilities.

De0erits o+ $ni;ersal Ban1in* S/ste0

i. 0nder the universal banking system various financial services includinginvestment#banking facilities are provided under one roof. It is,therefore, feared that the universal banking may pose the risk of conflict of interest and may not provide sufficient protection to investorsbecause the bank has inside information on the industry;unit andobviously it would like to protect its own interest.

ii. *ometimes riding the enthusiasm the bank may start a new activity for which e&pertise is not available with it. 'his may even result in failure of the bank.

iii. 0niversal banking results in greater economic efficiency in the form of lower cost higher output and better product mi& on the other side if oneuniversal bank collapses, it leads to a systemic financial risk.

iv. 'he system of providing all services under one roof may prevent theuniversal banks from developing the highly specialised e&pertise

needed to compete in todayCs financial markets.

v. 0nder the universal Banking system, the organisational structures arebig and become overly bureaucratic, which may create problems inattracting top 1uality employees.

$ni;ersal Ban1in* In In-ia

Banks in India are already practicing universal banking by providing a wholerange of financial services. Banks in India are resorting to O+inancialonglomeratesO route. -any public sector banks have set up subsidiaries for

providing various financial services.



'he following financial services are already being offered by the commercialbanks through adopting the O+inancial onglomerateO route in India.

i. 'he ommercial banks are active in providing pro)ect finance,

wholesale credit, retail credit, housing finance and mortgage credit.redit derivative products such as factoring, leasing and hire purchaseand number of non#fund based products like guarantees and letters of credit are also being provided.

ii. A good number of commercial banks have set up mutual funds throughtheir subsidiaries.

iii. redit card business is the recent innovation in the Indian commercialbanking.

iv. !old banking is another new product recently launched by a fewcommercial banks.

v. -ost of the commercial banks are actively participating in the moneyand capital markets.

vi. ommercial banks are also providing advisory services through their merchant#banking arm.

#FFSH#RE BANKING

• It refers to international banking business involving non#resident foreign

currency dominated assets and liabilities.

• It refers to banking operations that cover only non#residents and do not

mi& with domestic banking.

• 'his banking is carried out in about 5/ centres throughout the world

which offers following benefits 3

•

8&emption from minimum reserve re1uirement.• +reedom from control on interest rates.

• ow or non#e&istence of 'a& @ evies.

• 8ntry for large international banks is relatively easy.

• icense fees are generally low.

• lose pro&imity to important loan outlet and deposit sources.

8& 3 Bahrain is in offshore base for petro#dollars



MERCHANT BANKING

-erchant Bankers are financial intermediaries. 'hey act as intermediaries inthe process of transfer of capital from those who own it to those who use it.

-erchant Banking is an agency, retained by a company to advise and assistin capital structuring;restructuring and its mobilisation within the prescribed,regulatory framework. 'hus, the merchant bankerCs role can be institutionalloan syndications, institutional placements, advisory services, includingmergers;.ac1uisitions;alliance and primary markets.

In primary markets a merchant banker is one of the many important agenciesretained by the company to assist it in mobilisation of funds. However, there isa critical difference that a merchant banker helps, selects and co#ordinatesthe work of other agencies. In the process the merchant banker has to

shoulder the high responsibility of an elder brother and be indirectlyresponsible for the acts of other agencies.

In Indian conditions, -erchant Banking is understood ordinarily as relatedmainly to issue house activities. Issue house activities include counselling,corporate clients who are in need of capital, capital structure, form of capital tobe raised, terms and conditions, under#writing, timing and preparation of prospectus, publicity for grooming the issue etc.

It includes following range of services 3

• %ro)ect counselling and appraisal.

• ounselling on capital restructuring.• oans syndication.

• %ublic issue management.

• 0nderwriting of shares and debentures.

• Acting as Banker to the issue.

• Acting as Banker for the Refund orders;collection of call money.

• Handling of interest and dividend warrants.

• ounselling for $RIs.

• %ortfolio -anagement etc.



TREAS$R' MANAGEMENT

'he domestic treasury management have three main ob)ectives3

a. 'o maintain *tatutory Ratios, namely RR and *R as stipulated by theRBI from time to time.b. 'o ma&imi"e yield on the funds deployed.c. 'o manage the funds in such a way that the short term liabilities are

matched with the corresponding assets without any strain on the fundsmanagement. .

'he prime ob)ective is to ensure that the Bank at all times adheres to thestatutory obligations of the entral Bank stipulated and modified from time totime. Any default, apart from attracting severe penalties would also attach astigma of non#compliance of *tatutory obligations and hence the 'reasury7epartment has to constantly vigilant on this front.

*ince the yield earned on deployment of funds for complying with statutoryobligations would necessarily be low, it is for 'reasury 7epartment to look for other better and remunerative avenues for deployment of residual funds. Inthis respect, the non#*R investments such as investment in e1uity shares of corporates, debentures, bonds of public sector, units of 0'I, commercialpapers and floating interest rate bonds etc. assumes lot of importance.

'he liability management has assumed importance these days which aspectwas not given due importance earlier. 'he liability management includesmatching of liabilities with assets of corresponding maturities, rate of returnand investment risk. 'he constant comparison of these three aspects is amust if any treasury department is to make most of the opportunities whiche&ists in the treasury operations.

'he *R component of any bank consists of mainly the following 3

a. entral !ovt. oans.b. 'reasury Bills GE;?;>5 and 26E days.c. *tate 7evelopment oans.d. 'he bonds floated by *tate sponsored bodies such as *tate 7evelopment

orp, *tate 8lectricity Board etc, as also securities floated by -unicipalcorporations and other developmental agencies repayment of which and

payment of interest on which is guaranteed by *tate !ovts ;entral govt.e. Bonds issued by All India financial Institutions which are specifically floatedas approved securities for the purpose of *R.

f. ash on hand, Balance with other Banks and the portion of RR which isin e&cess of he statutory re1uirement. RR comprises of the balances of the branches of the Bank maintained with the Reserve Bank of India atvarious centres put together.In todayCs conte&t the emphasis has shifted from mere -aintenance of RR and *RC to -anagement of R and *R. 8ffective managementof the treasury has an important role to play in the profit management of the Bank.



INTEGRATED TREAS$R'

Forei*n E<chan*e an- Mone/ Mar1et #,erations

As the names indicate +oreign#8&change -arket (+N#-K' operationsinvolve conversion of one currency into another, whereas -oney -arket (-#-K' operations involve only transacting in any particular currency.

In a free and competitive market place, the forces of arbitrage opportunismensure that 3. A currency with higher rate of interest is at discount for forward delivery5. A currency with lower rate of interest is at discount for forward delivery2. 7iscount;%remium (forward e&change differential is e1ual to net

accessible interest rate differential between the two currencies involved.0nder perfect market conditions, e1uilibrium will be attained only and if

forward e&change differentials between currencies are e1ual to their interestrate differentials. +orward e&change differentials are commonly referred to as+N#*WA% differences or *WA% points.In as much as Indian foreign e&change markets as yet are not fully free nor completely competitive, forward e&change differentials of various foreigncurrencies against Indian Rupee are not necessarily e1ual to interest ratedifference between the relative currency and Indian Rupee. As a result of gradual liberalisation of Indian markets since ??2, some co#relationshipbetween +& forward differentials (*WA% points and relative interest atdifferential has since come to play, albeit, occasionally and in a very limitedsegment.

onse1uently, Indian +N and 7omestic -oney -arkets are still not free fromarbitrage. 'here are occasions when interest rate differentials and forwardswap difference are not e1ual and such imperfect market conditions offer scope for arbitrageurs to e&ploit the situation by *wapping foreign currencyinto Indian Rupees or vice versa. 'he regulators, with a view to movingtowards perfect market conditions, have been gradually permitting marketparticipants(Authorised 7ealers to freely borrow;invest foreign currencies;inoverseas centres. However, presently as the e&tent of this freedom is limited(< of unimparied tier G a capital of A7*, market is yet not arbitrage free. Authorised 7ealers, having simultaneous access to both +ore& and -oney-arkets can 1uickly sei"e arbitrage opportunities by their *WI+' and co#

ordinated actions. As such it is of paramount importance that both fore& and-#-K' activities are undertaken in an integrated manner preferably under single roof and under command of same authority.:ur Bank, by establishing 'reasury Branch, has put in place, re1uiredsystems under which various market opportunities, including those arising onaccount of imperfect co#relationship between +N#-K' and -#-K' can befully e&ploited for augmenting BankCs profits. However, while undertakingthese activities, it has to be ensured that RBI guidelines in this regard arestrictly adhered to. +urthermore Risk -anagement parameters of the Bankare to be meticulously followed.



BRIDGE L#ANS

Banks are permitted to sanction Bridge oans to the companies for a period

not e&ceeding one year against e&pected e1uity flows;issues. *uch loansshould be accommodated within the ceiling of < of incremental deposits of the previous year prescribed for the bankCs investments in ordinaryshares;convertible debentures of corporates including %*0 shares, loans tocorporates for meeting promoters contribution and units of mutual fundschemes, the corpus of which is not e&clusively invested in corporate debtinstruments. RBI has also advised banks to formulate their own internalguidelines with the approval of their Board of 7irectors for grant of such loansand to e&ercise ade1uate caution and attention to security for such loans.

'hese loans are normally tied up with the underwriting commitments by other

Banks;+inancial Institutions and thus considered secured and self li1uidating,though no tangible security is available to the bank, the control mechanismadopted in his regard interalia includes the following aspects 3

. %ublic issue should have the approval of relevant authorities including*8BI.

5. 'he e&tent of Bridge oan is related to the specified percentage of theamount actually called up each time.

2. 'he period of Bridge oan is related to the time taken for completion of

various formalities related to public issue.

E. *uch Bridge oans are normally considered in AAA;AA rated accountswith the Bank preferably where the lending Bank is Banker to the issue.8&ceptions to this rule can be made only in the case possessing highmerits. In case of consortium accounts, $: from the leader to beobtained.

. +or ensuring proper end use of the Bridge oan, the disbursements aremade through a special account so that the funds do not get mi&ed up.

6. 'he utilisation of Bridge oan is allowed for the purpose for which thepublic issue has been floated. 'his is ensured by obtaining writtenstatement from the company as to how the amount of Bridge oan is goingto be spent. *upporting documentary evidence is obtained wherever considered necessary. Additionally, the ompany may be asked to submita certificate from a reputed hartered Accountant about the end use of funds.

Bri-*e Loans to Go;ern0ent

Banks should not e&tend bridge loans;interim finance for activities, which arere1uired to be legitimately met out of !overnment resources;budgetaryallocations.



Bri-*e loans a*ainst recei;a>les +ro0 Go;ern0ent

Banks should not e&tend bridge loans against amount receivable fromentral;*tate !overnments, by way of subsidies, refunds, reimbursements,

capital contributions, etc., sub)ect to the following e&ceptions 3

a. Banks can contribute to finance subsidy receivable under the normalretention %rice *cheme, for periods upto 6/ days, in the case of fertiliser industry.

b. Banks can continue to grant finance to e&porters against receivables from!overnment such as 7uty 7rawback and I%R*, as per the e&istingguidelines.

Banks may consider sanction of bridge loan;interim finance against

commitment made by a financial institutions and;or another bank only incases, where the lending institutions faces temporary li1uidity constraint, andsub)ect to compliance with the following conditions

a. 'he bank e&tending bridge loan;interim finance must obtain prior approvalof the other bank and;or financial institution, which has sanctioned theterm loan

b. 'he sanctioning bank must also obtain a commitment from the other bankand;or financial institution that the latter would directly remit the amount of term loan to it at the time of disbursement

c. %eriod of such bridge loan;interim finance should not e&ceed four months.0nder no circumstances, should banks allow e&tension of time for repayment of bridge loan;interim finance,

d. Banks should ensure that bridge loan;interim finance sanctioned anddisbursed is utilised strictly for the purpose for which the term loan hasbeen sanctioned by the other bank and;or financial institution.



HEDGE F$NDS

&hat are he-*e +un-s(

Hedge funds can be defined as eclectic investment pools organised as privatepartnerships for wealthy individuals and institutions, and very often, for offshore residents, primarily for ta& and regulatory purposes whose managersare paid on a fee#for#performance basis. Appro&imately, #5 per cent of post#ta& profit accrues to the hedge fund manager apart from themanagement fee of per cent of the assets, annually. Hedge fund managersas partners, have their own capital invested in the funds they manage. 'his isin sharp contrast to the mutual fund industry, where managers typically do nothave their own fund, invested. 'his has important implications for hedge fundmanagers, as they tend to be oriented towards achieving the highest absolutereturn without taking e&cessive risk.

T/,es o+ he-*e +un-s%

Hedge funds can be classified into following broad categories3

• Macro +un-s G 'hese take a view on the macro#economic policies of

select countries and attempt to profit from perceived discrepancies inthem.

• Glo>al +un-s G 'hese invest in emerging markets. 'hose dedicated to

specific regions in the world, invest in these regions, too. While they takepositions on directional moves in particular markets as the macro fundsdo, they tend to be more bottom#up oriented in that they pick stocks in

individual markets they favour.• Lon* onl/ +un-s G 'hese are traditional e1uity funds that use leverage

and charge incentive fees.

• Mar1et9neutral +un-s G 'hese funds attempt to reduce market risk by

taking offsetting long and short positions and invest in a wide variety of instruments, including those that arbitrage stock and inde& futures, or those that take positions on yield curves in bond markets.

• Sector +un-s G 'hese have an industry focus that includes a wide set of

industries 3 health care, financial services, technology etc.

• Short sale +un-s G *hort sale funds borrow securities they )udge to be

CovervaluedC from brokers and sell them in the market, hoping to buy themback at a lower price when repaying the broker. 'hese funds attractinvestors wishing to hedge long#only portfolios, or those wishing to take aposition that the market is likely to decline.

• E;ent9-ri;en +un-s G 'heir investment theme is to capitalise on events

that are seen as special situations. 'hey encompass distressed securitiesfunds that focus on securities of companies in reorganisation or bankruptcy, and risk arbitrage funds that take a position on the likelihoodof an announced merger or ac1uisition going through by simultaneouslybuying stocks in a company being ac1uired and selling stocks in theac1uiring company.



• Fun-s o+ +un-s G 'hese are hedge funds that allocate their portfolio of

investments, sometimes with leverage, among a number of Hedge +unds.



LETTERS #F CREDIT

LETTERS #F CREDIT also called 7ocumentary credits are generally usedfor facilitating international trade. However, its use for the domestic (localtrade is also not unknown.

*imply put, etter of redit is an instrument for settling trade payments. It isan arrangement for making payment against documents. 'o elaborate, ; isan undertaking by a bank on behalf of its customer to pay the value of goodsor services to its supplier against submission of specified documents;meetingterms and conditions set out in the ;.

"ARTIES T# A LETTER #F CREDIT

#"ENER is the one at whose re1uest ; is issued by a bank. :pener of ;

is importer or buyer of goods;services.

ISS$ING BANK is the Bank which issues ;.

BENEFICIAR' is the one in whose favour ; is established. Beneficiary of the ; is the e&porter;seller.

ADVISING BANK is the bank which advises the issuance of ; to thebeneficiary. Advising bank verifies the authenticity of the ; before advisingthe beneficiary.

NEG#TIATING BANK is the bank which negotiates documents stipulated inthe ; and is authorised to pay the value (if terms;conditions and documents

as set out in the ; are complied with to the beneficiary.

In addition to above, some times C#NFIRMING BANK is also found in thechain of ; transactions. onfirming Bank is the one which adds its ownconfirmation to pay the value. onfirming bank comes into the picture whenbeneficiary is not comfortable with the opening bank , its creditworthiness or country risk. In such cases, opening bank will arrange to get the ;confirmed through an acceptable bank to the beneficiary.

When opening bank is not maintaining an account with negotiating bank, ithas to reimburse the payment made by the negotiating bank, In such cases,opening bank authorises the negotiating bank to claim the amount of

reimbursement from the bank with which opening bank maintains an account.*uch a bank (where an account is maintained by the opening bank is calledREIMB$RSING BANK4

T'"ES #F L=C%

Re;oca>le L=C is a credit which can be amended or cancelled by the ;issuing bank without notice to the beneficiary.

Irre;oca>le L=C is a credit which cannot be amended or cancelled without theconsent of the parties to ;. In terms of Article 6 of 0%7 //, all ;s areirrevocable unless specifically mentioned as revocable.



"a/0ent cre-it is a sight credit, and on presentation of documents specifiedin the ;, value will be paid. In such credits, no bill of e&change or usance billis drawn.

De+erre- ,a/0ent cre-it is a credit under which designated bank makespayments on due dates determined as per terms of ;. *uch ; specifiesthe maturity at which payment has to be made and how such maturity isdetermined. $o drafts;bills of e&changes are drawn under this ;.

Acce,tance cre-it is similar in nature to the deferred payment credit e&ceptthat under this credit, usance bills of e&change are drawn on specified bank or drawee for a specific tenor. 7esignated bank will accept drafts and honour thesame on maturity.

Trans+era>le L=C is a credit that can be transferred at the re1uest of thebeneficiary to another beneficiary in whole or part. However, second

beneficiary cannot transfer it to 2

rd

beneficiary. *uch credit must mention thatit is transferable.

Bac1 to >ac1 L=C is an ; which is issued on the strength of another ;.'his credit helps beneficiary to obtain another ; favouring his supplier. 'his; is like transferable ; e&cept that in case of transferable ;, original ;is transferred to another beneficiary, in case of back#to#back ;, a new ;is issued favouring second beneficiaries.

Re- clause L=C which makes available finance at pre#shipment stageenabling the beneficiary to procure and process goods. *uchpayment;finance at pre#shipment stage is authorised by the opening bank.

*ince clause to this effect is printed in red ink in the ;, it is called Redlause ;.

Green Clause L=C is a ; which contains a clause providing finance for warehousing;storing of goods at the risk of the opening bank till the goodscovered under the credit is put on board.

Re;ol;in* cre-it is a credit under which value and validity of the ; areautomatically reinstated on receiving advice from the issuing bank thatprevious documents have been retired and paid for. *uch credits maintainma&imum drawings under ;.

Stan-9>/ L=C is not strictly ;, It is a substitution of letter of guarantee and

covers only financial commitment. %ayment obligation arises only upon failureof performance. *tand#by credit originated in 0*A and is now widely used inmany countries. 0se of stand by credit in India is increasing in the light of growing liberalisation;globalisation. *ince obligation for payment arises out of non#performance under stand#by credit, opening such credit re1uires e&traprecaution.



EX"#RT FINANCE

E<,ort +inance can >e >roa-l/ classi+ie- in 3 cate*ories %

%re#shipment finance, and

5 %ost#shipment finance.

"re9Shi,0ent Finance can >e +urther -i;i-e- into

%acking credit in rupees.

5 %acking credit in foreign currency (%+,

2 Advances against incentives receivable from govt.

E Advances against duty draw#back.

"ost9Shi,0ent Finance can >e in the +or0 o+

%urchase of discount of e&port documents under confirmed orders.

5 $egotiation;payment;acceptance of documents under ;,

2 Advance against e&port bills sent on collection,

E Advance against receivables from !ovt.

8&port bills rediscounted in foreign currency, We will discuss only a few of the above facilities3

"RE9SHI"MENT FINANCE

%acking redit in Rupees is a loan;advance or credit facility granted to ane&porter for procuring and processing raw materials, etc. 'his also includesfinance for transportation, warehousing and shipping. *uch facility can be

granted to an e&porter who has a confirmed e&port order or irrevocable ; inhis name. 8&porter en)oying PAAC;PAAAC rating can be granted OR0$$I$! A:0$'O facility. Where ORunning AccountO facility has been grantedC,re1uirement of prior lodgement of ; is not insisted upon. However, ; firmorders should be produced in reasonable time, ORunning AccountO facility isthe one where that first debit is repaid by the first credit irrespective of the factthat such credit may not pertain to the debit being set#off against.

%acking redit should be repaid from the proceeds of the e&ports. In case it isrepaid from local resources, rate of interest, as applicable to domestic credit(commercial rate, should be charged.



%acking credit being in the nature of working capital finance is for short periodonly. 'hese advances are granted for period not e&ceeding >/ days atconcessional rate. 'his period can be e&tended by another ?/ days (total 54/days without reference to RBIQ for where delay is beyond the control of the

e&porter. However, higher rate of interest will be charged for such e&tendedperiod.

+urther, concession in rate of interests is available only if the e&port takesplace within reasonable time from availing of finance. *uch period should note&ceed 26/ days and in case it e&ceeds 26/ days, banks should chargecommercial rate of interest from the date of granting finance. In case noe&port takes place, banks are entitled to charge interest 5< abovecommercial rate.

%+ is packing credit denominated in foreign currency. 'his is done with a

view to avail of low rate of interest prevailing abroad which adds to thecompetitiveness of an e&porter, %+ funds can be used for import of rawmaterial and processing and then ree&porting or for usage in domesticpurposes. %+ is li1uidated by submitting e&port bills for collection or negotiation.

"#ST9SHI"MENT FINANCE

Forei*n Bills ,urchase- or -iscounte- % Increasingly, 1uite a lot of international trade is taking place without the mechanism of ;. Wheredocuments are tendered for purchase or discounting (not accompanied by

;, bank must ensure that the customer is of undoubted worth. *tatusreports, both, on the e&porter as well as the importers should be called for andkept on record. Bank should also verify the kind of goods being e&ported whilepurchasing;discounting the bills. If the goods are of special nature;made#to#order type, it becomes difficult to dispose of such goods in case the buyer fails to pay for it.

Ne*otiation o+ Forei*n Bills un-er L=C % is the most secured form of postshipment finance. Bank negotiates bills complying with terms and conditionsof the ;. Where it does so in pursuance of the mandate given by the issuingbank, negotiating bank is assured of receiving reimbursement from issuing

bank. Bills should be realised within period, failing which it will attractcommercial rate of interest.



ECGC SERVICES

As e&ports involve cross border movement of goods and services, theattendant risks are several. 'o mitigate these risks and to encourage bankers

to finance e&port trade on liberal terms, !overnment of India set up 8&portRisk Insurance orporation in Muly ?. It was renamed as 8&port redit @!uarantee orporation of India td. (8! in ?>2.

8! provides %olicies to e&porters and !uarantees to banks coveringvarious risks involved.

&hole Turno;er "ac1in* Cre-it Guarantee &T"CCG!

W'%! is a contract between 8! and Bank, whereby the orporationguarantees protection to Bank against losses sustained in the process of granting pre#shipment finance to e&porters.

'he banks which undertake to obtain cover for packing credit advancesgranted to its customers in all branches, 8! issues Whole 'urnover %acking redit !uarantee W'%!.

Almost all the banks in India have taken the guarantee since then.

Salient +eatures o+ &T"CRis1s co;ere-

• Insolvency of the e&porter.

• %rotracted default of the e&porter.

Guarantee co;era*e+ollowing is the e&tent of coverage 3

• $ormal goods # 4<• Ha"ardous goods # 66.66<

• **8;**I # ?/<

S0all Scale In-ustries 3 Anticipated Annual 8&port 'urnover not e&ceedingRs.5 lacs, irrespective of amount of local sales.

S0all Scale E<,orters 3 Anticipated Annual 'urnover not e&ceeding Rs. E/lacs w;w 8&port 'urnover not to e&ceed Rs. 5 lacs.

Re,ortin* o+ Li0its

Whenever new limits are sanctioned or e&isting limits enhanced, reduced or

cancelled, they should be reported to the orporation immediately but in anycase within 2/ days.

Discretionar/ Li0it

8very !uarantee mentions a limit (in terms of Rupees upto which the bankcan allow packing credit advances to any of its e&porter client without 8!Csapproval. 'his limit is called 7iscretionary imit (7. 4

Monthl/ Declaration an- ,a/0ent o+ ,re0iu0

All branches which have granted % have to submit a monthly declaration to8! along with the amount of premium payable on such declarations. 'he



amount of premium should be calculated at the rate of 4 paise per Rs. // per month on the total average daily products.

%remium is recovered from the e&porters immediately from 7; Account.

Filin* o+ clai0'he Bank should file a claim in respect of an advance within si& months fromthe date of Report of 7efault.

Rene7al o+ Guarantee

'he W'%! issued to the bank e&pires on 2/ th Mune every year and renewalsare made for a period of 5 months i.e. st Muly to 2/th Mune. IB7 takes care of the renewal.

&H#LET$RN#VER "#ST SHI"MENT EX"#RT CREDIT G$ARANTEE&T"SG!

W'%*! was introduced in our Bank w.e.f. .E.??4. It covers post#shipmentfinance granted to e&porters by Banks in the form of purchase, discount andnegotiation of e&port bills. It also covers advance basis and covers entirepost#shipment advance granted by the Bank. In the case of our Bank,W'%*! covers only purchase;discount of e&port bills and advance againste&port bills sent on collection both drawn under contracts.'he salient features of the W'%*! are as under 3Ris1 co;ere-%- Insolvency of the e&porter.- %rotracted default by the e&porter to pay post shipment advance due to

the Bank.- Buyers failure to pay;retire bill will not give rise to claim, unless our

e&porter has failed to ad)ust the advance"ercenta*e o+ co;er%

8&porter who is a Holder of *td. %olicy 8&porter who is not a Holder of *td.%olicy

**8;**I ?/< **8;**I 6<

:thers >< :thers 6/<

"re0iu0

%remium is payable on average amount outstanding calculated on a daily

product basis at the rate of 6 paise for Rs. // per month. %remium is to beborne by the Bank. %resently, we are covering only $on#; e&porttransactions under W'%*!.Re,ort o+ De+ault

In respect of post#shipment advances, non li1uidation of advances will be dueto non#payment by overseas buyer or due to problems in the importingcountries. However, the R:7 has to be filed only if, in the opinion of the bank,the post#shipment advances cannot be recovered from the e&porter in normalcourse. R:7 has to be filed within E months from due date or e&tended duedate or one month from date of recall, whichever is earlier.



Clai0slaims should be filed by the branch within 6 months from the date of filing of R:7 with the nearest office of the 8! which services the branch.

N#N RESIDENT DE"#SIT ACC#$NTS

$on#Resident deposit accounts are governed by regulations contained in the+8-A. An e&tract of relevant schemes;guidelines are as under 3Non9resi-ent #r-inar/ Ru,ee NR#! Account% can be opened by anyperson resident outside India. 'hese accounts can be opened in the form of savings, current, recurring or fi&ed deposits. %roceeds of inward remittancesor permitted currency tendered by the account holder during his visit to Indiaor transfers from rupee accounts of non#resident banks are permitted modes

of credits into $R: account. ocal payments, including payments for investments are allowed from $R: accounts. Remittance of current incomenet of applicable ta&es is allowed.oans to account holders can be granted in rupees for personalpurposes;carrying on business sub)ect to norms as applicable to residentaccounts. *uch loans can be granted to third parties also.$R: accounts can be held )ointly with residents.Non9Resi-ent Non9Re,atria>le! Ru,ee De,osit accounts% can be openedby any person resident outside India. 'hese accounts are opened in the formof term deposits only for periods ranging from 6 months to 26 months. Banksare free to determine rates of interest on deposits under this *cheme and onadvances against funds held in such deposits. Interest accrued on $R$Rdeposits is repatriable. However, if the interest is reinvested, amount of interest so reinvested will not be eligible for repatriation.$R$R deposits can be opened in )oint names with the resident.oans; overdrafts can be granted to the account holders and third parties for personal purposes;carrying on business against the security of $R$Rdeposits.Non9Resi-ent S,ecial! Ru,ee Accounts% can be opened by $RI whovoluntarily undertake not to seek remittance of funds held in these accountsas also income earned thereon. 'hese accounts carry the same facilities and

restrictions as applicable to domestic accounts of residents regardingrepatriation of funds and income thereon. 'hese accounts can be held in theform of savings, current, recurring or fi&ed deposit. *uch accounts can be held )ointly with residents. :perations in the account are allowed freely as in caseof domestic accounts. A special application#cum#undertaking form has been devised by ReserveBank of India for opening these accounts.Non9Resi-ent E<ternal! Ru,ee Accounts% can be opened by $RIs and:Bs. *uch accounts can be in the form of savings, current, recurring or fi&eddeposit. Balances held in the account can be repatriated outside India. Andtherefore, credits in the account are regulated as to the source. %roceeds of

inward remittances, che1ues drawn on foreign bank;branches, travellersche1ues or foreign currency notes or transfer from other $R8;+$R accounts



is permitted to be credited into $R8 account. :n the other hand, debits for local disbursements are allowed. Wherever regulations permit, debits areallowed for investment in shares;securities of an Indian company or for purchase of immovable property in India.

oans against the security of the funds held in the $R8 account can begranted to the account holder for personal purposes or for carrying onbusiness activity. Repayment of such loans will be made by means of either appropriating the deposit or fresh inward remittance or out of the local rupeeresources in the $R: account of the borrower. oans can also be granted for direct investment on non#repatriation basis or for the purpose of ac1uisition of flat;house for own residential use.Banks can grant fund#based;non#fund based facility to residentindividuals;firms;companies against the collateral of +7 held in $R8 account.however, for such loans, there should be no direct;indirect foreign e&changeconsideration for the non#resident depositor agreeing to pledge his deposit.

Income from interest is e&empt from Income 'a&. Balances held in the $R8accounts are e&empt from Wealth 'a&.Forei*n Currenc/ Non9Resi-entB! Accounts% can be opened by all $RIsand :Bs in currencies G 0* 7ollar, %ound *terling and euro. 'heseaccounts can be opened only as term deposit for maturities ranging from 5months and up to 26 months. All debits and credits permitted in the $R8accounts are permitted in +$R (B accounts also.*ince the deposit and interest thereon is denominated in foreign currencyonly, the depositor is not e&posed to e&change rate risk. However, ReserveBank of India does not provide e&change rate guarantee;cover to the banks.Banks can lend resources mobilised under these accounts without anyinterest rate stipulations made by Reserve Bank of India. 'hat is to say, bankscan determine rates of interest on loans made out of +$R (B funds.Resi-ent Forei*n Currenc/ Accounts RFC! can be opened by a personresident in India out of foreign e&change received as pension;any other superannuation benefits from his employer outside India or received asgift;inheritance or ac1uired when he was resident outside India.'hese accounts are maintained in foreign currencies only. 'hese accounts arefree from all restrictions regarding utilisation or foreign currency balancesincluding restriction on investment in any form outside India.E<chan*e Earners Forei*n Currenc/ Accounts Sche0e EEFC!% was

introduced in ??5 to enable e&porters and other e&change earners to retain aportion of their receipts in foreign e&change with an authorised dealer in India.//< 8&port#:riented 0nits or a unit in (a 8&port %rocessing Done or (b*oftware 'echnology %ark or (c 8lectronic Hardware 'echnology %ark mayretain 4/< and any other person resident in India may retain /< of theeligible inward remittances.88+ accounts can be held in the form of non interest bearing currentaccounts only. $o credit facility (funded or non#funded can be made availableagainst the 88+ balances. 88+ funds can be used for payments outsideIndia in the nature of current account.$NFIXED DE"#SIT SCHEME #F #$R BANK F#R NRIs



• Withdrawal in multiples of units of Rs.///;# alongwith interest without loss

of interest on continuing units.

• 0nit withdrawal will be treated as prematurely withdrawn.

• 7eposit together with interest is fully repatriable.

• It is treated as $R8 deposits.



NE& FINANCIAL SERVICES

Factorin*

It refers to management of receivables of a company by the financialintermediary for a fees. It may be with recourse or without recourse.

'he services offered by a factor can be some or all of the following 3

(i Administration of *ales edger of the client.

(ii *ervice to follow#up and collect the receivables.

(iii %urchasing receivable with recourse.

(iv %urchasing receivables without recourse.

For+aitin*It refers to purchase of debt instruments, without recourse to the e&porter. Ithelps the e&porters to concentrate on e&port front without bothering about thecollection of e&port bills.

8NI- bank has introduced a scheme of forfaiting from +ebruary ??5, under which it arranges to get bills of e&change;promissory notes discounted byoverseas forfaiting agencies on without recourse basis.

Factorin* Vs4 For+aitin*

Factorin* For+aitin*

. 'his is usually for credit transactionsof short term maturity.

. 'his is for credit transaction of usually longer maturity.

5. It may be with or without recourse. 5. It is always without recourse tothe e&porter.

2. ost of factoring is usually borne bythe seller.

2. ost is eventually borne by theoverseas buyer.

E. Here complete sales ledger accounting;administration can behandled by the factor.

E. It is on case to case basis.

Mutual Fun-s

• A -utual +und is one which pools resources from several investors and

manages the same with an ob)ective to ma&imise returns for theseinvestor members.

• 0nit 'rust of India started the first mutual fund scheme in India. +rom ?>4

ommercial Bank;+inancial Institutions are permitted to float -utual +undsthrough their subsidiaries.

•

In ??, the government of India permitted private sector to float mutualfund.



Venture Ca,ital

• It refers to financing of opportunities based on technical innovations in

contrast to our conventional security based lending. In other wards it is

financing of new ideas and technologies, e.g. +inancing pro)ects based onpotentiality for untried pro)ects promoted by a new promoter who is havingre1uired technical background.

• It is a high risk and high return business.

• -ain Jenture apital ompanies 3

. '7II G'echnology 7evelopment and Information ompany of Indiaimited.

5. R'+ G Risk apital and 'echnology +inance orporation imited.

2. 'he Industrial 7evelopment Bank of India=s Jenture apital +und.

E. redit apital imited.

Securitiation

• It is a process by which an illi1uid, non negotiable and high value financial

asset is converted into securities of small value which are tradable andtransferable.

• %arties to *ecuritisation#

'here are three parties to a transaction of Asset *ecuritistion3

. 'he ending Institution (also called originator, who offers credit assets for securitisation.

5. 'he 'rust (also called *pecial %urpose Jehicle which buys the assets andissues securities. Banks can discharge this role.

2. 'he Investors (who buys the securities

Custo-ial Ser;ices

a 'o provide agency services to customers for safe custody, collection of dividends;interest, bonus and other related functions related to shares and7ebentures for a fee.

b :rganisation offering ustodial *ervices 3 ity Bank, Hongkong Bank,*tandard hartered Bank, *tate Bank of India, Bank of Baroda, and *tockHolding orporation of India. -any other Banks and +inancial Institutionsare in the process of forming subsidiaries for starting custodial services.

Cor,orate A-;isor/ Ser;ices

c 'hese services are being rendered by banks to highly demandingcorporate clients.

d *ome Banks have e&tended computer terminals, to their corporate clientsso that important Banking services can be done from their office itself.

e Highly 1ualified staff are needed to attend varied needs of corporateclients like !7R;A7R, 8uroloans and new methods of risk management



like, *wap, :ption, +uture etc.

Leasin*

f easing can be defined as a transaction in which the owner of the Asset

(called 8**:R gives the same to another party (alled 8**88 for his use for a specified period of time in consideration of payment of leaserentals.

T/,es o+ Lease %

Financial lease : Which is also capital lease or full pay#out lease. 'histype of lease is used as a method of financing capitale&penditure.

Operating Lease: It is basically a short term lease. 'he period is verysmall as compared to the life of assets and the lease isusually cancelable.

Leveraged leave: When a leasing company borrows money frombank;financiers to buy a particular e1uipment with thepurpose to lease it out. It is known as a leveragedlease.

Hire "urchase

It means an agreement under which goods are let on hire and under whichthe hirer has option to purchase the same.

Hire purchase involves delivery of possession of the goods to the hirer and onpayment of last installment. 'he property passes on the hirer.

Loan S/n-ication

'his refers to a loan arranged by a Bank for a borrower who is likely to be alarge company, a local authority or !ovt. 7epartment.

%arties to a syndicated debts are 3

. Borrower 5. ead -anager or *yndicator 2. %articipating Bank

E. Agent Bank and .!uarantor.

Consortiu0 +inancin*

Where the entire credit needs of a borrowing unit is financed by a group of banks by forming a consortium.

It is a concept to promote collective application of banking resources.

S/n-ication Vs4 Consortiu0 Len-in*

. Both the systems provide for dispersal of risk amongst creditors.

5. In syndication the borrower can get a competitive price by asking for bidfrom different banks.

2. *yndicated redit is to be paid by during a fi&ed period which is not incase of consortium lending.



NE& FINANCIAL INSTR$MENTS

Mone/ Mar1et

• It may be defined as a centre in which financial institutions congregate for

the purpose of dealing impersonally in monetary assets. In a wider spectrum, a money market can be defined as a market for short termmoney and financial assets that are near substitute for money.

• *hort G'erm means generally a period less than one year.

• $ear *ubstitute to money means a financial assets which can be 1uickly

converted into money with minimum transactional cost.

Call Mone/ Mar1et

It is basically inter bank market centralised primarily in -umbai but with sub#market in 7elhi, alcutta, -adras and Ahmedabad. 'he participants of this

market are commercial and co#operative banks, who can borrow and lendfunds.

Call Money – on overnight basis

Notice Money – upto maximum 14 days

Re,os

g It is re#purchase agreement (R8%:* or ready forward or buy back.

h It includes the ac1uisition of funds through a sale of agreed securities witha simultaneous commitment to purchase the same on a pre#determinedfi&ed period, generally E days at a specified price.

i Bank use Repos deal for ad)usting *R;RR positions

(i.e. in case of *R surplus and RR deficit simultaneously.

Ter0 Mone/ Mar1et

) 7+Is borrow from this market for a maturity period of 2 to 6 months. Withinthe limits stipulated by RBI for each institution.

k Interest rates are market driven and the market is pre#dominantly?/ days market.

l As per IBA ground rules, lenders can not pre#maturely recall these fundsand as such this instrument is not li1uid.

Treasur/ Bills

'he treasury bills are short term promissory notes issued by !ovt. of India ata discount for ? days to 26E days.

Co00ercial Bills

ommercial bill is an instrument drawn by a seller of goods, on a buyer of goods. 0nder new bill market scheme, the commercial banks can rediscountwith approved institutions, the bills which were originally discounted by them,provided that the bills should have arisen out of genuine commercial tradetransactions.

Inter9Ban1s "artici,ation Certi+icate

'he IB%s are short#term instruments to even out the short term li1uidity

within the banking system.



'he IB%s are issued by any commercial bank and subscribed by anycommercial bank.

Glo>al De,ositor Recei,ts

It is 7ollar denominated instrument traded on a stock e&change in 8urope or 0.*. or both.

It represent certain numbers of underlying shares.

'he shares are issued by a company to an intermediary called depository,who subse1uently issues !7Rs. 'he physical possession of such shares iswith another intermediary called custodian who is the agent of the depository.

Mone/ Mar1et Mutual Fun-s

ligibility 3 It can be set#up by scheduled commercial banks,public sector financial institutions and mutual funds.

ligibility !or "ubscription : Individuals, orporate, $RIs on non#

repatriation basis and others.ock#in#%eriod 3 days

#eserve re$uirement : $il

!or %an&s

"tamp duty 3 8&empted

#egulatory 'uthority 3 RBI for %rivate *ector GRBI @ *8BI.

Certi+icate o+ De,osit CD!

It is a document of title to a term deposit. All ommercial Banks e&cludingRRB are authorised to issue 7s in form of usance promissory notes which

are transferable by endorsement and delivery. 7s can be issued toindividuals ,corporations, companies, trusts, associations @ can be issued to$RIs also but on non#repatriable basis.

(eriod 3 -inimum 7ays, ma&imum year.

'mount 3 -inimum Rs. lacs and in multiple ofRs. lacs.

Ceiling on )ssue 3 Banks can now issue any amount of 7.

Loc& #in %eriod 3 E days from the date of issue.

#eserve #e$uirement 3 ike other deposits

"tamping 3 As applicable to usance %$.

m $o loan can be granted against 7.

n 7+HI provides secondary market for 7.

o :n due date pay order should be prepared an e&changed with thecertificate when presented for payment of maturity value.

Co00ercial "a,er C"!

%s are unsecured, usance promissory $otes transferable by endorsementand delivery.

Eli*i>ilit/ % ompanies satisfying following eligibility criteria can aloneissue %s

'angible $et worth # -inimum Rs. E rores.



+und based W. # -inimum Rs. E rores or higher.

facility en)oyed

redit Rating #-inimum redit Rating %5 from RI*

A5 from IRA, %R5 from AR8 75 from +itch India Account *tatus *tandard Asset

urrent Ratio .223

%eriod of .% # 'hree months to less than year

-a&imum Amount of Issue a+or a company having -%B+ of Rs. 5/ r.and above //< of their ; limit.

b+or company having -%B+ of Rs. / crand above but less than Rs. 5/ R 4<

of ; imit.

-inimum Amount # Rs. lacs and multiples of thereof.

-aturity # A minimum of days and a ma&imum upto oneyear.

imits and Amount % can be issued as a Sstand aloneT product.Banks and +is will have the fle&ibility to fi& workingcapital limits duly taking into account the resourcepatterns of companies= financing including %s.

Issuing @ %aying Agent # :nly a scheduled bank can act as an I%A.

Investment in % # % may be held by individuals, banks, corporates,unincorporated bodies, $RIs and +IIs.

-ode of Issuance # % can be issued as a promissory note or in adematerialised form, 0nderwriting, not permitted.

7ematerialised Holding

Banks, +inancial Institutions (+Is, %7s and*atellite 7ealers (*7s are now permitted to makefresh investments and hold % only indematerialised form, effective Mune 2/, 5//

Deri;ati;e $sance "ro0issor/ Note D$"N!

In order to avoid physical delivery of bills to the rediscounting institutions, RBIhas permitted banks to generate 70%$s, on the strength of commercial bills

held by them. 70%$s, are e&empted from payment of advalorem stamp duty.Banks get these 70%$s rediscounted with 7+HI the 7+HI in turn sells these70%$s to other investors interested in such investment.

Discount an- Finance House o+ In-ia DFHL!

• 'he main share holders of this institution are G RBI, %ublic *ector Banks,

and +inancial Institutions.

• 'he main ob)ective of 7+HI is to develop an active *econdary -arket for

the money market instrument. It purchases and sells 'reasury Bills, 7sand %s. It rediscounts commercial bills.

• It borrows and lends call money on behalf of banks.



CREDIT RATING

redit rating indicating, in a summari"ed form, through symbol or letter therelative safety of timely payment of interest and principal of the debt

instrument of a borrowing company.

Cre-it Ratin* A*encies in In-ia%

%resently there are five rating agencies in India i.e. RI*I, IRA, AR8, 0'Iredit Rating and 7R India td.

CRISIL Cre-it Ratin* In+or0ation Ser;ices o+ In-ia Lt-4! %

%romoted by III, 0'I and other financial institutions and banks.

CRISIIs Ratin* S/0>ols an- their 0eanin*s %

De>entures % AAA G Highest safety, AA#High safety, A#Ade1uate safety, BBB#-oderate safety, BB#Inade1uate safety, B#High Risk, #7efault

Fi<e- De,osits % +AAA# Highest *afety +AA#High *afety+A#Ade1uate safety, +#High Risk +7#7efault.

Co00ercial "a,ers % %#Highest safety, %5#High *afety, %2#Ade1uatesafety, %E G Inade1uate safety, %#7efault.

$ote 3 RI*I utilises F (plus or G (minus signs for reflecting comparativestanding within the category.

ICRA In;est0ent In+or0ation an- Cre-it Ratin* A*enc/ o+ In-ia Lt-4!%

%romoted by I+I, 0'I and other financial institutions and banks.

ICRAs Ratin* S/0>ols an- their 0eanin*s %

De>entures ,re+erence shares Lon* Ter0 De>ts! % AAA#Highest*afety AA#High *afety A#Ade1uate safety, BBB#-oderate safety BB#Inade1uate safety B#Risk prone, #*ubstantial risk 7#default.

CARE Cre-it Anal/sis Research Lt-4! %

%romoted by I7BI$TI Cre-it Ratin* Lt-4 %%romoted by 0'IFITCH RATINGS INDIA ";t4 Lt- % A foreign company permitted by RBI to rate commercial papers.



CREDIT M#NIT#RING ARRANGEMENT CMA!

'he Reserve Bank of India introduced the redit Authorisation *cheme in?4, to e&ercise control over bank credit, to ensure proper appraisal of

needs and utilisation of credit in accordance with the national policies andpriorities and that the big borrowers did not pre#empt scarce resources. Bankswere re1uired to obtain prior approval of Reserve Bank of India under redit Authori"ation *cheme A* for credit proposals beyond certain specifiedlimits.

'he *ystem of redit -onitoring Arrangement (-A was introduced in:ctober ?>>, conse1uent to the withdrawal of the redit Authorisation*cheme (A*. 0nder -A banks were re1uired to report to RBI creditfacilities sanctioned to large borrowers, i.e. those en)oying term loans(including 7eferred %ayment !uarantees of Rs. crore or above and

working capital limits of Rs. / crore or above from the banking systemalongwith the relevant data in the prescribed -A forms for post sanctionscrutiny.

'he ob)ective of reporting under the -A was to ensure (i compliance withthe norms relating to lending discipline laid down by RBI so that need#basedcredit is sanctioned and preemption of bank credit to large borrowers does nottake place and (ii to observe if any deviation has taken place from theguidelines related to consortium lending.

Re,ortin* Cre-it Sanctions to Reser;e Ban1 o+ In-ia

'he earlier system of reporting under -A has been discontinued. In order to

have a data base in relation to the flow of bank credit to borrowers in variousindustries, banks are re1uired to report new limits additions and reductions toRBI, in respect of borrowers availing of working capital credit or term loan(including deferred payment guarantee limit of Rs. / crore or above from thebanking system, on a fortnightly basis.

In respect of borrowers availing of working capital credit or term loan(including deferred payment guarantee limit of Rs. crore or above but lessthan Rs. / crore from the banking system, banks are re1uired to report netadditional credit limits sanctioned, on a monthly basis with industry#wise breakup.



BANKERS RATI#S

Sol;enc/ Ratio U 'otal 'angible Assets;'otal :utside iabilities

# Where this ratio is more than one, the unit is solvent

Current Ratio U urrent Assets;urrent iabilities

It means short term solvency of the concern

'he ideal urrent Ratio 53

'andon ommittee prescribed a minimum current ratioof .223 under second method of lending.

If the current ratio is less than , the unit may be sickor leading towards sickness.

)uic1 Ratio U urrent Assets G Inventory

urrent iabilities G Bank BorrowingIt measures the li1uidity position of the concern.

Ideal 1uick ratio is 3

Ca,ital Gearin*Ratio

U +i&ed harge Bearing ong 'erm +unds.

'otal ong 'erm +unds.

It is also known as financial leverage ratio.

A high geared unit can not afford to borrow more.

De>it9E.uit/

Ratio

ong 'erm 7ebts

'angible $etworth.Higher the ratio, more is the borrowed fund and lessprotection to the creditors.

+or **I units this ratio should not e&ceed 53 and for medium and large units it should not e&ceed .3

Gross "ro+itRatio

!ross %rofit & //

$et *ales.

Higher the !ross profit ratio means efficiency inproduction.

#,eratin* "ro+itRatio

:perating %rofit & //

$et *ales.

Higher the margin indicates operational efficiency.

Net "ro+it Ratio U !ross %rofit & //

$et *ales.

It measures overall profitability.

It may go up due to non#business income.

Return on Net

&orth

U $et %rofit after 'a& & //

'angible $et worth .



It indicates the overall efficiency of the management inutilising the total fund available for running thebusiness.It is very suitable ratio for inter#firm comparison.

Return onIn;est0ent

U %rofit before Interest and 'a&

'otal 'angible Assets.

It determines profitability of assets.

In;entor/Turno;er Ratio

U ost of *ales (cost of goods sold

Average Inventory.

It indicates the number of times, the inventory isrotated during the relevant accounting period.

A higher turnover compared to past year indicates

better management of inventory.De>tors Turno;er Ratio

U *ales

'rade 7ebtors

It is measured in number, days of month and alsoknown as 7ebtors Jelocity.

Higher period indicates inefficiency in receivablemanagement

Cre-itorsTurno;er Ratio

U %urchases

'otal reditors

It is also e&pressed in number or days or month.

It is also known as creditors velocity.

It is calculated for determining the ability of the firm toobtain market credit.

De>t9Ser;iceCo;era*e Ratio

U $et %rofit After 'a& F 7epreciation FInterest on 'ermoan

Annual Installment of 'erm oan F Interest on 'ermoan.

'he ideal ratio 53, however for **I units or unitslocated in backward areas minimum 7*R of .3 isacceptable.

It is calculated to determine the ability of the firm toservice its debt obligations.



BREAK EVEN "#INT

B8% is the amount of sales at which an unit makes no profit or no loss. An unitcan make profit only if its level of sales is above the break even point.

Calculation o+ BE"

It can be e&pressed in three ways 3

# B8% in 0nits U +i&ed ost;ontribution per unit.

# B8% in Rs. U B8% in 0nits & *ales %rice;0nits.

# B8% in 'erms of apacity 0tilisation

U +i&ed ost & %ro)ect capacity utilisation at optimumsales level.

'otal ontribution.

ontribution U # *ales price;0nit G Jariable cost;0nit

MARGIN #F SAFET'%

-argin of *afety U Actual *ale G B8% (*ales

- It is the measure of cushion available in the given level of sale. -orethe margin of safety, stronger is the unit. Where the margin of safety islow, the possibility of the unit coming to loss is 1uite high and banksavoid financing such units.

$SES #F BREAK9EVEN "#INT ANAL'SIS%

- 'o study viability of pro)ect G (%ro)ects having B8% above 4< of capacity utilisation should not be accepted for finance.

- 'o decide the optimum product mi&. (%roducts with higher contributionshould be chosen.,

- 'o decide the re1uired level of production in order to attend a desiredlevel of profit.

CASH9 BREAK EVEN "#INT

- It is the point of *ale at which the unit does not incur cash loss or cashprofit. While calculating costs (for calculating this 78% non cashe&penses like 7epreciation are not taken into account.



RBI G$IDELINES F#R ALL#CATI#N #FBANK CREDIT

•

%riority *ector Advances G -inimum E/< of total advances.• Agriculture (7irect @ Indirect G >< of 'otal Advances.

• Indirect Agricultural Advances will be taken under agriculture advance

ma&imum to the e&tent of 5< of total agricultural lending of ><.

• 7 Ratio of Rural @ *emi#0rban branches should be minimum 6/<.

• Advance to weaker sections should be minimum /< advances

outstanding at the end of the previous year.

• -inimum 5;2rd of 7RI advances should be given by Rural and *emi#

0rband branches.• E/< of 7RI advances to *;*t.

• E/< of 'otal **I redit for smaller units.

• 8&port redit should be minimum /< of 'otal Advances.

• In case of non#achievement of agricultural advance target *chedule

ommercial Banks will have to contribute sub)ect to ma&imum of .< of net towards Rural Infrastructure 7evelopment +und of $ABAR7 atinterest of /.< point above the ma&imum permissible rate on termdeposit.

• onsortium of banks with *BI as leader will lend Rs./// rores to KJI

which will be guaranteed by the !overnment and the interest rate will be.< below prime lending rate of five ma)or banks in the consortium.

• %riority sector target for foreign banks G at least 25< of their $et Bank

redit.

• In case of foreign banks 8&port redit will be considered as priority sector

advance.

• 'heir e&port credit and **I advance in each case should be at least /<

of $et Bank redit.• In case of shortfall, the foreign banks will have to make it good by placing

the amount as one year deposit will *I7BI which will carry interest /<.

• *cheduled ommercial Banks are re1uired to Allocate 2< of their

incremental deposit of the previous year towards housing finance.

• 5< of the net credit should be given to women beneficiary @ raise it to <

over the ne&t years.



VARI#$S SEGMENTS #F "RI#RIT' SECT#R

• A*riculture

7irect and Indirect

• S0all Scale In-ustriesa 7irect **I, Ancillary 0nits, Jillage @ ottage Industries, 'iny Industries @

***B8s.b Indirect finance to **I.

• S0all Roa- Trans,ort #,erators

'hose owning not more than 6 vehicles including one vehicle to be financed.

• Retail Tra-e

a 7ealers in essential commodities (+are price shops.b onsumer ooperative *tores @c :ther private retail traders with redit limit not e&ceeding Rs. lacs.

• S0all Business

Whose original cost price of e1uipments does not e&ceed Rs./ lacs andWorking apital +inance does not e&ceed Rs. lacs.

• "ro+essional Sel+ E0,lo/e- "ersons

%rofessionals having total credit limit not e&ceeding Rs. lacs out of whichWorking apital +inance not e&ceeding Rs. lac . In case of doctors settingup practices in Rural @ *emi#0rbans areas ceiling fi&ed is Rs./ lacs withsub#ceiling of Rs.5 lacs (including one vehicle finance.

• Housin*

a! 7irect finance upto Rs. lacs (Rs. / lacs in 0rban and -etros for construction;purchase of houses to individuals and loan upto Rs./,/// for repair of houses for individual.

>! Indirect finance given to !ovt. agencies for construction of houses or rehabilitation of slum dwellers where loan component per individual does note&ceed Rs. lacs.

• E-ucation

oan granted to a student for Higher studies.

• Consu0,tion loan

'o weaker sections upto prescribed limit.

• Sel+ Hel, Grou,

• Re+inance ,ro;i-e- >/ the s,onsorin* >an1s to RRBs

/< of such refinance to be treated as indirect Agricultural finance while E/<as advance to weaker sections.

• Ter0 Finance=Line o+ Cre-it ,ro;i-e- to State In-ustrial De;elo,0ent

Cor,orations an- State Financial Cor,orations'o the e&tent granted for **I units will be treated as priority sector (only freshdisbursement made after ?..?E and the outstanding in them will be takeninto consideration for this purpose.

&ea1er Sections

• *mall;-arginal +armers, andless labourers, 'enant +armers @ *hare

roppers. *;*' beneficiaries. 7RI beneficiaries.

• Beneficiaries under IR7%, *0-8, %-I 0%8%, *M*R9, *!*9,

• Advances made under *R* *cheme.

• Advance made to *8+#H8% !R:0%.• Artisans, Jillage and ottage Industries # redit imit upto Rs.5,///.



• 8ligible %-R9 account.

. KA"$R "ANEL % S"ECIAL SSI F$ND

'he *.. Kapur ommittee on the working of credit delivery system for small

scale industries (**I has recommended that **Is should be granted noob)ection of collateral securities for loans up to Rs. 5 lakh, the setting up of acollateral reserve fund to provide support to first generation of entrepreneurswho find it difficult to furnish collateral securities or third party guarantees andthe setting up of *mall Industries Infrastructure 7evelopment +und for developing industrial areas in and around metropolitan areas and a change inthe definition of sick **Is.

'he committee has also suggested special treatment to smaller among smallindustries, the removal of procedural difficulties in the path of **I advances,sorting out of issues relating to mortgage of land, including removal of stamp

duty and permitting e1uitable mortgages, and special access to low#costfunds to *mall Industries 7evelopment Bank of India (*I7BI for refinancing**I loans.

'he committee has also called for statutory powers to state#level inter#institutional committees, setting up of a separate guarantee organisation andopening of additional ,/// specialised branches.

'he committee has called for 5/ per cent additional ad hoc limits to **Is frombanks and setting up of a reconstruction fund with initiative and initial corpusfrom the government and the RBI to enable branch managers to provide, if

necessary, initial corpus money for such additional facilities, earmarking atleast E/, per cent of *I7BI resources of the tiny sector, close cooperationbetween *+s and public sector banks for )ointly providing term loans andworking capital limits to **Is. It has also called on $ABAR7 to set up a fundsimilar to the $ational 81uity +und.

'he panel has also suggested that *I7BI should set up a few softwareventure capital funds immediately.

'he group has also suggested that some recommendation made by the Khanommittee regarding restructuring of weaker *+s may be taken up for prompt decisions by the government. *I7BI should be helped through

provision of funds to take up a plan for financial restructuring of these bodies.*tate governments, because of their poor financial position, may not be ableto fund the restructuring of *+s. *tate governments share should either besubstituted and provided by *I7BI or by the government4



CREDIT G$ARANTEE F$ND TR$ST SCHEME F#RSMALL IND$STRIES

Title redit !uarantee +und (*cheme for *mall Industries (!+*I5///No-alA*enc/

redit !uarantee +und 'rust for *mall Industries set up by the!:I @ *I7BI

E++ecti;e-ate

redit facilities e&tended by the lending institutions w.e.f. Mune ,5///.

E<tent o+Loanco;era*e

redit to a single eligible borrower not e&ceeding Rs.5 lacs(interest charged not more than 2< over %R by way of 'ermoan and;or fund based working capital facilities on or after entering into an agreement with the 'rust to the manufacturing **Iunits including I.'. and *oftware Industries without any collateral

security and;or third party guarantee.'he provisions of the scheme shall be applicable to or in relationto all credit facilities eligible for guarantee under the scheme.

GuaranteeCo;er

4< of the defaulted principal amount in respect of 'erm oanand;or outstanding fund based working capital inclusive of interest(when account becomes $%A or as on date of filing suit whichever is earlier, sub)ect to ma&imum of Rs.>.4 lac per borrower.

Loc1 in,erio-

5E months from either the date of last disbursement or the date of payment of guarantee fee, whichever is later.

Co;era*eTenure

Repayment %eriod of 'erm oan or for a period of years whereworking capital facilities alone are e&tended.

GuaranteeFee

A one time !uarantee +ee 5.< of the credit facility sanctioned(comprising 'erm oan and;or fund based working capital facility Gsuch as , :7, bills purchased or discounted etc. shall be paidupfront to the 'rust, provided that the lending institution applies for a guarantee cover within a period of ?/ days from the date of firstdisbursement. 'he amount e1uivalent to the guarantee fee and;or the service fee may be recovered by the financing institution at itsdiscretion from the eligible borrowers.

Ser;ice +ee 'he annual service fee < per annum on the outstandingamount to the debit of the borrowerCs account covered under thescheme as on -arch 2 of each year.

Reco;eries 'he lending institution recovers money subse1uent to the recoveryproceedings initiated by it, the same shall be deposited by thelending institution with the 'rust after ad)usting towards the costincurred by it for recovery of the amount (within 2/ days failingwhich penal interest E< :BR shall be charged from 2st day.

In;ocation 'he aggregate credit e&tended by all the lending institution doesnot e&ceed Rs.5 lacs. ock in period 5E months. lassified as$%A. oan facility has been recalled and recovery proceedingshave been initiated under due process of law. :btention of prior permission of the 'rust before entering into any compromise or agreement with the borrower or any other party which may haveeffect on discharge of assets.



SELF HEL" GR#$"S SHGs!

A *elf Help !roup is a homogeneous affinity group of micro entrepreneursvoluntarily formed to save whatever amount they can conveniently save out of their earnings and mutually agree to contribute to a common fund of the groupfrom which small loans are given to the members for meeting their productiveand emergent credit needs at such rate of interest, period of loan and other terms which the group may decide.

#>ecti;es ♦ 'o evolve supplementary strategy for meeting the credit

needs of the poor by combining fle&ibility, sensitivity andresponsiveness of the informal credit system with thestrength of technical and administrative capabilities andfinancial resources of the formal credit institutions

♦ 'o build up mutual trust and confidence between the

bankers and the rural poor.

♦ 'o encourage banking activity both on thrift as well as

credit side in a segment of the population that the formalfinancial institutions usually find difficult to cover.

Characteristicso+ a SHG

♦ 'he membership of a !roup may be generally / to 5/.

However, under *!*9 *cheme, a group of personscan be formed for the purpose of -inor irrigation and inthe case of disabled persons.

♦ 'he !roup should devise a code of conduct bylaws to

bind themselves.

♦ Internal saving mobilised by its members is the core of

*H!.

♦ 'he !roup to decide the amount to be saved, itsperiodicity and the purposes for which loan can be givento members.

♦ 'he !roup decides the rate of interest to be

paid;charged on savings;credit to members.

♦ 'he !roup should maintain simple basic records such

as -inute Book, -embership Register, saving andredit Registers.

♦ 'he !roup to open a *avings Bank Account with the



bank.

#r*anisin*SHG

*H!s may be organised in clusters of blocks or districtseither by reputed voluntary agencies;$!:s and;or at the

initiative of Branch -anagers of ommercial Banks, o#operatives and Regional Rural Banks.

SelectionCriteria +or lin1a*e

♦ 'he group should have been in active e&istence for

alteast a period of si& months.

♦ 'he group should have successfully undertaken savings

and credit operations from its own resources.

♦ 7emocratic working of the group wherein all members

feel that they have a say should be evident.

♦ 'he group should maintain proper accounts;records.

♦ 'he Branch -anager should be convinced that the

group has not come into e&istence only for the sake of participation in the pro)ect and availing benefitsthereunder.

♦ 'he *H! members should preferably have homogenous

background and interest.

♦ 'he interest of the $!: or the self#help promoting

institutions (*H%I concerned, if any, in the group shouldbe evident and the agency should help the *H! by wayof training and other support for skill upgradation andproper functioning.

LINKAGE"ro*ra00e

Bank will provide credit in bulk directly to the group only,which may be informal or formal. 'he group in turn wouldundertake lending to members. 'he bank may also financegroups through voluntary agencies ($!:s who havepromoted the *elf Help !roups.

E<tent o+ Loan 'he proportion of savings to the loan could vary from 3 to3E depending on the assessment of the *H! by the Bank.

Securit/ ♦ Inter *e Agreement by all members.

♦ Articles of Agreement by authorised members.

Re,a/0ent oans from the Bank to *H!s could be repaid normally inregular monthly instalments or as determined at the time of loaning based on local conditions activities undertaken by



members etc.

oans from *H!s to members, could be repaidinappropriate instalements which may be daily, weekly or

market days fortnightly, monthly etc.

BANKING #MB$DSMAN SCHEME

'he ob)ect of the *cheme is to enable resolution of complaints relating toprovision of banking services and to facilitate the satisfaction, or settlement of such complaints. 'he Reserve Bank is authorised appoint one or more persons to be known asBanking :mbudsman to carry out the functions entrusted to him by or under the scheme.

"R#CED$RE F#R REDRESSAL #F GRIEVANCE

C#M"LAINT. Any person who has a grievance against a bank, may himself or

through an authorised representative make a complaint in writing to theBanking :mbudsman within whose )urisdiction the branch or office of the bank complained against is located.

5. $o complaint to the Banking :mbudsman shall lie unlessa. 'he complainant had before making a complaint to the Banking

:mbudsman made a written representation to the bank named in thecomplaint and either the bank had re)ected the complaint or the

complainant had not received any reply within a period of two monthsafter the bank concerned received his representation or thecomplainant is not satisfied with the reply given to him by the bank.

b. 'he complaints made not later than one year after the bank hadre)ected the representation or sent its final reply on the representationof the complainant.

c. 'he complaint is not in respect of the some sub)ect matter, which wassettled through the office of the Banking :mbudsman in any previousproceedings whether received from the same complainant or any oneor more of the parties concerned with the sub)ect matter.

d. 'he complaint is not the same sub)ect matter, for which any

proceedings before any court, tribunal or arbitrator or any other forumis pending or a decree or Award or order of dismissal has already beenpassed by any such court, tribunal, arbitrator or forum.

e. 'he complaint is not frivolous or ve&atious in nature.SETTLEMENT #F C#M"LAINT B' AGREEMENT

. As soon as it may be practicable so to do the Banking :mbudsmanshall cause a notice of the receipt of any complaint along with a copy of the complaint to the branch or office of the bank named in thecomplaint and endeavour to promote a settlement of the complaint byagreement between the complainant and the bank named in thecomplaint through conciliation or mediation.



5. +or the purpose of promoting a settlement of the complaint, theBanking :mbudsman may follow such procedure as he may consider appropriate and he shall not be bound by any legal rule of evidence.

REC#MMENDATI#N F#R SETTLEMENT

If a complaint is not settled by agreement within a period of one month fromthe date of receipt of the complaint or such further period as he may consider necessary, the Banking :mbudsman may make a recommendation byreference to what is, in his opinion, fair in all the circumstances. opies of therecommendation shall be sent to the complainant and the bank concerned.

• 'he recommendation by the Banking :mbudsman shall be open to

acceptance by the complainant only if he accepts all terms of therecommendation in full and final settlement of his claim against the bankand he shall, if he accepts the recommendation, within two weeks from thedate of receipt of the recommendation sends his acceptance in writingstating clearly that he is prepared to accept a settlement in terms of therecommendation in full and final settlement of his complaint.

• 'he bank shall, if the recommendation is acceptable to it, comply with the

terms of the recommendation immediately on receipt of acceptance of theterms by the complainant and inform the Banking :mbudsman of thesettlement in terms of his recommendation. If the recommendation is notacceptable to the bank, it shall inform the Banking :mbudsman within aperiod of two weeks.

A&ARD B' THE BANKING #MB$DSMAN. Where the complaint is not settled by agreement or recommendation

as provided in clause > or ? as the case may be, within a period of

two months from the date of receipt of the complaint or such e&tendeddate as may be considered necessary by him, the Banking:mbudsman shall inform the parties of his intention to pass an Award.

5. It shall be open to the parties to submit any further representations or evidence in support of their case within a period of days from thedate of notice referred to in sub# clause (.

2. 'he Banking :mbudsman shall pass an Award after affording theparties reasonable opportunity to present their case. He shall beguided by the evidence placed before him by the parties, the principlesof banking law and practice, directions, instructions and guidelinesissued by the Reserve Bank from time to time and such other factors

which in his opinion are necessary in the interest of )ustice.E. An Award shall be in writing and shall state the direction;s, if any, to the

bank for specific performance of its obligations and the amountawarded to the complainant by way of compensation for the losssuffered by him along with a summary of the reasons for making theaward, provided that the Banking :mbudsman shall not award anycompensation in e&cess of that which is necessary to cover the losssuffered by the complainant as a direct conse1uence of thecommission or omission of the bank, or for an amount e&ceedingrupees ten lakhs, whichever is lower.

. A copy of the award shall be sent to the complainant and the bank

named in the complaint.



6. An Award shall not be binding on a bank against which it is passedunless the complainant furnishes to it, within a period of one monthfrom the date of the Award, a letter of acceptance of the award in fulland final settlement of his claim in the matter. Within fifteen days from

the date of receipt by it, of the acceptance in writing of the Award bythe complainant the bank shall comply with the Award and intimate thecompliance to the Banking :mbudsman.

DEBT REC#VER' TRIB$NAL

C'he Recovery of 7ebts due to banks and +inancial Institution A' ??2Ocame in force w.e.f. 5E.6.?2 forspeedy recovery of debts as recommended by$arasismham ommittee.

'his Act is applicable only in respect of debts with outstanding of Rs. / lacsand more. 'he entral !ovt. has established 7R's at E metros, Hyderabad,

Bangalore, Ahmedabad, Mabalpur, !uahati, Maipur and %atna and other important centres. $o court will have authority to hear the cases which fallwithin the )urisdiction of the tribunal. All e&isting pending cases which comewithin the )urisdiction of the 'ribunal will also stand transferred after establishment of the 'ribunal. All e&isting pending cases which come withinthe )urisdiction of the 'ribunal will also stand transferred after establishment of the 'ribunal.

'he 'ribunal is e&pected to dispose of the application within 6 months of itsreceipts.

&H# CAN AVAIL THE SERVICES%

All banking companies and corresponding new banks as defined in section of the Banking Regulation Act ?E?. *BI and its associates, RRBs and publicfinancial institutions within the meaning of *ection E#A of the ompanies Act?6 shall, benefit by the special provisions of the Act. 'he entral !ovt. isempowered to make additions to this list, by issuing a notification in the official!a"ette.

"R#CED$RE=R$LES F#R FILING #F A""LICATI#N IN DRT

a. Application should be presented to the Registrar of 7R' under

whose )urisdiction the bank or +I is covered.

b. Application in a set of four should be submitted in theprescribed form in a paper book form.

c. Application should be accompanied with application fee of Rs.5/// for debt claim of Rs./ lac and Rs.5/// F Rs.///for every Rs. lac in e&cess of Rs./ lac sub)ect to ama&imumfee of Rs.,/,///.

d. Application should provide details of debt due andcircumstances under which it became due, all documents to be

relied up, inde& of documents.



A""EALS%

'he order passed by the 'ribunal will be appealable to the Appellate 'ribunalbut no appeal shall be entertained by the Appellate 'ribunal unless the

appellant deposits 4< of the amount of debt due from him as determined bythe 'ribunal. 'he Appellate Authority may, for reasons to be recorded inwriting, waive or reduce the amount of such deposit.

C#R"#RATE DEBT RESTR$CT$RING

'he Reserve Bank of India has finali"ed a corporate debt restructuring (7Rschemes based on the e&tensive discussions the !overnment of India andthe Bank had with banks and financial institutions. 'he 7R scheme is to beimplemented by all commercial banks, e&cluding regional rural banks (RRBsand local area banks (ABs.

7R will be a non#statutory, voluntary system based on debtor#creditor agreement and inter#creditor agreement. It will be applicable to only standardand sub#standard accounts. 'he ob)ective of the scheme is to ensure a timelyand transparent mechanism for restructuring of corporate debts of viablecorporate entities affected by internal or e&ternal factors. *uch entities shouldbe outside the purview of Board for industrial and +inancial Restructuring(BI+R, 7ebt Recovery 'ribunal (7R' and other legal proceedings. 'hescheme would be applicable only to multiple bankingaccounts;syndicates;consortium accounts with outstanding e&posure of Rs.5/crore and above with the banks and financial institutions.

All standard and sub#standard accounts sub)ected to the 7R process wouldcontinue to be eligible for fresh financing of funding re1uirements by thelenders as per their normal policy parameters and eligibility criteria.

'here would be no re1uirement of the account ; company being sick, non#performing assets ($%A or being in default for a specified period beforereference to the 7R !roup. However, potentially viable cases of $%As willget priority. In no case, the re1uests of any corporate indulging in willfuldefault or misfeasance will be considered for restructuring under 7R.

STR$CT$RAL FRAME&#RK

'he 7R scheme will have a three#tier structure consisting of 7R *tanding+orum, 7R 8mpowered !roup and 7R ell. 'he viability and rehabilitationpotential of the corporate would be e&amined by the 7R empowered groupconstituted to consider individual cases of corporate debt restructuring.

'his group will also approve the restructuring package. 'he banksrepresentatives in the empowered group should be senior level e&ecutiveswith authorisations from their boards to make commitments on behalf of thebanks towards debt restructuring.

'he standing forum will lay down policies and guidelines and guide andmonitor the progress of 7R. 'he standing form will be assisted by a 7R

core group in conducting the meetings and taking decisions relating to policy.Individual cases of 7R will be decided by a 7R empowered group. 'his



group would be mandated to look into each case of debt restructuring,e&amine the viability and rehabilitation potential of the company and approvethe restructuring package within a specified time frame of ?/ days or at best>/ days of reference to the empowered group . 'he 7R standing forum

and the 7R empowered group will be assisted by a 7R standing forum andthe 7R empowered group will be assisted by a 7R cell in all their functions. 'he 7R cell will make the initial scrutiny of the proposals receivedfrom borrowers ; lenders by calling for proposed rehabilitation plan and other information and put up the matter before the 7R empowered group withinone moth to decide whether rehabilitation is prima facie feasible if so, the7R cell will proceed to prepare detailed rehabilitation plan with the help of lenders and, if necessary, e&perts to be engaged from outside. If not feasible,the lenders may start recovery of dues. 'he scheme has also detailedaccounting treatment of accounts restructured under 7R.

• If such security interest is registered under the central computerisedregistry in the event of default, secured creditors would have a right to takepossession of the securities after giving notice of ?/ days and sell thesecurities for recovery of the loan.

• %rovision has been made for appointing a receiver after taking possession

of the securities pending their sale.

• If there is any resistance from the borrower in handing over possession,

the secured creditor can approach the hief -agistrate for assistance intaking possession.

• Any appeal against the action of the bank;financial institution in takingpossession of securities can be filed before the 7ebt Recovery 'ribunalafter the sale of securities. In other words, the borrowers cannot ob)ect toconversion of securities by sale into money.

• *ince the bill seeks to give drastic powers to the banks and financial

institutions, it also provides for the rights of the borrowers. It provides thatthe borrowers should get a copy of the security agreement and periodicalstatements of accounts with rates of interest charged.

• 8&cept in case of 8nglish mortgage, under the provisions of the 'ransfer of

%roperty Act, mortgagees do not have power to sell the mortgaged

property without the intervention of court. 'he draft law recognises allkinds of mortgages, including mortgage by deposit of title deeds, as asecurity interest. It provides for registration of notice of such mortgage withthe central computerised registry. By virtue of these provisions, banks andfinancial institutions would have power to take possession of mortgagedproperties and sell them after following the procedure prescribed by theproposed law.

• A provision has also been made for the purpose of registration of e&isting

security interests under the proposed law within a period of si& months.

• 'he bill has suggested that the new computerised central registry system

should be operated concurrently with e&isting registration systems under



the Registration Act, ompanies Act, -otor Jehicles Act, -erchant*hipping Act, etc.



• B#ARD F#R FINANCIAL S$"ERVISI#N BFS!

'he B+ has been set up by RBI. 'he !overnor RBI is the hairman and onethe 7y. !overnors of the RBI is full#time Jice#hairman. 'he Board is assisted

by the 7epartment of *upervision (7:* of RBI.

'he main function of the Board is to strengthen, supervision and surveillanceover the financial system which includes banks, +Is, $B+Is and %ara Banking+inancial Institutions. 'he supervision will be both on site (ie. inspection andoff#site (i.e. calling for reports and returns to supervise and monitor thefinancial system. +or off site supervision, RBI has introduced 4 types of 7*B(7epartment of *upervision for Banks return i.e.3

7*B Return $: on Assets, iabilities, apital @ Reserves and off Balance*heet e&posures 7*B II3 Regarding Oapital Ade1uacyO. 7*B III3 Luarterlyoperating Result *tatement 7*B#IJ3 Return on Asset Luality 7*B#J3 Reportof arge redits of the bank and top ten credit e&posures 7*B# JI3 Report ononnected ending and 7*B Return# JII3 Report on O :wnership and controlO.

REC#MMENDATI#NS #F VARI#$S C#MMITTEES#N FINANCIAL S'STEM

. All In-ia Rural Cre-it Re;ie7 Co00ittee (0nder the hairmanship of -r, JenkatappaiahRecommended for3

• *etting up of *+7A @-+A. 'hese agencies were set up in the year

?6?#4/. In course of time these agencies were merged and renamedas 7R7A.

• *ocial control over ommercial Banks in ?6>.

34 National Cre-it Councils(0nder the hairmanship of %rof. 7.R. !adgil, ?64Recommended for3'he adoption of Oarea approachO for development of credit and banking inthe country on the basis of local conditions.

4 A co00ittee o+ >an1ers un-er the Chair0anshi, o+ Shri F4 K4 F Nari0an

Appointed by RBI. Recommended for lead bank *cheme towards the end

of ?6?.?4 National co00ission on A*riculture :@:!

Recommended of +ormation of +armersC *ervice *ociety.54 Stu-/ Ba7a! Tea0 :@:!

Appointed by the !ovt. of India, recommended for +ormation of A-%*in tribal areas, for providing under a single roof all types of credit includingsocial obligation and consumer re1uisite

J4 &or1in* Grou, un-er the Chair0anshi, o+ Dr4 K4S4 Krishnas7a0ithe then De,ut/ Go;ernor o+ RBI :@8!

• 7efined CWeaker *ectionC under the priority sector.

• *uggest for sub#target for Weaker section and

• -obilisation for implementation of 5/ %oint programmes.



4 &or1in* Grou, un-er the Chair0anshi, o+ Shri A0ita> Ghosh thethen De,ut/ Go;ernor Reser;e Ban1 o+ In-ia :@!Recommended for3

• -odification in the definition of priority sectors and composition of

Weaker *ection.• Banks should aim at increasing the OWeaker *ectionO. Advance not

less than 5< of total priority sector.

• E/< 'arget for %riority *ector total Bank redit by -arch, ?>.

• 6< direct Agricultural advance to 'otal redit.

4 Co00ittee to Re;ie7 Arran*e0ents +or Institutional Cre-it +or A*riculture Rural De;elo,0ent CRAFI CARD! :@@

(0nder the hairmanship of -r. B. *ivaraman Recommended for 3

• 8stablishment of $ABAR7 as an ape& institution for rural credit.

@4 Stan-in* Co00ittee on A*ricultural Loans throu*h Co00ercial Ban1CALC#B! :@@!

Recommended for 3

• Jarious measures to improve the recovery performance of

ommercial banks.:84 R4G4 Sarai;a Co00ittee :@3! Recommended for 3

• reation of Rural Banks to satisfy rural credit needs. 'his was not

accepted by the !overnment of India in toto .::4 &or1in* Grou, un-er the Chair0anshi, o+ Shri M4 Narsi0han :@5!

Recommended for 3

• *etting up of RRBs. Based on the recommendation the !overnment

of India promulgated the RRB ordinance on 56.?.4 which wasreplaced by RRB Act ?46. 'he first set of 6 RRBs were set up on5./.4.

:34Daheia Co00ittee :@J! Recommended that 3

• 'he Banking system should resort to financing on the basis of a total

study of the borrowerCs operation rather than security consideration.:4 Tan-on Co00ittee :@?!

Recommendation given by the ommittee can be grouped into four categories.

i! Nor0s +or hol-in* in;entor/ recei;a>le %$ow substantially charged by Reserve Bank of India.

ii! Metho-s o+ len-in* % :ut of the three methods, RBI accepted only two.

First Metho- o+ Len-in* % As per -ethod I, the borrower is re1uired to bring minimum $W to thee&tent of 5< of Working apital !ap. 'he balance will be -%B+.Secon- Metho- o+ len-in* %0nder this method the borrower should bring minimum $W to the e&tent

of 5< of the 'otal urrent Assets and the balance will be -%B+.



'he applicability of different methods of lending has under gonesubstantial change after va" committee recommendation.i! St/le o+ Cre-it %

Bifurcation of ash redit imit @

Bill +inance.ii! Follo7 u, Control %

Annual Review of accounts of borrowers en)oying fund based Workingapital imit of Rs. / lacs and above.Luarterly Budgeting *ystem through 1uarterly operating statement.($ow replaced by LI*

:?! Chore Co00ittee :@@! Appointed by RBI to have review of the ash redit *ystem of lending inall respects, whose recommendations are as under 3 i!Nor0s +or in;entor/ recei;a>les % ii!As ,er Tan-on Co00ittee4

Metho- o+ len-in* % All new units availing +BW of Rs./ lacs and above and e&isting unitsen)oying +BW of Rs. / lacs and above to brought under IInd method

of lending ('his guideline has since changed.Working apital 'erm oan for financing shortfall in $W due to shifting

to IInd method.ii! St/le o+ Cre-it %

Recommended for continuation of the 2 ma)or styles vi"#ash redit,7emand oan and Bill +inance.'here should be a separate limit for peak and non#peak levelre1uirement.

iii! Bill Culture % Advocated strongly in favour of Bill system of financing.Introduction of 7RAW88 BI *ystem of financing.-inimum 7rawee Bill limit should be /< of the limit sanctioned for Rawmaterials in case of borrowers en)oying +BW of Rs./ lacs and above(RBI guidelines G 5< 7rawee Bill finance for all -A Acs.

:54 Na/a1 Co00ittee :@@3!(0nder the hairmanship of *hri %.R. $ayakRecommended 3

i! A ne7 0etho- +or assess0ent o+ &or1in* Ca,ital +or SSI $nits

:n the basis of minimum 5< of the out put value of the pro)ected turnover (for the redit imits now upto Rs. crore from the Banking*ystem.

ii Sin*le &in-o7 Sche0e +or SSI upto 'erm oans of Rs.5/ lacs andWorking apital of Rs./ lacs.

iii Annual Bu-*et +or SSI at Bank and branch level.i;! More e0,hasis on +inance to Vill4 Cott4 In-ustries Artisans Tin/

SSSBEv $ew 7efinition for sic1 **I 0nits.:J! I4T4 Va Co00ittee:@@!

Reco00en-ations %

Henceforth the banks would decide the ma&imum levels of holding of each item of inventory @ receivables for build#up of current assets that



could be supported by bank finance. While e&ercising such )udgement,banks should take into account the production;processing cycle of thatindustry, seasonality in availability of raw materials as well as seasonalityin the sale of finished products.

However, RBI would continue to advise banks the overall levels of inventory for their guideline, which may be used by banks as broadindicators.

-aintaining inventory and receivables as per norms will be applicableonly to borrowing units with aggregate fund based credit limits of Rupees:ne crore and above from the banking system.

+or units availing working capital limits of Rs. crore and above. *econdmethod of lending will be applicable.

+irst -ethod lending will be applicable only for *ick ;Weak units under rehabilitation.

Agencies marketing e&clusively the products of **I units (provided theagency settles the dues of the **I suppliers within a ma&imum period of thirty days.

+or 0nits availing Working apital limits less than rupees one crore and**I 0nits upto Rs. E crore, bank should finance working capital limitsminimum to the e&tent of 5/< of their %ro)ected Annual 'urn :ver.

4RASHID ILANI C#MMITTEE % *uggested alternate method of lending for Working apital in place of ash redit. 7emand loan system beintroduced for delivery of Bank credit to be known as Working apital7emand oan (W7.

Cut o++ "oints %

In case of ash redit. 7emand loan system be introduced for delivery of Bank credit to be known as Working apital 7emand oan (W7.

Cut o++ "oints %i Borrower availing -%B+ of Rs. 5/ crores and above, minimum >/<

7emand oan and -a&imum 5/< ash redit.ii Borrowers availing -%B+ of Rs. / crores and above, and less than

Rs. 5/ crores also, minimum >/< 7emand loan and -a&imum 5/<ash redit.

iii+or borrower availing -%B+ less then Rs. / crores, 7emand oanmay be granted if the borrowers agree.

Re,a/0ent o+ De0an- Loan %

• +or *easonal Industries minimum si& months and for other industries

minimum one year repayable by way of a B08' or BA::$method.

:4La<i0inara/an Co00ittee :@?!*uggested rules for consortium finance. But the guidelines failed to

discipline the banks.:@4 Ma-ha;an Co00ittee :@3!



Recommended 3*ingle window concept under consortium lending.$ine model documents as now suggested by RBI including Moint 7eed of Hypothecation @ Inter se Agreement.

384 4V4 Sett/ Co00itteeRecommended that, Banks in India may be allowed to provide loan on*9$7IA'I:$ BA*I* as an alternate to consortium lending.

3:4 R4 Ti7ari Co00ittee :@?!Recommended G-easures to deal with the sickness of the Industrial ompanies.+ormation of *IA ?>+ormation of BI+R @ AAI+R7efinition of *IK Industrial 0nits

334 G4 Sun-era0 Co00itteeommittee on structure of 8&port redit.

34 So-hani Co00ittee :@@5!Recommended Giberlisation of +oreign 8&change Business.8&ports be allowed to retain //< of +ore& earning.+oreign 8&change clearing house to be set up.Banks be allowed to lend @ borrow *hort 'erm $ostro funds.ompanies be allowed to book forward contract without formal documentetc.

3?4 First Narsi0han Co00ittee :@@:!Recommended G

•

Restructuring of the banking and financial system.• %rudential Accounting $orms.

• *etting up of 7ebt Recovery 'ribunal.

• Reduction in Reserve Re1uirements.

• 7eregulation of interest rates.

• apital Ade1uacy $orms.

• Re#defining the priority sector and reduction of target.

• *etting up of *8BI.

• losure of I office.

• :pening up of apital -arket for foreign portfolio investment.

• omputerisation.

354 Ran*araan Co00itteeRecommended for omputerisation in the banking Industry.

3J4 Va*ul Co00ittee :@!Recommended G'o provide e1uilibrium in the short term money market+reeing Inter Bank G Interest RatesIntroduction of ommercial %apers, +actoring, IB% etc.

34 Kal/an Sun-ara0 Co00ittee :@!Recommended +actoring services in India, its modalities @ legislativeprovisions.



34 Su1h0o/ Cha1ra>ort/ Co00ittee :@5!Recommended for G

• Revision in yield on securities.

• %rice competition between Banks.

• Removal of ceiling in the call money market.

3@4 S4S4 Da;e Co00ittee Stu-/ Grou, on Mutual Fun-s!Recommended for G

• *pecialised +und -anagement ompanies.

• lose @ :pen ended funds and their functions.

84 G4S4 "atel Co00ittee :@J! #n #r*anisation an- Mana*e0ent o+ Stoc1 E<chan*e!

• Rationalisation of Rates.

• isting re1uirements.

• ode of conduct.

• reation of ustomerCs %rotection +und.

• Insurance cover for brokers.

• 0niform model for stock e&changes.

:4 "har7ani Co00ittee :@@:!Recommended for setting up of $ational *tock 8&change ($*8.

34 &or1in* Grou, o+ Financial Co0,anies Dr4 A4C4 Shah :@@3!Recommended compulsory of registration of all deposits takingcompanies.apital Ade1uacy of >< and other parameter for li1uidity, operations @e&posures.

4 Co00ittee on "S$ Disin;est0ent C4 Ran*araan :@@3!Recommendations 3

• 0pto E?< disinvestment in industries be reserved for %*0s.

• %referential offers to employees.

• 7isinvestment should be spread over number of years.

• -ethod for valuation of %*0.

?4 Co00ittee on Fiscal Re+or0s Raa 4 Chelliah! :@@3!Recommendations 3

• +ocus on uniform corporate ta&.

• %ersonal ta& to be made wider to include fringe benefits.

• Withdrawal of !ovtCs power to grant customs and e&cise e&emptions.• 'a&ation should be made income elastic instead of being source of

additional revenue.

• 'a& authorities should not have 1uasi Mudicial powers.

• Jarious ta& reforms.

5 Co00ittee on In-ustrial Sic1ness an- Cor,orate Restructurin*Dr4 #01ar Ghosh :@@!Recommendations 3

• *etting up of fast track winding up 'ribunals in four metros and

Bangalore to reduce delay in winding up.

• Introduction of *ummary proceedings.



• Revamping of BI+R and more power to BI+R.

• Removal of *tate !ovtCs approval for winding up of units.

• +8RA should be e&cluded from *IA etc.

J4 Dr4 "4D4 #ha Co00ittee on Ser;ice Area A,,roach :@!Recommended for service area approach for rural lending.

4 Tal7ar Co00ittee on Custo0er Ser;ice :@J!Recommended 46 parameters on customer service.

4 Goi,oria Co00ittee on Custo0er Ser;iceRecommended ?4 parameters for improving customer service in Banksout of which >? recommendations have already been implemented.

@4 Ghosh Co00ittee on "re;ention o+ Frau-s in Ban1sRecommendations 3oncurrent audit of large;very large branches by e&ternal auditors. Annual internal audit.

*tock inspection without any periodicity.Bank employees should divulge the details of their accounts in other branches and banks.

?84 NAV Co00ittee :@@J! on Mutual Fun-Recommendations 3lose#ended schemes should be listed within 6 months.+unds should be allowed to re#issue the re#purchase units.*chemes for investment in money market.%rohibition on use of lotteries, gifts, early bird incentives to unit holdersetc.

?:4 Na-1arni Co00ittee Reco00en-ations on Assess0ent o+

Cost o+ "roects All financial institutions have agreed to implement the recommendations of the committee which are related to cost overrun of the pro)ects. 'heommittee suggested that while assessing the pro)ect cost, possibleescalation in cost on account of inflation during the implementation periodshould be provided for.

?34 Stu-/ Grou, o+ IRD" Mehta Co00ittee!Recommendations.

• :n identification of beneficiaries.

• +ull pro)ect cost should be disbursed as loan and the amount the

subsidy should be kept as fi&ed deposit in the name of borrower to bead)usted towards last installment.

• %reparation of family credit plan for // families;Block;year.

• oan should be given for purchase of land also.

• Luantum of investment of be revised by $ABAR7.

• Working capital assistance to beneficiaries.

• %rovision of 'raining support.

• 7evelopment of infrastructure.

• Institutional support.

• Appointment of recovery officer by the *tate !ovt. e&clusively of Bank

recovery etc.?4 Shere Co00ittee :@@J! (-s. K.*. *here, %rincipal egal Advisor,



RBI (for operation of 8lectronic +und 'ransfer *ystem in BanksRecommendations 3'ransfer of funds to any point of the country within 5E hours.8+'%:* @ other card based payments to be introduced.

Banks, +inancial Institutions, !ovt. @ other Institutions approved by RBI tobe admitted as direct participants of 8+' system.8lectronic +und 'ransfer to be restricted to rupee transactions only.$odal agency to administer and operate 8+' system.%art of RBI Act, BankersC Book of 8vidence Act, $egotiable Instruments Act and *ecurities (ontract Regulations Act. should be amended and afresh legislation should be drafted.

The Secon- Narasi0ha0 Co00ittee After 4 years of financial sector reforms, structure, operations andperformance of the commercial banks have improved considerably. With aview to assess the performance and to chalk out further course of actions, a

committee was set up under the chairmanship of *hri. -. $arasimham in7ecember, ??4 which is known as the $arasimham ommittee on Banking*ector Reforms. 'he terms of reference include review of progress in reformsin the banking sector over the past si& years, charting of a programme of banking sector reforms re1uired to make the Indian banking system morerobust and internationally competitive and framing of detailedrecommendations in regards to banking policy covering institutional,supervisory, legislative and technological dimensions and the ommitteesubmitted its recommendation in April, ??>.In consultation with the !overnment of India, the Reserve Bank of India hasfinalised its views on a large number of specific recommendations, which arewithin its purview.Reco00en-ations an- Decisions Ta1en Till #cto>er @!

5 ,er cent 7ei*ht +or 0ar1et ris1 +or Go;ern0ent=a,,ro;e- securities%'o be implemented in phases3 5. per cent risk weight by the year ending-arch 2, 5///. Balance of 5. per cent will be announced later. Anadditional risk weight of 5/ per cent is proposed for securities of governmentundertakings which do not form part of the approved market borrowingprogramme with effect from the financial year 5///#5//. 'his will beimplemented in the case of outstanding stock of such securities as on -arch2, 5///, in two phases at the rate of / per cent each in 5//#5//5 and

5//5#5//2.5 The ris1 7ei*ht +or Go;ern0ent *uarantee- a-;ances to >e the sa0e as+or other a-;ances%Risk weight will be assigned for government guaranteed advancessanctioned from April , ??? as under3 Against the guarantee of the3a entral !overnment / per centb *tate !overnment / per centc !overnments who remain defaulters as on -arch

2, 5///5/ per cent

d !overnments who continue to be defaulters after

-arch 2, 5//

// per cent

2 Forei*n e<chan*e o,en ,osition li0it to carr/ :88 ,er cent ris1 7ei*ht%



'o be implemented from the current financial year ending -arch 2, ???.E A 0ini0u0 tar*et o+ @ ,er cent CRAR to >e achie;e- in the /ear 3888

an- :8 ,er cent >/ 38833Banks should achieve a minimum RAR of ? per cent as on -arch 2, 5///.

7ecision about further enhancement of RAR will be announced later. An asset >e classi+ie- as -ou>t+ul i+ it is in the su> stan-ar- cate*or/

+or : 0onths in the +irst instance an- e;entuall/ +or :3 0onths an-loss i+ it has >een so i-enti+ie- >ut not 7ritten o++ 3 An asset will be treated as doubtful, if it has remained in sub standardcategory for > months instead of 5E months, by march 2, 5//.Banks may make provisions therefore, in two phases as under3 As on -arch 2, 5//3 provisioning of not less than / per cent on the assetswhich have become doubtful on account of the new norms, i.e., reduction of the period from 5E months to > months. As on -arch 2, 5//53 Balance / per cent of the provisions should be made

in addition to the provisions needed as on -arch 2, 5//5. 'he proposal tointroduce the norm of 5 months will be announced later.

6 The Go;ern0ent *uarantee- a-;ances 7hich ha;e turne- stic1/ to >eclassi+ie- as N"As%'he !overnment guaranteed advances which have turned sticky are to beclassified as $%As as per the e&isting prudential norms with effect from April, 5///.Inco0e reco*nition asset classi+ication an- ,ro;isionin* nor0s shoul-a,,l/ to Go;ern0ent *uarantee- a-;ances in the sa0e 0anner as +or an/ other a-;ances4%rovisions on these advances should be made over a period of E years asdetailed below38&isting;old !overnment guaranteed advances which would become $%A onaccount of asset classification norms are to be fully provided for during thene&t four years from the year ending -arch ??? to march 5//5 minimum of 5 per cent, each year.

4 A *eneral ,ro;ision o+ : ,er cent on stan-ar- assets >e intro-uce-%'o start with, banks should make a general provision to a minimum of /.5per cent for the year ending -arch 2,5///. 'he decision to raise further theprovisioning re1uirement on standard assets would be announced in duecourse.

> Ban1s an- Financial Institutions shoul- a;oi- the ,ractice o+ e;er9*reenin*%'he Reserve Bank reiterates that banks and +inancial institutions shouldadhere to the prudential norms on asset classification, provisioning, etc., andavoid the practice of ever#greening.

? An/ e++ort at +inancial restructurin* 0ust *o in han- 7ith o,erationalrestructurin*4 &ith the cleanin* u, o+ the >alance sheet si0ultaneousste,s to >e ta1en to ,re;ent=li0it ree0er*ence o+ ne7 N"As%'he banks are advised to take effective steps for reduction of $%As and alsoput in place risk management systems and practices to prevent reemergenceof fresh $%As.

/ To ena>le >an1s in -i++iculties to issue >on-s +or Tier II ca,italGo;ern0ent 7ill nee- to *uarantee these instru0ents 7hich 7oul- then



0a1e the0 eli*i>le +or SLR in;est0ent%%ublic *ector Banks are encouraged to raise their 'ier II capital. !overnmentguarantee to these instruments does not seem appropriate.

There is a nee- +or -isclosure in a ,hase- 0anner o+ the 0aturit/

,attern o+ asset an- lia>ilities +orei*n currenc/ assets an- lia>ilities0o;e0ents in ,ro;ision account an- N"As%Banks have already been advised to put in place a formal Asset#iability-anagement (A- system with effect from April , ???. Instructions onfurther disclosures will be issued in due course.

5 Concentration ratios nee- to >e in-icate- in res,ect o+ >an1s e<,osureto an/ ,articular in-ustrial sector as also to sectors sensiti;e to asset,rice +luctuations such as stoc1 0ar1et an- real estate4 These e<,osurenor0s nee- to >e care+ull/ 0onitore-%Banks are advised to strictly comply with instructions which are already inplace.

2 Ban1s shoul- >rin* out re;ise- o,erational 0anuals an- u,-ate the0re*ularl/% Arrangements should be put in place for regular updating. ompliance has tobe reported to RBI by April 2/, ???.

E There is nee- to institute an in-e,en-ent loan re;ie7 0echanis0es,eciall/ +or lar*e >orro7al accounts an- to i-enti+/ ,otential N"As%Banks should ensure a loan review mechanism for larger advances soonafter it is sanctioned and continuously monitor the weaknesses developing inthe accounts for initiating corrective measures in time.

"annir Sel;a0 co00ittee'he committee on $%As appointed by the government to look into theissues of non#performing assets of public sector banks has recommendedthat banks look at the three fold method of arresting fresh inflows of $%As,reducing e&isting $%As and bringing about a culture of doing away withnon#performing assets.

redit appraisal and credit monitoring are the two main tactics for arrestingthe growth of $%As. +or this, banks should establish a credit riskevaluation system, upgrade their e&isting systems, set up a centraliseddatabase, and ensure 1uicker, tougher, but fle&ible appraisals anddecisions by bank officials.

Review machinery should be strengthened and a 1uarterly monitoringsystem should be put in place for detection of early warning signals of timely remedial measures, which will prevent a loan from turning bad.8ven standard assets should be monitored on a 1uarterly basis, thecommittee has recommended. Risk rating systems should be developed tocover newer risks and the system should be in tune with prevalentscenario.

8&isting $%As should be taken seriously and banks should set up recoverycells and task forces to deal with them. Branches having si"eable $%As

should be identified and skilled and trained personnel should be placed



there. %eriodic meetings should be convened with $%A borrowers toascertain the reasons for default and the true financial position, accordingto the %annir *elvam committee.

7oubtful and loss assets should be reviewed periodically to e&plorepossibilities for a 1uick write#off in cases where they are fully provided for.Incentive schemes for employees and interest discounts for promptrepayments should be adopted by banks.

Ver0a Co00ittee

'he RBI had set up the Working !roup under the hairmanship of *hri -.*. Jerma, former hairman of *tate Bank of India and presentlyHonorary Advisor to the RBI to suggest measures for revival of weakpublic sector banks. 'he Working !roup submitted its report on :ctober 2,???. -a)or recommendations of the Working !roup are3

I-enti+ication o+ &ea1 Ban1s% 'he !roup has recommended the use of seven parameters to identify a bankCs= weakness or strength in con)unctionwith two criteria (first, where accumulated losses and net $%A e&ceeds thenet worth of the Bank, second, one whose operating profit less income onrecapitalisation bonds has been negative for three consecutive yearssuggested by the $arsimham ommittee (??>. 'hese seven parametersare3 ( capital ade1uacy ratio, (ii coverage ratio, (iii return on assets, (ivnet interest margin, (v ratio of operating profit to average working funds,(vi ratio of cost to income, (vii ratio of staff cost to net interest incomeplus all other income. All the public sector banks were evaluated on theabove seven parameters keeping the median as the threshold in five of theparameters. +or capital ade1uacy the threshold was >< and in repect of the coverage ratio it was kept at /./<. Accordingly, the !roup classifiedthe public sector banks in five categories3

. Weak banks.5. Banks under strong distress.2. Banks with non compliance of three or four %arameters.E. Banks with non compliance of one or two parameters.. Banks which have met all parameters.

'hree banks were classified under the category of weak banks, vi"., 0:

Bank, Indian Bank and 0nited Bank of India. Bank of India is under category 2 on the basis of its performance during ??>#??.

Causes o+ &ea1ness% 'he weaknesses relate to three areas3 #,erational+ailures mainly relate to high level and fresh generation of $%As, slowdecision making with regard to fresh sanction of advances and compromiseproposals resulting in loss of fund#based income and fee income, decliningmarket share in key areas of operations, limited product line and revenuestream, absence of cost control and effective -I* and costing e&ercise, weakinternal control and housekeeping, inade1uate risk management systems,poor customer service, low level of technology and non competitive rates.Hu0an Resources issues mainly relate to overstaffing, low productivity and

age profile, low levels of motivation. Mana*e0ent issues relate to lack of



succession planning, short tenures and fre1uent changes in top managementand inade1uate support from the Board of 7irectors.

Restructurin* "ro*ra00e% 'he !roup has developed a four#dimensionalcomprehensive restructuring programme for three weak banks coveringoperational restructuring, organisational restructuring, financial restructuringand systemic restructuring.

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