OBJECTIVES OF BANK MANAGEMENT

The basic objectives of banks management are: 1. Maximise profitability: As bank is a commercial organisation its main objective is to maximise profitability of the bank. 2. Social responsibility: As bank has some social responsibility especially for the weaker section of the country. 3. Customer service: Through proper bank management it can provide better customer service. 4. Introduction of new schemes: Through proper management bank can bring new scheme, so that maximum needs can be satisfied. 5. Introduction of new technology: Proper bank management will help to bring and implement new technology for providing better qualitative service. 6. Meeting challenge of competitors: Bringing new technology, scheme etc through better management can meet the challenges of the competitors. 7. Manpower planning: Better management is helpful for planning qualitative manpower for the bank and give them required training to maintain qualitative employyes.

FUNCTIONS OF MANAGEMENT
The basic aim of managing is to achieve certain objectives or goals. The manager must be sure of the objectives he desires to attain or of the end result to be ensured. The precise and the complete statement in this regard would make the objectives clear and understood by all concerned who have ot divert their activities towards its attainment. The desired result, objective or goal is attained by performing certain fundamental management functions which can be grouped under basic heads, namely 1. 2. 3. 4. 5. 6. Planning Organizing Staffing Directing Coordinating Controlling

PLANNING
It means Preparing a sketch or an outline of any proposed plan of actions. It implies considering and arranging in advance a projected course of action. It can also be defined as determining what is to be done, making the decisions to do it, and devising a procedure, method and time table to do it. Planning is a general activity. It is a necessary part of all operations of a bank, and for the operations of each of the departments and sections. It stimulates people to action and also determines their mode of action. For e.g. Sales manager plans his sales campaign/The purchasing Manager Plans his purchasing and transporting operations/The production Manager Plans his production programs. Planning is an exercise in forecasting and decision making. It involves forecast of future conditions and an estimate of how the proposed plans would be affected by them. Thus planning involves two aspects. First it involves mental formulations of an idea of what is desired to be achieved. Upto this, it remains at the thinking level and is based on forecasts and estimates. Secondly it determines the mode of action to be pursued to achieve what has been thought up. At this stage, the idea takes a definite shape with a due regard to the ordinary and immediate circumstances facing the enterprise.

ORGANISATION

To organize means to put into working order and arrange in a system. In this sense, an organization is an organized body or persons. Organising may be defined as arranging a number of complex tasks into manageable units and defining the formal relationship among the people who are assigned the various units of tasks. This definition is in the context of attainment of the goals and objectives of an undertaking. Generally, identifiable units of tasks are put under the charge of a department, section or division. The head of that department, section or unit being given with the authority to perform those tasks. For e.g. Business activities in an industrial concern may be grouped under: 1. 2. 3. 4. Production Sales Finance and Personnel

After classification and analysis of functions to be performed by each department, persons possessing requisite qualifications and experience may be appointed as head of each of these departments. Such persons should also be given proper authority to discharge their functions efficiently. . Thus basically organization is concerned with grouping the activities required to attain the planned objectives, defining responsibilities of the people in the organization, delegating the appropriate authority to them to discharge the respective responsibilities and establishing structural relationships to enable Co-ordination of the individual efforts towards accomplishment of the enterprise objectives. The main objective of organization is to establish well defined relationships as between individuals and groups of individuals and between the activities performed by them.

STAFFING
It has been defined as manning and keeping manned the positions provided by the organization structure. Thus staffing involves four things: Assessment of personnel needs of the enterprise and selection and training of employees. Determination of employee remuneration. Evaluation of employee performance. Establishment of effective communication skills. Staffing is a difficult managerial function, because it is concerned with selection of properly qualified and mentally well-adjusted persons and their retention in the enterprise as a contented and motivated work force.

DIRECTING
To direct means to guide and supervise any action or conduct. It implies guidance or instructions about what to do and how to do it. We have seen that in organisatin executives assign responsibilities and duties to their subordinates and delegate to them with requisite authority to perform the assigned responsibilities of duties. This in fact is of very essence of management the art and process of getting things done by others. No doubt, executives have the authority to force their subordinates to comply with their directives. In case any subordinates faisl or refuses to comply, be may be thrown out or punished in some other manner. But this a wrong view of the enterprise entire process of management. On any case, with strong trade unions and a number of labour laws to protect the worker, it would not be wise to demand compliance from ones subordinated. For securing whole hearted compliance from subordinated, the function of direction assumes considerable significance. Direction function involves 1. Issuing orders and instructions to subordinate. 2. Guiding, training, energizing and leading the subordinates to perform the work methodically.

3. Exercising supervision over the work done by subordinates to ensure that it is n conformity with aims and objectives of the enterprise. From all accounts, the function of directions is very important. Thus to make the organization click, it becomes necessary to direct ones subordinates in a manner that they become effective instruments in the realization of enterprise goods. The process of direction comprises of the following elements viz. i. ii. iii. iv. Leadership Communication Motivation and Supervision

A detailed discussion about these aspects is given in the subsequent chapters.

CO-ORDINATION
Some authorities emphasis co-ordination as a separate function of Management. This approach has not been adopted here because it is felt that co-ordination is emphasized in each of the functions of management process. Co-ordination must be sought from the very first step, namely, planning, so that plans of all departments are integrated into a master plan, issuing the adequate co-ordination. Similarly organizing of people into groups and work into activities involves adequate co-ordination. It can also be secured through proper motivation of the workers towards organized efforts in terms of organizational objectives and personal objectives of the employees through an integration of such objectives. Finally the controlling aspect also indicates further co-ordination is required resulting in improvements and fresh plans.

CONTROL
Controlling can be defined as comparing results with plans and taking corrective action when results deviate from plans. In an organizational set up, it every Managers responsibility to control the performance of work and workers places under his charge. Pre-requisites of control: 1. Control is possible only where is there is a plan according to which actual performance is intended to proceed. 2. The second requirement of control to measurement of the results of actual operations. 3. The third requirement of control is taking corrective action as soon as deviation from the plan is discovered. Fundamentally, control is any process that guides activity towards some pre-determined goal. The essence of this concept is in determining in whether the activity is achieving the desire results. This is what control is all about. For control to be effective and fruitful, it must be based on a plan. Then on the basis of information received from the operational level, there must be measurement of actual performance to ascertain deviations.

Functions of Commercial Banks

The main functions of a commercial bank can be segregated into three main areas: (i) Payment System (ii) Financial Intermediation (iii) Financial Services. Figure 1.1: Main functions of a commercial bank

(i) Payment System Banks are at the core of the payments system in an economy. A payment refers to the means by which financial transactions are settled. A fundamental method by which banks help in settling the financial transaction process is by issuing and paying cheques issued on behalf of customers. Further, in modern banking, the payments system also involves electronic banking, wire transfers, settlement of credit card transactions, etc. In all such transactions, banks play a critical role. (ii) Financial Intermediation The second principal function of a bank is to take different types of deposits from customers and then lend these funds to borrowers, in other words, financial intermediation. In financial terms, bank deposits represent the banks' liabilities, while loans disbursed, and investments made by banks are their assets. Bank deposits serve the useful purpose of addressing the needs of depositors, who want to ensure liquidity, safety as well as returns in the form of interest. On the other hand, bank loans and investments made by banks play an important function in channeling funds into profitable as well as socially productive uses. (iii) Financial Services In addition to acting as financial intermediaries, banks today are increasingly involved with offering customers a wide variety of financial services including investment banking, insurance-related services, government-related business, foreign exchange businesses, wealth management services, etc. Income from providing such services improves a bank's profitability.

Duties & Responsibilities of a Board of Directors of a Bank

Managing Risk The board of directors not only helps lay out the bank's goals, but acts as a watchdog as well. One of its main duties in this capacity is to limit the bank's exposure to excessive risk of all kinds, including legal, reputational and financial. By managing risk judiciously, the board tries to maintain a balance between enterprise and caution. Allocating Resources The primary function of banks is to take money from people who want to save and lend it to people who want to borrow. Deciding, in a general way, to whom it lends is one of the board's most important duties. Banks that chose not to invest in sub-prime motgages in the late 2000s, for instance, were more likely to stay afloat than banks that invested in them heavily. Protecting Stockholders
A bank's board of directors is the stockholders' proxy, and represents their interests. Many banks require that

board members own some company stock to provide them with personal incentives in their decision-making. In overseeing the running of the bank, however, the board must keep the interests of the shareholders paramount. Compliance
In its role as company watchdog, the board must also ensure the bank complies with all relevant statutes,

both internal and external. The boards of some banks suffer a financial penalty if the bank violates certain legal statutes.

Audits
A board of directors should always know how the bank is being run. One of the foremost ways to accomplish

this is to conduct periodic audits of the bank. These audits can be both financial and structural in nature, examining both the banks' books and its management practices. Conflicts of Interest
Boards must always have an eye out for conflicts of interests, both in the bank's top executives and on the

board itself. If a person in a position of leadership has mixed motives, this compromises the interests of shareholders; a good board of directors must step in and resolve the conflict.

Unit 3
Modern commercial banks perform a variety of functions. They keep the wheels of commerce, trade and industry always revolving. Major functions of a commercial bank are: - Primary or Banking functions and Secondary or Non-Banking functions. FUNCTIONS OF COMMERCIAL BANKS Primary Secondary Subsidiary Activities Deposits Loans Agency Utility & Services Services Advances I. Primary / Banking Functions: - Commercial banks have two important banking functions. One is accepting deposits and other is advancing loans. 1) Deposits: One of the main functions of a bank is to accept deposits from the public. Deposits are accepted by the banks in various forms. a) Current Account Deposits: - Current Accounts are usually opened by businessmen who have a number of regular transactions with the bank, both deposits and withdrawals. There is no restriction on number and amount of deposits. There is also no restriction on withdrawl. No interest is paid on current deposits. Banks may even charge interest for providing this facility. These accounts are also known as demand deposits as amount can be withdrawn on demand. b) Saving Account Deposits: - Saving Accounts are opened by salaried and other less income people. There is no restriction on number and amount of deposits. Withdrawl are subject to certain restrictions. It earns Interest but less than fixed deposits. It encourages saving habit among salary earners and others. Saving deposits are an important source of funds for banks. c) Fixed Account Deposits: - Deposits in fixed account are time deposits. Money under this account is deposited for a certain fixed period of time varying from 15 days to several years. A high rate of interest is paid. If money is withdrawn before expiry date, the depositor receives lower rate of interest. Deposits can be renewed for further period. Many banks sanction loans against security of fixed deposits. d) Recurring Account Deposits: - In recurring deposit, a specified amount is regularly deposited by account holder, at an internal of usually a month. This is to form the habit of small savings among the people. At the end of maturity period, the account holder gets a substantial amount. Interest on this type of deposit is almost equal to fixed deposits. Thus by creating variety of deposits, banks motivate people in a variety of ways and encourage savings in the economy. 2) Loans and Advances: Banks not only mobilize money but also lend to its credit worthy customers for maximizing profits. Loans and Advances are granted to:a) Business and Trade: - Commercial banks grant short-term loans to business and trade activities in following forms:i) Overdraft: - Commercial banks grant overdraft facility to current account holders under this system a borrower is allowed to draw more than what is deposited in his account. The borrower is granted to a fixed additional amount against collateral security. Interest is charged for actual amount drawn. ii) Cash Credit: - Cash credit is given by the bank to any businessman to meet regular working capital needs, against the security of goods or personal security. Interest is charged on actual amount drawn by the customer. iii) Discounting of Bills: - When the holder of the bill is not in a position to wait till the maturity of the bill and requires cash urgently, he sells the bill of exchange to bank. Bank advance credit by discounting bills of exchange, government securities or any other approved financial instruments. The bank purchases the instruments at a discount. iv) Money At Call: - Banks also grant loans for a very short period, generally not exceeding 7 days. Such advances are repayable immediately at a short notice hence they are called as Money at Call or Call money. These loans are given to dealers or brokers in stock market against Collateral Securities. v) Direct Loans: - Loans are given to customers against the security of moveable properties. Their maturity varies from 1 to 10 years. Interest has to be paid on entire loan amount sanctioned. Loans are of many types like: personal loans, term loans, call loans, participative loans, collateral loans etc. b) Loans to Agriculture: - Banks grant short-term credit to agriculture at a lower rate of interest. Loans are granted for irrigation, purchase of equipments, inputs, cattle etc. c) Loans to Industries: - Banks grant secured loans to small and medium scale industries to meet their working capital needs. The time period may be from one to five years. It may be in the form of Overdraft, cash credit or direct loan. d) Loans to Foreign Trade: - Loans are granted to export and import in the form of direct loans, discounting of bills, guarantee for deferred payments etc. Here the rate of interest is low. e) Consumer Credit / Personal loans: - Banks also grant credit to household in a limited amount to buy some durable consumer goods like television sets, refrigerators, washing machine etc. Such consumer credit is repayable in installments. Under 20-point programme, the scope of consumer credit has been extended to cover expenses on marriage, funeral etc., as well.

f) Miscellaneous Advances: - Banks also gives advances like packing credits to exporters, export bill purchased or discounted, import finance, finance to self-employed, credit to weaker sections of society at concessional rates etc. II. Secondary / Non-banking Functions: - Banks gives various forms of services to public. Such services are termed as non- banking or secondary functions: 1. Agency Services:Banks perform certain functions on behalf of their customers. While performing these services, banks act as agents to their customers, hence these are called as agency services. Important agency functions are:a) Collection: - Commercial banks collect cheques, drafts, bills, promissory notes, dividends, subscriptions, rents and any other receipts which are to be received by the customer. For these services banks charge a nominal amount. b) Payment: - Banks also makes payments on behalf of their customers like paying insurance premium, rent, taxes, electricity and telephone bills etc for such services commission is charged. c) Income Tax Consultant: - Commercial banks act as income-tax consultants. They prepare and finalise the income tax returns of their clients. d) Sale and Purchase of Financial Assets: - As per the customers instruction banks undertake sale and purchase of securities, shares and any other financial assets. Nominal charges are charged by a bank. e) Trustee, Executor and Attorney: - As a trustee, banks become the custodian and manager of customer funds. Bank also acts as executor of deceased customers will. As an Attorney the banks sign the documents on behalf of customer. f) E- Banking: - Through Electronic banking, a customer can operate his bank account through internet. He can make payments of various bills. He can even transfer money from one place to another. 2. Utility Services: - Modern Commercial banks also performs certain general utility services for the community, such as:a) Letter Of Credit: - Banks also deal in foreign trade. They issue letter of credit and provide guarantee to foreign traders for the soundness of their customers. b) Transfer Of Funds: - Banks arrange transfer of funds cheaply and safely from one place to another. Transfer can be in the form of Demand draft, Mail transfer Travellers cheques etc. c) Guarantor: - Banks offer a guarantee of payment on behalf of importer to facilitate imports with deferred payments. d) Underwriting: - This facility is provided to Joint Stock Companies and to government to enable them to raise funds. Banks guarantee the purchase of certain proportion of shares, if not sold in the market. e) Locker Facility: - Safe Lockers are provided to the customers. So that they can deposit their valuables like Jewellary, Securities, Shares and other documents. f) Referee: - Banks may act as referee with respect to financial standing, business reputation and respectability of customers. g) Credit Cards: - Credit card facility has been introduced by commercial banks. It enables the holder to minimize the use of hard cash. Credit card is a convenient medium of exchange which enables its holder to buy goods and services from member establishment without using money. III. Subsidiary Activities: - Many commercial banks also undertakes subsidiary activities such as: a) Housing Finance: - Housing finance is provided against the security of immoveable property of land and buildings. Many banks such as SBI, Bank of India etc. have set up housing finance subsidiaries. b) Mutual Funds: - A Mutual fund is a financial intermediary that pools the savings of investors for collective investment in diversified portfolio securities. Many banks like SBI, Indian Bank etc. have set up mutual fund subsidiaries. c) Merchant Banking: - A variety of services are offered by merchant banking like: Management, Marketing and Underwriting of new issues, project promotion, corporate advisory services, investment advisory services etc. d) Venture Capital Fund: - Venture capital fund provides start-up share capital to new ventures of little known, unregistered, risky, young and small private business, especially in technology oriented and knowledge intensive business. Many commercial banks like SBI, Canara Bank etc. have set up venture Capital Fund Subsidiaries. e) Factoring: - Factoring is a continuing arrangement between a financial intermediary (factor) and a business concern (client) whereby the factor purchases the clients accounts receivable. Banks like SBI and Canara Bank have established subsidiaries to provide factoring services.

Principles of Sound Lending

There are few general principles of good lending which every banker follows when appraising an advance proposal. These general principles of good lending are explained. 1. Safety: "Safety first" is the most important principle of good lending. When a banker lends, he must feel certain that the advance is safe; that is, the money will definitely come back. If, for example, the borrower invests the money in an unproductive or speculative venture, or if the borrower himself is dishonest, the advance would be in jeopardy. Similarly, if the borrower suffers losses in his business due to his incompetence, the recovery of the money may become difficult. The banker ensures that the money advanced by him goes to the right type of borrower and is utilized in such a way that it will not only be

safe at the time of lending but will remain so throughout, and after serving a useful purpose in the trade or industry where it is employed, is repaid with interest. 2. Liquidity: It is not enough that the money will come back; it is also necessary that it must come back on demand or in accordance with agreed terms of repayment. The borrower must be in a position to repay within a reasonable time after a demand for repayment is made. This can be possible only if the money is employed by the borrower for short-term requirements and not locked up in acquiring fixed assets, or in schemes which take a long time to pay their way. The source of repayment must also be definite. The reason why bankers attach as much importance to 'liquidity' as to safety' of their funds, is that a bulk of their deposits is repayable on demand or at short notice. If the banker lends a large portion of his funds to borrowers from whom repayment would be coming in but slowly, the ability of the banker to meet the demands made on him would be seriously affected in spite of the safety of the advances. For example, an advance of Rs.50 lakhs (approx. $111,354.60USD) on the security of a legal mortgage of a bungalow of the market value of Rs. 100 lakhs (approx. $222,716.82 USD), will be very safe. If, however, the recovery of the mortgage funds has to be made through a court process, it may take a few years to do so. The loan is safe but not liquid. 3. Purpose: The purpose should be productive so that the money not only remain safe but also provides a definite source of repayment. The purpose should also be short termed so that it ensures liquidity. Banks discourage advances for hoarding stocks or for speculative activities. There are obvious risks involved therein apart from the anti-social nature of such transactions. The banker must closely scrutinize the purpose for which the money is required, and ensure, as far as he can, that the money borrowed for a particular purpose is applied by the borrower accordingly. Purpose has assumed a special significance in the present day concept of banking. 4. Profitability: Equally important is the principle of 'profitability' in bank advance like other commercial institutions, banks must make profits. Firstly, they have to pay interest on the deposits received by them. They have to incur expenses on establishment, rent, stationery, etc. They have to make provision for depreciation of their fixed assets and also for any possible bad or doubtful debts. After meeting all these items of expenditure which enter the running cost of banks, a reasonable profit must be made; otherwise, it will not be possible to carry anything to the reserve or pay dividend to the shareholders. It is after considering all these factors that a bank decides upon its lending rate. It is sometimes possible that a particular transaction may not appear profitable in itself, but there may be some ancillary business available, such as deposits from the borrower's other concerns or his foreign exchange business, which may be highly remunerative. In this way, the transaction may on the whole be profitable for the bank. It should, however, be noted that lending rates are affected by the Bank Rate, inter-bank competition and the Federal / Central Bank's directives ( e.g. Directives of Reserve Bank of India, RBI), if any. The rates may also differ depending on the borrower's credit, nature of security, mode of charge, and form and type of advance, whether it is a cash credit, loan pre-shipment finance or a consumer loan, etc. 5. Security: It has been the practice of banks not to lend as far as possible except against security. Security is considered as insurance or a cushion to fall back upon in case of an emergency. The banker carefully scrutinizes all the different aspects of an advance before granting it. At the same time, he provides for an unexpected change in circumstances which may affect the safety and liquidity of the advance. It is only to provide against such contingencies that he takes security so that he may realize it and reimburse himself if the well-calculated and almost certain source of repayment unexpectedly fails. It is incorrect to consider an advance proposal from the point of view of security alone. An advance is granted by a good banker on its own merits, that is to say with due regard to its safety, likely purpose etc., and after looking into the character, capacity and capital of the borrower and not only because the security is good. Apart from the fact that taking of security reserves as a safety valve for an unexpected emergency it also renders very difficult, if not impossible, for the borrower to raise a secured advance from another source against the very security. 6. Spread: Another important principle of good lending is the diversification of advances. An element of risk is always present in every advance, however secure it might appear to be. In fact, the entire banking business is one of taking calculated risks and a successful hanker is an expert in assessing such risks. He is keen on spreading the risks involved in lending, over a large number of borrowers, over a large number of industries and areas, and over different types of securities. For example, if he has advanced too large a proportion of his funds against only one type of security, he will run a big risk if that class of security steeply depreciates. If the bank has numerous branches spread over the country, it gets a wide assortment of securities against the advances. Slump does not normally affect all industries and business centres simultaneously. 7. National Interest, Suitability, etc.: Even when an advance satisfies all the aforesaid principles, it may still not be suitable. The advance may run counter to national interest. The Federal / Central Bank (e.g Reserve Bank of India, RBI) may have issued a directive prohibiting banks to allow the particular type of advance. The law and order situation at the place where the borrower carries on his business may not be satisfactory. There may be other reasons of a like nature for which it may not be suitable for the bank to grant the advance. In the changing concept of banking, factors such as purpose of the advance, viability of the proposal and national interest are assuming a greater importance than security, especially in advances to agriculture, small industries, small borrowers, and export-oriented industries.

Credit Policy and Credit Planning

The word "policy covers matters ranging from high order strategy to administrative detail. It provides guidance for managerial thinking as well as action.

A policy is a deliberate plan of action, usually based on certain principles indicating the priorities of decision makers about allocations of resources for achieving rational outcome. It is a written statement that communicates managements intent, objectives, requirements, responsibilities, and or standards. Lending is one of the core activities of banks. Banks earnings, profitability, reputation, net asset value etc., depend on its credit portfolio. A sound and healthy lending portfolio is must for banks survival. Reserve Bank of India issues guidelines from time to time relating to flow of credit and directives about credit discipline by the borrowers and banks. Keeping in view the economic conditions, fiscal deficit position of the country Government of India/ Ministry of Finance too issue directives to banks about credit. RBI announces monetary and credit policy in April and October each year keeping in view the significant changes in the regulatory framework for financial markets. The policy has direct impact on the lending policy of banks. Why Credit Policy? In the process of financial intermediation banks are confronted with various kinds of financial and non-financial risks. These risks are highly inter-dependent. One area of risk can have ramifications for a range of other risk categories. Banks are attaching considerable importance to improve the ability to identify, measure, monitor and control the overall level of risks undertaken. To mitigate the risk, banks prepare credit policy which contains guidelines for the entire credit process, from credit origination to problems in loan management and covers areas like mechanism for loan review, interbank exposure, country risk, credit rating framework, portfolio management and risk adjusted return on capital. Credit policy gives valuable guidance to the operational units in credit dispensation, building up a diversified portfolio of quality assets and credit monitoring. The policy also contains prudential limits to individual borrowers, non-corporate borrowers, entry-level exposure norms, substantial exposure limits, benchmark financial ratios, borrower standards, exposure limits, ceilings to industries, sensitive sectors, rating categories etc. For effective implementation of credit policy banks have also put in place a multi-tier credit approving system wherein an Approval Grid clears the loan proposals before being placed to the respective sanctioning authorities. Objectives of credit policy: The main objectives of a credit policy are: o To comply with national priorities in achieving planned growth in various productive sectors of the economy. o To see that credit portfolio has a balanced mix from different viewpoints. o To regulate and streamline the financial resources of the bank in an orderly manner for achieving objectives of the bank and to instill a sense of credit culture in the operating staff. o To provide need based and timely availability of credit to borrowers. o To strengthen the credit management skills, supervision and follow up measures for maintaining a healthy and quality credit portfolio in the bank for ensuring overall profitability. o To minimize credit risk. o To comply with various regulatory requirements, pertaining to exposure norms, priority sector norms, income recognition and asset classification guidelines, capital adequacy, credit risk management guidelines, etc., of Reserve Bank of India and other authorities. o To decide discretionary lending powers of various authorities Aspects kept in view while preparing Credit Policy: (a) Regulatory Restrictions issued by RBI: While preparing lending policy, banks keep into consideration Regulatory Restrictions issued by RBI on lending, the power derived from the Banking Regulation Act, 1949. The regulatory restrictions include: o Statutory Restrictions o Regulatory Restrictions o Restrictions on other loans and advances and contains o Guidelines on Fair Practices Code for Lenders (i) Statutory Restrictions: In terms of Section 20(1) of the Banking Regulation Act, 1949, a bank cannot grant any loans and advances on the security of its own shares Banking Regulation Act, 1949. Section 20(1) of the Banking Regulation Act, 1949 also lays down the restrictions on loans and advances to the directors and the firms in which they hold substantial interest. (ii) Regulatory Restrictions: RBI has put restrictions on granting of loans and advances to:

o Relatives of Directors o Officers and Relatives of Senior Officers of Banks o Industries Producing / Consuming Ozone Depleting Substances (ODS) RBI has also put certain restrictions on advances against Sensitive Commodities under Selective Credit Control (SCC) and payment of commission to staff members including officers under Section 10(1)(b)(ii) of Banking Regulation Act, 1934, (iii) Restrictions on other loans and advances: RBI has issued guidelines to banks in respect of: o Loans and Advances against Shares, Debentures and Bonds o Advances against Fixed Deposit Receipts (FDRs) Issued by Other Banks o Advances to Agents/Intermediaries based on Consideration of Deposit Mobilisation o Loans against Certificate of Deposits (CDs) o Bank Finance to Non-Banking Financial Companies (NBFCs) in respect of certain activities undertaken by them o Bank Finance to Equipment Leasing Companies o Financing Infrastructure/ Housing Projects (iv) Guidelines on Fair Practices Code for Lenders: It is basically disclosure guidelines. Commercial banks and other lenders are required to state plainly the terms of the contract and provide a copy of the lending agreement to the borrower. RBI has advised all banks and financial institutions to display on their web sites Fair Practices Code for Lenders. Preparing Credit Policy: Credit policy differs from bank to bank. Banks prepare their credit policy keeping in view RBI guidelines, directives of Government of India, Ministry of Finance, banking scenario, provisions of Banking Regulations Act, position of assets and liabilities, traditions, inherent expertise, strengths and weaknesses, emerging market, economic trends, and banks priorities, thrust areas, innovative products and above all most profitable deployment of resources by way of lending. The credit policy also contains guidelines for risk identification, measurement, risk grading and risk reporting and risk control. Credit policies are periodically reviewed keeping in view the ever-changing economic and socioeconomic conditions. Credit policy duly approved by board of directors is circulated to branches and controlling offices along with detailed instructions and guidelines. As per RBI directives all commercial banks operating in India are required to give 40 percent of their net adjusted credit to priority sector. RBI regulates rate of interest on priority sector advances up to a limit of Rs. 2 lakhs. RBI announces credit policy twice a year. Credit policy specifies banks exposure in different segments of economy. (i) Assessment of Needs: Assessing the credit needs of different sectors help in budgeting the quantum of funds to be lent in to that sector. (ii) Assessing Resource position: Deposits are the main resource for banks. Bank deposits are held in different maturity buckets as under 1 to 14 days 15 to 29 days 29 days and up to 3 months Over 3 months and up to 6 months Over 6 months and up to 1 year Over 1 year and up to 3 years Over 3 years and up to 5 years Over 5 years While deciding credit policy deposits in different maturity buckets are considered, as a bank cannot afford to lend for longer period if major portion of deposits is held in short period maturity bucket. (iii) Sectoral Diversification: Credit policy should not have leaning towards a particular sector, as deployment of resources towards one particular sector may be suicidal for the bank. It is not advisable to keep all eggs in one basket. Therefore size of the loan portfolio for different sectors of economy needs to be determined.

iv) Retail lending or bulk (wholesale) lending: While preparing credit policy bank also decides whether it wants to go for retail lending or bulk lending. While retail lending involves higher cost of supervision and control the element of credit risk is less. In case of bulk lending cost of supervision and control is less but risk of default is high. (v) Loan Pricing: Bank has to decide the benchmark Prime Lending Rate for different types of loans and advances. It also decides whether to have fixed rate of interest or floating rate of interest or both and its applicability on different asset products. The advantage in charging fixed rate of interest is that the revenue can be worked out well in advance. The disadvantage is that in the event of interest rate going up and in the event of declining rate regime (unless bank falls in line) borrowers desert bank and migrate to other banks having lower interest rate. In case of floating interest rate it automatically gets adjusted as per market forces, however it become bit difficult to project revenue. Banks also permit borrowers to switch over from fixed to floating rate and vice versa by levying migration fee. (vi) Market intelligence: With a view to enabling them to face competition, while preparing credit policy, banks take in to account the credit policy of other banks. They find out-processing fee, charges for non-utilization of sanctioned limit and other incidental charges and reducing risks arising from lending operations. (vii) Risk assessment: Banks also undertake portfolio review / industry studies in order to assess the risks lying in the portfolio / industries financed and impact of concentration of exposures to certain borrowers, sectors or industries for improving quality of the portfolio and reduce the potential adverse. (vii) Exposure limit: In terms of powers conferred by the Banking Regulation Act, 1949, RBI issues statutory guideline to Scheduled Commercial Banks relating to credit exposure limits for individual / group borrowers , credit exposure to specific industry or sectors, and the capital market exposure of banks. Preparing Budget: Once the bank decides its lending policy, budgeting for lending is done. Controlling offices are asked to prepare their lending budget keeping in view the potential in their area of operations and priorities mentioned in district credit plan .

Investment Management
In addition to loans and advances, which were discussed earlier, banks deploy a part of their resources in the form of investment in securities/ financial instruments. The bulk of a bank's assets are held either in the form of (a) loans and advances and (b) investments. Investments form a significant portion of a bank's assets, next only to loans and advances, and are an important source of overall income. Commercial banks' investments are of three broad types: (a) Government securities, (b) other approved securities and (c) other securities. These three are also categorised into SLR (Statutory Liquidity Ratio) investment and non-SLR investments. SLR investments comprise Government and other approved securities, while non-SLR investments consist of 'other securities' which comprise commercial papers, shares, bonds and debentures issued by the corporate sector.

Figure: Classification of Bank Investments Under the SLR requirement, banks are required to invest a prescribed minimum of their net demand and time liabilities (NDTL) in Government- and other approved securities under the BR act, 1949. (Note that SLR is prescribed in terms of banks' liabilities and not assets). This provision amounts to 'directed investment', as the law directs banks to invest a certain minimum part of their NDTL in specific securities. While the SLR provision reduces a bank's flexibility to determine its asset mix, it helps the Government finance its fiscal deficit. It is the RBI that lays down guidelines regarding investments in SLR and non-SLR securities. Bank investments are handled by banks through their respective Treasury Department. Investment Policy Each bank is responsible for framing its own Internal Investment Policy Guidelines (or, simply, Investment policy). The Asset Liability Committee (ALCO) of a bank, comprising senior bank officials and headed in most cases by the CEO, plays a key role in drafting the investment policy of the bank. The investment policy and the changes made therein from time to time have to obtain the bank Board's approval for it. The aim of an Investment Policy of a bank is to create a broad framework within which investment decisions of the Bank could be taken. The actual decisions regarding investment are to be taken by the Investment Committee set up by the Board. The Investment Policy outlines general instructions and safeguards necessary to ensure that operations in securities are conducted in accordance with sound and acceptable business practices. The parameters on which the policy is based are return (target return as determined in individual cases), duration (target duration of the portfolio), liquidity consideration and risk. Thus, while the Policy remains within the framework of the RBI guidelines with respect to bank investment, it also takes into consideration certain bank-specific factors, viz., the bank's liquidity condition and its ability to take credit risk, interest rate risk and market risk. The policy is determined for SLR and non-SLR securities, separately. The Investment Policy provides guidelines with respect to investment instruments, maturity mix of investment portfolio, exposure ceilings, minimum rating of bonds/ debentures, trading policy, accounting standards, valuation of securities and income recognition norms, audit review and reporting and provisions for Non-Performing Investments (NPI). It also outlines functions of front office/ back office/ mid office, delegation of financial powers as a part of expeditious decision-making process in treasury operations, handling of asset liability management (ALM) issues, etc. Several banks follow the practice of a strategy paper. Based on the market environment envisaged by Asset Liability Committee (ALCO) in the Asset Liability Management (ALM) Policy, a Strategy Paper on investments and expected yield is usually prepared which is placed before the CEO of the Bank. A review of the Strategy Paper may be done at, say half yearly basis and put up to the CEO.

Non-SLR Investments
If there is any proposal to invest or disinvest in non-SLR securities, the concerned officials must refer these proposals to the Investment Committee of the bank. Upon vetting and clearance by the Investment Committee, financial sanction should be obtained from the appropriate authority in terms of the Scheme of Delegation of Financial Powers. Non-SLR Investments can include: Investments in Associates/ Subsidiaries and Regional Rural Banks Strategic Investments Venture Capital Investments PSU Bonds Corporate Investments Mutual Funds Bonds/debentures issued by Securitisation Companies (SCs) and Reconstruction Companies (RCs) However, as per RBI guidelines, the investments (SLR as well as Non-SLR) will be disclosed in the balance sheet of the Bank as per the six-category classification listed below: a. Government securities, b. Other approved securities, c. Shares, d. Debentures & Bonds, e. Investment in subsidiaries/ joint ventures in the form of shares, debentures, bonds etc, and f. Others (Commercial Paper, Mutual Fund Units, etc.).