ECONOMIC INDICATORS

Parameters 2010-11 2011-12

Inflation as measured by variation
in WPI (YOY basis) $
@ Projected end March 2013 at
7%
8.98% 6.89%
M3
@Projected growth for 2012-13 at
15%
15.9% 13%
FX (US bn) !eserve " 30.82!n 29.!n
#P " (fa$tor $ost $onstant %ri$es)
@ Projected for 2012-13 at
6.5%
8.5% 6.5%
Manufa$turin& #ro't( " 8.3% 2.8%
)&ri$ulture #ro't( " 6.6% 2.5- 3%
Savin&s( as * of #P) "
Investments (as * of #P)"
+,%orts US $ terms "billion 25.56 303.7
Im%orts US $ terms " billion 350.70 88.6
)&&re&ate e%osit #ro't( of S-.
@ "rojected to grow d#r$ng 2012-
13
15.8% 17.%
/on0food -redit #ro't( of S-.
@ "rojected non-food cred$t $s to
grow 17% $n 2012-13
21.2% 19.3%
1 Sour$e 2Union .ud&et 3453 and monetary %oli$y 536
$ )s %er revised estimates of -SO
" +$onomi$ survey 3455053
%ha"ter -1
%#rrent &conom$c 'cenar$o
By 2030 India could become the 3
rd
largest economy after China and U.S. India
also has the potential to record the fastest growth oer the ne!t 30 to "0 years. #f course$
India%s growth could be higher than "& oer the ne!t 30 years and close to "& een in
20"0 if deelopment progresses successfully. In fact$ India could be ahead of the U.S. in
20"" and be 'o. ( in 20)*.+
, -oldman Sachs B.IC report 2003
1. &%()(M*% '%&)+,*( - +n o-er-$ew - Sin$e inde%enden$e7 India (as made all
round %ro&ress in every s%(ere of e$onomi$ a$tivity6 We ta8e le&itimate %ride in t(e
fa$t t(at %ro&ress
(as been sustained
in t(e frame'or8 of
a demo$rati$ %oli$y
and an o%en so$iety
dee%ly $ommitted
to fundamental
(uman freedoms
and la' of t(e land6
India9s e$onomi$
stru$ture is
$onsiderably
diversified 0 'it(
vast reservoir of
s$ientifi$7
te$(nolo&i$al and
mana&erial s8ills6
:(ere (as also been
si&nifi$ant
im%rovement in nation9s edu$ational and (ealt( status as measured by s$(ool
environment7 litera$y rate and life e,%e$tan$y at birt(6 Self0relian$e (as been basi$
5
ob;e$tive of e$onomi$ %lannin& in India sin$e inde%enden$e6 <o'ever7 3455053 (as
been e,$e%tionally $(allen&in& for t(e &lobal e$onomy in &eneral and India in
%arti$ular as '(at started off as turmoil in t(e &lobal mar8et %arti$ularly +uro is no'
sno'ballin& in Indian e$onomy '(i$( (as been fa$in& un%re$edented inflation6
+$onomi$ fall out of t(is is (a) #P slo'do'n7 (b) ollar a%%re$iation7 ($) Fallin&
fore, reserve7 (d) Widenin& &a% in balan$e of %ayment7 (e) In$reasin& fis$al defi$it7
(f) :(reat of rise in unem%loyment and ;ob $ut (&) %ressure on sto$8 mar8et and (()
Sin8in& business $onfiden$e inde,6 It (as fall out on ban8in& system also namely (a)
!ise in delin=uen$y of loan7 (b) Fallin& /IM and %rofitability and ($) fear of stability
of finan$ial system6 In its re$ently released Finan$ial Stability !e%ort7 !.I (as (inted
t(at forei&n institutional investment in sto$8 may di% due to un$ertainty in US and
+uro%e7 .an8s may (ave to &ra%%le 'it( more bad loans and $urrent a$$ount defi$it
may 'iden (+: 3365363455)6
2. ./P
W(ile &lobal e$onomy may (ave to settle for a slo'er &ro't( of 363>036>4*7
India9s #P (ad been &ro'in& at ?* %lus for five years in a ro' 0 ?6@* in 344304@7
?63* in 344@04>7 A63* in 344>04B7 A6C* in 344B04C and A* in 344C04?6 <o'ever
due to un%re$edented e$onomi$ and finan$ial $rises &lobally7 &ro't( (as slo' do'n
to B6C* in 344?04A7 C6@* in 344A0547 ?6@* in 3454055 and B6>* in 3455053 and
e,%e$ted to be >6>* ( &ood in $onte,t of slu&&is( &lobal e$onomy) in 34530536
Slo'do'n in 345505 3 is attributed to %oor &ro't( in a&ri$ulture7 forestry and fis(in&
(36>*)7 manufa$turin& (36A*) and $onstru$tion (@6?*)6 Finan$e Minister re$ently
$ited t(ree reasons for t(is slo' do'nD #lobal %roblems7 (i&( inflation and de$linin&
investments6
)mon& .!I-S $ountries7 &ro't( in -(ina fell from ?65* in E5 of 3453 to C6B*
in E36 #ro't( in .raFil and Sout( )fri$a also moderated si&nifi$antly in E56 World
+$onomi$ Outloo8 (as revised &lobal &ro't( in 3453 mar&inally do'n'ard to 36>*6
!6 -6 !an&ra;an7 -(airman7 Prime Minister9s )dvisory -oun$il outlined five
measures t(at $an tri&&er investmentsD (a) if e$onomy $ontinues to &ro' at ?6>* t(at
it self may stimulate &ro't(7 (b) inflation s(ould be tamed to a reasonable level as
=ui$8ly as %ossible7 ($) fis$al defi$it to be $ontained at bud&eted level (d) tar&et
3
for t(e infrastru$ture of t(is year s(ould be fulfilled7 (e) %riority must be &iven for
$om%letin& t(ese tar&ets be it rail'ay frei&(t $orridor or road'ays %ro;e$ts6 It is
no' bein& debated t(at !.I s(ould $ut rates as 8ee%in& blind eye to &ro't( and only
fo$ussin& on inflation is not in interest of t(e $ountry6
3. 0ore$gn &1change ,eser-e
India9s fore, reserves $overed C65 mont(s im%orts at t(e end of Mar$(7 536 ue
to many adverse fa$tors su$( as fallin& &ro't(7 risin& $ommodity %ri$es7 sur&in&
trade defi$it7 s%iralin& inflation7 risin& interest rates and %lun&in& value of Indian
ru%ees7 Fore, reserves (ave been on %ressure6 India is no' fourt( lar&est (older of
Fore, reserve in )sia after -(ina7 Ga%an and :ai'an6 ) debate is &oin& on if su$( a
(u&e Fore, reserve is ne$essary6 :(e traditional indi$ators of ade=ua$y of reserves are
based on trade7 debt and monetary indi$ators or even t(e H#uidotti !uleI or
HJi=uidity at !is8I rule su&&ested by )lan #reens%an7 t(ey need to be su%%lemented
'it( '(at $an be des$ribed as multi%le indi$ators to assess t(e ade=ua$y of t(e
reserves of any $ountry at a &iven ;un$ture6 It s(ould (o'ever be 8e%t in mind t(at
t(ere are many un=uantifiable benefits of 8ee%in& (i&( reserves li8e maintainin&
$onfiden$e in monetary and e,$(an&e rate %oli$ies7 en(an$in& t(e $a%a$ity to
intervene in forei&n e,$(an&e mar8ets7 limitin& e,ternal vulnerability so as to absorb
s(o$8s durin& time of $risesK %rovidin& $onfiden$e to t(e mar8ets t(at e,ternal
obli&ations $an al'ays be met and redu$in& volatility in forei&n e,$(an&e mar8ets6
:(us $omfort level of reserves is de$ided not only 'it( $urrent situation but also
'it( %ossible future eventualities6 )s is 8no'n7 !.I is investin& FX reserve into safe
treasury se$urities of develo%ed $ountries at a si&nifi$antly lo'er interest rate t(an
'(at India in$urs on its liabilities6 +$onomist S(ri .(as8ar atta7 (as o%ined t(at
a$$umulation of FX reserve is 2em!arrassment of r$ches3. It means t(at in$rease in
domesti$ money su%%ly7 '(i$( invariably results into in$rease of a&&re&ate domesti$
demand7 t(ereby addin& 2demand-"#44 $nf4at$on3. :(ere are su&&estions t(at (a)
a %art of t(ese reserves $an be %la$ed 'it( ban8s '(i$( in turn $an lend it to
$or%orate7 '(i$( are ot(er'ise raisin& +-.s from e,ternal finan$ial mar8et6 :(is
'ill earn (i&(er returns to !.I7 (b) #OI $an utiliFe FX reserve to im%ort lar&e array
of non0food items to in$rease domesti$ availability and $ool off inflation6 ($)
3
!.IL#OI to move to'ard full $a%ital a$$ount $onvertibility6 :(e #OI and !.I (as
re$ently de$ided to form a SPM 'it( $ > billion as subsidiary of India Infrastru$ture
Finan$e -om%any based in Jondon to lend fund to Indian -om%anies to finan$e its
infrastru$ture6 #OI is also $onsiderin& a %ro%osal to for $reatin& a %ri$e stabiliFation
fund for %etroleum %rodu$ts by usin& a %art of our reserves6
. 0ore$gn /$rect *n-estment-
:(e forei&n dire$t investment brin&s 'it( it t(e $ru$ial mana&erial s8ill7
te$(nolo&y7 brand name and e,%erien$e of t(e &lobal %layer6 FI (as t(ree
$om%onents0 fres( e=uity investment7 reinvestment of %rofits or a %art of it instead of
re%atriatin& t(e same and investments brou&(t in for %ayin& 'or8men9s $om%ensation
for relo$ation and ot(er su$( %ur%ose not related to e=uity investment6 FI inflo' in
India 'as US$ 336? billion in 344B04C7 US$3@6? billion in 344C04?7 US$ 3C6? billion
in 344?04A7 US$ 3C6? billion in 344A0547 US$ 3@6? billion in 3454055 and US$ @B6?
billion in 34550536 India (as emer&ed as a %referred destination for forei&n investors
and is ran8ed 3
rd
7 ne,t only to .raFil and -(ina and US is ran8ed @
t(
as %er
.loomber& Survey (+: 3364A654)6 Investment $ommission (as re$ommended t'o
%ron&ed strate&y to in$rease forei&n dire$t investmentD (a) In$reasin& visibility in
$ountries li8e Fran$e7 S%ain7 -anada and :ai'an '(i$( (as little investment in India
and (b) fo$usin& on US7 UN7 /et(erlands and Ga%an6 Investment $ommission furt(er
identified as many as A3 %otential forei&n $om%anies for investment a$ross various
se$tors6 +,%ert %anel under t(e $(airmans(i% of U:I )M- -(airman S(ri U6 N6
Sin(a (as %ro%osed to remove t(e distin$tion bet'een various forms of forei&n
investors su$( as forei&n institutional investors7 %rivate e=uity or non0resident Indians
and su&&ested to re%la$e it 'it( =ualified institutional investor model6 :(e ne' model
'ill %ave 'ay to forei&n individual investor to invest dire$tly in sto$8 mar8et by
o%enin& a dedi$ated tradin& a$$ount 'it( re&istered de%ository %arti$i%ants6
>6 Man#fact#r$ng 5 ser-$ce sector
Manufa$turin& and servi$e se$tor (olds 8ey to &ro't( and ;ob6 IIP (Inde, of
Industrial %rodu$tion) of Gune7 53 indi$ated s(ar% de$line in fa$tory out%ut to 56?*
a&ainst A6>* in t(e %revious year6 Out%ut of $a%ital &oods and non durable &oods
di%%ed s(ar%ly6 Investment -ommission in its re%ort to t(e #overnment of India
@
(as su&&ested t(at infle,ible labour la's7 %oor infrastru$ture and ambi&uity in
outlinin& t(e %riority se$tors (as a$ted as im%ediments in buildin& lar&e firms7
attra$tin& forei&n dire$t investment and rea%in& t(e e$onomies of s$ale6 +$onomist
also feel t(at drasti$ fall in industrial out%ut may %rom%t t(e !eserve .an8 to
$onsider revisitin& (i&( interest rates in ne,t revie' of monetary %oli$y in Se%tember7
536
6. *nf4at$on
<eadline inflation as measured by '(olesale %ri$e inde, (WPI) eased to C63* as
on e$6 536 !.I (as revised its fore$ast for Mar$( 53 from B6>* to C*6 Food
inflation 'as 546B* in /ov6 53 and %ulses7 ve&etables7 mil87 e&& meat and fis( %ri$es
are still under %ressure6 Overall inflation s$enario $ontinues to be above !.I $omfort
level 'it( manufa$tured non0food %rodu$t inflation in$(in& u% and food %ri$es
remainin& stubborn6 It is &enerally believed t(at defi$ient monsoon rains and risin&
&lobal $rude %ri$es are e,%e$ted to a$$elerate %ri$e %ressure in t(e mot(s a(ead6 !.I
believes t(at $urrent inflation %ressure 'ill %ersist due to disa%%ointin& monsoon7
ad;ustments in administered fuel %ri$es7 t(e de%re$iated e,$(an&e rate and
infrastru$ture bottlene$8s6 -urrent level of inflation is also $onsidered 2s"$ra4$ng3 out
of $ontrol to (urt investments and e$onomi$ &ro't( due to ti&(tenin& of monetary
%oli$y6 :(e (i&(er inflation differential bet'een India and ma;or tradin& %artners is a
sour$e of %ressure on $om%etitiveness of Indian e,%orts6 :(us $ontainin& inflation is
essential to e,ternal balan$e of %ayment %osition as 'ell as to &ro't( in lon& run6 It
is felt t(at revival of $onsum%tion demand7 $(an&e in $onsum%tion %attern in favor of
%rotein ri$( items li8e e&&7 mil87 fis(7 meat et$6 '(ere %ri$e in$rease (as been (i&(7
risin& international $ommodities %ri$es in$ludin& $rude oil7 rise in e,$ise and
$ustom duties due to roll ba$8 of fis$al stimulus and inflationary e,%e$tation are
%uttin& %ressure on inflation6 World over $entral ban8s are $on$erned of inflation
and vie' is to 2ta6e care of $nf4at$on and growth w$44 ta6e care of $tse4f3.
7. *nterest ,ate *nstance
In =uarterly %oli$y of Mar$( 537 !.I said t(at des%ite de$eleration in &ro't(7
inflation ris8s remain7 '(i$( 'ill influen$e bot( t(e timin& and ma&nitude of future
rate a$tion6 It is o%ined t(at (a) $ombination of 'ea8ened e,$(an&e rate and (i&( oil
>
%ri$es %resent u%side ris8 to broader inflation7 (b) di% in $ore inflation refle$ts
demand %ressure in t(e e$onomy and 'ea8 investment a$tivities7 ($) $redible fis$al
$onsolidation 'ill be an im%ortant fa$tor s(a%in& t(e inflation out loo8 and (d)
$urrent a$$ount defi$it is li8ely to remain (i&( and finan$in& it may $ontinue to be a
$(allen&e6 -!ISIJ !esear$( o%ined t(at lendin& rates are unli8ely to ease mu$(
durin& 3453053 in vie' of $ontinued ti&(tness in li=uidity7 in$reased &overnment
borro'in&s and (i&( $ost of funds for ban8s6
A6 7$8#$d$t9
Ji=uidity %osition in t(e $urrent =uarter (Guly0 O$t7 53) is 'ell 'it(in !.I $omfort
levels 'it( ban8 on avera&e borro'in&s !s6 @3B44 $rores t(rou&( t(e re%o 'indo'6
Furt(er -!! $ut by 3> b%s effe$tive 33
nd
Se%tember7 3453 'ill add furt(er li=uidity
of !s6 5C444 $rores in t(e system6 Wit( fallin& in$remental $redit de%osit ratio from
A3* in Mar$(7 53 to ?3* in Mar$(7 53 and slu&&is( demand of $redit7 li=uidity
%osition of ban8s is %redi$ted to remain $omfortable6 It may be re$alled t(at in order
to (el% t(e ban8s to over$ome li=uidity $onstraints in future7 !.I (as introdu$ed
Mar&inal Standin& Fa$ility (MSF) at 3* of /:J at 5* over re%o rate and Ji=uidity
)d;ustment Fa$ility (J)F) t(rou&( re%ur$(ase a&reement (!+PO) a&ainst $ollateral
of #OI bonds6
546 M3
M3 in$ludes (a) $urren$y 'it( t(e %ubli$7 (b) demand de%osits 'it( ban8s7 ($)
time de%osits 'it( ban8s and (d) ot(er de%osits 'it( !eserve .an86 M3 &ro't( (net
of $onversion) at 5>6A* durin& 3454055 'as lo'er t(an t(e !eserve .an89s indi$ative
tra;e$tory of 5C %er $ent due to slo' de%osit &ro't( and a$$eleration in $urren$y &ro't(6 :(e
(i&(er $urren$y demand slo'ed t(e money multi%lier6 -onse=uently7 M3 &ro't( slo'ed
des%ite a si&nifi$ant in$rease in reserve money6 :(is su&&ests t(at money su%%ly &ro't( 'as
not a $ontributin& fa$tor to inflation6
11. :rade def$c$t- &1"orts and *m"orts
Forei&n :rade Poli$y 344@04A (as tar&eted &ro't( of +,%ort from $ B36>4 billion
as on Mar$( end 344@ to $ 344 billion by Mar$( end 3455 to a$(ieve 56>* of &lobal
mar8et s(are6 -)#! envisa&ed is 35* for five years6 +,%orts for 3455053 (ave
$rossed $ 3436C billion 'it( &ro't( rate of 35*6 Im%ort durin& t(is %eriod $ @??6B
billion 'it( trade defi$it of $5?> billion '(i$( 'as =uite (i&( and is area of $on$ern6
B
+,%orts in Guly 537 de$lined by 5@6?* to $ 336@ billion7 s(ar%est $ontra$tion in t(ree
year7 in t(e 'a8e of fallin& demand from US and +uro%e6 Im%orts too de$lined by ?*
in Guly 536 #iven t(e $urrent &lobal e$onomi$ s$enario and over '(elmin&
%rote$tionist sentiments in India9s traditional e,%ort mar8et7 (i&( level of trade defi$it
is &oin& to adversely affe$t $om%etitiveness of im%ort de%endent e,%orts and 'ill
$ontinue to %ose a &reat $(allen&e to !.I in mana&in& slidin& ru%ee6
12. %#rrent +cco#nt def$c$t
For most of its %ost0im%enden$e e$onomi$ (istory7 India (as seen a defi$it in its
$urrent a$$ount6 <o'ever for brief %eriod of 3445043 to 344304@7 India 'itnessed a
$urrent a$$ount sur%lus6 :(e sur%lus durin& 3445043 'as US $ 556CB billion7 in 34440
45 it 'as US $ >6?B billion US $ and in 344304@7 it 'as US $ ?6C billion6 <o'ever
a&ain from 344@04> $urrent a$$ounts turned defi$it lar&ely on ba$8 of risin& oil
%ri$es6 -urrent a$$ount defi$it $ould end @>* of #P in 34530536 :(e bloatin&
$urrent a$$ount defi$it (as raised alarm bell for variety of reasons0 (a) e,ternal debt
is no' (i&(er t(an fore, reserve and (b) s(ort term debts on residual maturity basis is
as (i&( as @3* of total e,ternal debt as on Gune7 537 ) risin& $urrent a$$ount defi$it
'ould lead to de%re$iatin& $urren$y7 '(i$( may lead to (i&(er interest rate and
$onse=uent slo' do'n in t(e e$onomy6 ) slo'do'n $ould (urt bot( Indian In$6 as
also t(e &overnment '(i$( $ould see lo'er ta, &ro't( and $onse=uent (i&(er defi$it6
Joo8in& to t(e (ealt(y forei&n e,$(an&e reserves $rises is not in si&(t but $ontinuous
in$rease in defi$it is movin& our e$onomy into t(e Fone of dis$omfort6
13. 0$sca4 5 ,e-en#e def$c$t
Fis$al defi$it 0 e1cess of go-ernment e1"end$t#re o-er rece$"ts 4ess !orrow$ng
2 is measure of amount t(e &overnment needs to borro' to meet its e,%enditure6
Fis$al defi$it of 3455053 rose to >6A* of #P ( bud&et 3453 %ro%ose to brin& it
do'n to >63* in 3453053) and $onsiderin& off balan$e s(eet items li8e oil and
fertiliFer bonds and $onsolidated defi$it of state &overnment7 t(e a$tual defi$it turns
out to be almost 55* of #P6 Far more alarmin& is t(e more t(an four fold in$rease
in t(e revenue defi$it7 '(i$( is differen$e bet'een revenue re$ei%t and revenue
e,%enditure6 !evenue defi$it $an only be finan$ed by one of t(ree sour$esD domesti$
borro'in&7 borro'in& overseas or %rintin& money6 +a$( of t(ese $omes 'it( a
C
do'nside 0 raisin& interest rates7 $ro'din& out t(e %rivate se$tor an addin& t(e debt
burden in t(e $ase of t(e first t'o and addin& to inflationary %ressure in t(e $ase of
t(e t(ird6 )lso revenue defi$it does not result in t(e $reation of any assets6 It merely
adds to t(e interest and re%ayment burden 'it(out $reatin& t(e '(ere'it(al from
'(ere t(e debt $ould be servi$es6 It may be noted t(at #OI invo8ed t(e emer&en$y
%rovisions of t(e Fis$al !es%onsibility and .ud&et Mana&ement (F!.M) a$t to see8
rela,ation from fis$al tar&ets and to laun$( stimulus %a$8a&es from e$ember 344?6
FM P6 -(idambaram %resented (.J 34654653) fis$al $onsolidation %lan under '(i$(
fis$al defi$it 'ill be brou&(t do'n to 3* by 345B05C in %(ased manner6 +,%erts are
s8e%ti$al to t(is as t(ey feel t(at unless &overnment is able to $ontrol e,%enditure
%arti$ularly subsidies $ontainin& fis$al defi$it 'ill not be %ossible6
1. /e"os$ts and %red$t growth
For si, lon& years7 Indian .an8s (ave no %roblem in mobiliFin& lar&er sum as
fres( de%osits t(an t(e %revious year but trend reversed sin$e 3455053 '(en de%osit
&ro't( 'as less t(an $redit e,%ansion6 :(e %roblem (as a$$elerated in 3453053 as
YOY de%osit &ro't( in e$ember7 53 'as only 5565* a&ainst $redit &ro't( of 5>65*
6:(ere are stron& eviden$e of investors ma8in& use of ot(er o%tions '(i$( are
fet$(in& (i&(er returns to t(em su$( as bonds issues of /.F- raisin& a%%ro,imately
!s6 B@44 $rores by offerin& returns in t(e ran&e of 54053*6 Furt(er - ratio at all
time (i&( at C?65* for year endin& 3453 and in$remental - ration tou$(in& 345*
durin& 34550537 su&&ests $(o$8in& of resour$es for $or%orate in +-. and %ubli$
issues mobiliFation mar8ets and for$in& t(em to borro' from ban8s at '(at ever rate
money is available6 Wit( t(is ba$8 &round7 !.I (as also raised re%eated $on$ern
about $redit &ro't( sur%assin& de%osit &ro't( and it (as indi$ated t(e ban8s to
in$rease de%osit and restrain $redit &ro't( and furt(er advised t(em t(at de%osit and
advan$es &ro't( 'ill be (ave to be ali&ned 'it( ea$( ot(er6
15. 'a-$ngs growth-
riven by t(e sur&e in (ouse(old savin&s in finan$ial assets7 t(e &ross
domesti$ savin&s rate in t(e e$onomy (it a (istori$ (i&( of 3C6C* in 344C04? but
%lun&ed to 33* in 344?04A due to 'orld 'ide $rises6 It $ould re$over mar&inally in
3454055 but to e,%e$t to fall furt(er in 3455053 as e$onomi$ $onditions (ave been
?
far from $ondu$ive6 Persistent inflation and slo'in& &ro't( (ave eaten into t(e
in$omes of (ouse(olds and $or%orate and e$onomists a%%re(ends t(at 'e may enter
into t(e %(ase of sub034* savin&s rate6 Furt(er analysis %rovides t(at India finan$ial
savin&s de$lined se$ond year in ro' to C6?* in 3455053 meanin& t(ereby (ouse(olds
save more in %(ysi$al assets li8e &old7 real estate et$67 t(an in finan$ial assets li8e
ban8 de%osit7 mutual funds7 %ost offi$e savin&s et$6 :(e s(ar% fall in finan$ial savin&s
furt(er means t(at India (as to de%end more on overseas flo's to funds its $a%ital
needs6 It may be noted t(at rise in savin&sL#P ratio is not &ood enou&( to &uarantee
&ro't( unless (ouse(old saves more in finan$ial assets t(an to %(ysi$al assets6
16. *nd$a3s c#rrent o#t4oo6
-itin& $orru%tion inade=uate reforms7 (i&( inflation and slo' &ro't(7 #lobal
!atin& a&en$y Fit$( ;oined Standard O Poor in lo'erin& India9s outloo8 to ne&ative
from stable6 /e' outloo8 refle$t $ombination of deterioratin& &ro't( %otential and
'idenin& defi$its even t(ou&( &lobal ratin& $om%anies reaffirmed India9s lon& term
forei&n and lo$al $urren$y ratin& at P...9 and s(ort term forei&n $urren$y as PF396
17. ;#s$ness %onf$dence '#r-e9
.usiness $onfiden$e in India %lun&e to t'o year lo' as $om%anies &ra%%le 'it(
%roblem su$( as (i&( interest rates7 frustration 'it( &overnan$e7 land a$=uisition
issues and erodin& %ri$in& %o'er in inflationary environment6 :(e survey $ondu$ted
by FI--I s(o'ed t(at $om%anies are 'orried about %erforman$e of e$onomy and
$or%orate se$tor in ne,t si, mont(s6 (+: 3A64?63455) :(e !eserve .an89s IOS
$ondu$ted durin& Mar$( 3455 also indi$ated some moderation in business
e,%e$tations for t(e =uarter ended Gune 34556 ) 'ea8 business sentiment no' $ould7
in ot(er 'ord7 de%ress &ro't( ne,t year or t(e year after t(at if it %ersists but not in
t(e $urrent year6
18. %#rrent g4o!a4 econom$c scenar$o<-
We (ave very $om%le, &lobal e$onomi$ environment at t(e moment6 It is no'
$lear t(at &lobal finan$ial and e$onomi$ outloo8 is unsettled and un$ertain6 :(e latest
assessment by ma;or international a&en$ies %ro;e$tin& s(ar% $ontra$tion in &lobal
trade volumes in 344A (as e,a$erbated t(e un$ertainty6 :(e $urrent assessments
%ro;e$t little $(an$e of &lobal e$onomi$ re$overy in 344A but t(ere are enou&( &reen
A
s(oots indi$atin& revival of Indian e$onomy6 It is e,%e$ted t(at 344A054 'orst year
follo'in& &lobal melt do'n 'ill be be(ind us and e$onomy 'ill start &ro'in&6
19. = ' ,ecess$on as threat<-
e$ou%lin&7 t(eory t(at t(e rest of t(e 'orld does not (ave to $at$( a $old if t(e
US sneeFes7 '(i$( 'as all t(e rate last year $ould easily &o do'n as on t(e of t(e
s(ortest live buFF'ord of e$onomi$ t(eory6 ) ne' buFF'ord (as started doin& t(e
round is re$ou%lin&6 )$$ordin& to t(is t(eory7 t(e rest of t(e 'orld is still umbili$ally
atta$(ed to t(e sate of t(e U S e$onomy may be a lot more for +uro%e and some'(at
less of )sia6 It is o%ined t(at last year %roblem of US 'ere mostly domesti$ based on
(ousin& but as si&ns of re$ession dee%en7 +uro%e7 at least 'ill not be able to es$a%e
t(e ill effe$ts and 'ill ta8e a but on domesti$ &ro't(6 :(e alternative &ro't( en&ines7
-(ina and India7 des%ite t(eir lar&e domesti$ $onsum%tion7 'ill not be able to fill t(e
&a% $reated by US6 W(ile India may be reasonably s(ielded from t(e im%a$t7 -(ina9s
e,%ort based e$onomy may follo' t(e )meri$an drummer6
20. &#ro"ean ;an6$ng %r$s$s
:(e ban8in& se$tor in euro Fone (as $ome under e,treme stress in re$ent mont(s
due to its e,%osure to soverei&n debt6 :(e (eavily e,%osed euro Fone ban8in& system
$ould suffer dramati$ally as a result of soverei&n default as many of t(em (old lar&e
amount of soverei&n debut of $ountries su$( as #ree$e7 Ireland7 Italy7 Portu&al and
S%ain6 Worries over t(e (ealt( of +uro%e9s ban8s (ave led to do'n&radin& of many
ban8s6
21. *nd$a among to" f$-e g4o!a4 !rands<-
:(e Future .rand9s latest $ountry brand inde, (-.I) (as ran8ed India amon& t(e
to% five $ountries for value for money7 aut(enti$ity7 (istory7 best brand for art and
$ulture and business6 :(e over all -.I inde, is to%ed by t(e United States7 follo'ed
by -anada and )ustralia6
22. >arness$ng demogra"h$c d$-$dend<-
+$onomists %redi$ts t(at in 34347 t(e avera&e a&e of an Indian 'ill be 3A years7
$om%ared to 3C for -(ina and US7 @> for West +uro%e and @? for Ga%an6 +$onomists
tra$8in& India9s demo&ra%(i$ %rofile estimate t(at de%enden$y ratio7 defined as t(e
ration of de%endent %o%ulation (Q5> O RB@ years) to 'or8in& a&e %o%ulation (5> to
54
B@ years)7 '(i$( is $urrently 46B 'ill see a s(ar% de$line and by 34347 India9s
de%enden$y ration s(ould be ;ust over 46@6 It 'ill $ontinue to de$line over t(e ne,t 34
years or so and t(is $onstitutes t(e demo&ra%(i$ dividend for India6 <i&(er youn&er
%o%ulation 'ill lead to (i&(er savin&s7 (i&(er investments and (i&( %er $a%ita #P6
-learly7 t(ere is an un%re$edented o%%ortunity for India to be$ome on of t(e 'orld9s
most %ros%erous $ountry and t(at too in ;ust on &eneration6
P(7*%? %>+).&'
From lar&er %ers%e$tive7 moot %oint is to revive $onfiden$e in t(e Indian e$onomy
t(rou&( &ro't( en(an$in& measures6 Wit( #OI not able to %ut t(rou&( e$onomi$
reforms (deferment of FI is one su$( instan$e)7 it is !.I res%onsibility to fi&(t t(e
battle alone t(rou&( monetary and fis$al measures6
#iven t(e stru$tural $(ara$teristi$s7 India is %er(a%s enterin& a ne' $ombination
of &ro't( and inflation of C and ? %er$ent res%e$tively6 It is in t(is $onte,t obli&atory
for !.I to move to rate easin& %at( as early as %ossible so t(at $onfiden$e of mar8et
is restored and &ro't( $omes automati$ally6 #ood %oint is t(at !.I &overnor (as
started t(e %ro$ess by >4 b%s $ut in re%o rate vide monetary %oli$y )%ril 3453 'it( a
rider t(at (e $an not $ommit '(en and (o' fast furt(er $uts 'ould (a%%en6
%ha"ter-2
Banking Sector Reforms and emerging issues
55
We in India, have been adhering to a cautious and calibrated approach in
our reforms so far and there is merit in adopting a road map approach building on the
strengths that we have already developedThe basic feature of Indian approach are
gradualism; coordination with other economic policies, pragmatism rather than
ideology; relevance to the conte!t; consultative process; dynamism and good
se"uencing so as to be able to meet the emerging domestic and international trends# $
%r# &#'#(eddy )overnor, (eserve *an+ of India#

Economist, former finance secretary and governor of RBI, Sri M. Narismhan was
the architect of financial sector reforms. His two reports of 11 and 1! form the
fo"ndation of #an$ing reform in India and are still regarded as the #l"e print of f"t"re
#an$ing landscape. %hese reforms have provided necessary platform to the #an$ing
sector to operate on the #asis of operational fle&i#ility and f"nctional a"tonomy, there#y
enhancing efficiency, prod"ctivity and profita#ility. '"rther v"lnera#ility of the #an$ing
sector as revealed #y the glo#al financial crisis s"ch as inade("ate loss)a#sor#ing
capital* ins"fficient li("idity #"ffers* e&cessive #"ild)"p of leverage* procyclicality of
financial mar$ets* foc"s on firm)specific s"pervision and neglect of macro)pr"dential
s"pervision of system)wide ris$s* moral ha+ard from too)#ig)to)fail instit"tions* wea$
governance practices* poor "nderstanding of comple& prod"cts* and shortcomings in ris$
management etc. have to #e addressed thro"gh reforms. India has #een a#le to face all
these challenges in the reform process thro"gh grad"alism; coordination with other
economic policies* pragmatism rather than ideology* relevance to the conte&t*
cons"ltative processes* dynamism and good se("encing, so as to #e a#le to meet the
emerging domestic and international trends.
,n attempt has #een made in this paper to map reforms of the #an$ing sector
since adoption of Narismhan -ommittee recommendations, their implications and also
lay down emerging agenda of reforms "nder consideration of the government of India
.Reserve #an$ of India.
REFORMS
Enhanced competition and entry of private sector banks / In t"ne with the
Narsimhan -ommittee I recommendation, RBI has rela&ed norms for iss"ing
license to new #an$s with o#0ective to ind"ce greater competition, red"ce cost,
improve ("ality of service, promote financial incl"sion that wo"ld "ltimately
53
s"pport incl"sive growth. Many new private sector #an$s have #een set "p o"t
of which 1ES Ban$ is the latest offering. ,s competition mo"nted, 2"#lic Sector
Ban$s, which operated on the comfort of sovereign g"arantee, were forced to
$eep pace with private sector co"nter parts #y "pgrading their wor$ process
thro"gh technology and also #ecoming c"stomer foc"sed. Ban$s are replicating
the story clearly seen in telecom and aviation sectors. 3hile presenting B"dget
of 4515)11, finance minister anno"nced that more #an$ing licenses will #e iss"ed
to private sector players and non #an$ing finance companies to enhance
competition and help financial incl"sion. ,s per policy paper released #y RBI
6B7 85.!.45119 only entities.gro"p in the private sector, owned and controlled #y
residents, can promote #an$s #"t those having real estate and capital mar$et
activities will not #e eligi#le. New #an$ can only #e set with wholly owned non
operative holding company with minim"m capital of Rs. :55 crores and it will
have to hold minim"m ;5< capital for five years. ,ggregate non)resident share
holding from '=I, 'II and NRI will #e restricted to ;< in first five years. ,t
present we have, 14 new generation private #an$s, 4> 2"#lic sector #an$s, 1:
old private #an$s, 81 foreign #an$s, !: regional r"ral #an$s, 81 foreign #an$s,
; local area #an$s, 1?41 "r#an cooperative #an$s, 81 state cooperative #an$s
and 8?1 district central cooperative #an$s.
Branch licensing) RBI has permitted opening of #ranches in tier 8 to tier >
cities 6pop"lation "p to :5555 as per 4551 cens"s9 witho"t prior a"thori+ation
"nder general permission. However #an$s will have to o#tain prior a"thori+ation
for opening #ranches in tier 1 and tier 4 centers. Ban$s will have to plan their
#ranch e&pansion in tier 8 to tier > cities in s"ch a manner that at least 1.8
rd
of
newly opened #ranches are opened in "nder #an$ed districts of "nder #an$ed
states as notified #y the RBI.
Road map for entry of foreign banks) RBI has notified @roadmap for presence
of foreign #an$s in India and g"idelines on ownership and governance in private
#an$s.A ,s per the roadmap, foreign #an$s wishing to esta#lish a presence in
India for the first time co"ld either choose to operate thro"gh #ranch presence, or
set "p 155< wholly owned s"#sidiary 63BS9 following the @one mode presence
criterionA. In phase)I, foreign #an$s already operating in India will #e allowed to
convert their e&isting #ranches to 3BS. In phase)II, 3BS of foreign #an$s will
#e accorded f"ll national treatment, incl"ding opting for going p"#lic, s"#0ect to
53
4>< of the capital #eing held #y resident Indians at all times. RBI has also
allowed some fle&i#ility in individ"al sta$e and s"#0ect to RBI approval this sta$e
can e&ceed 15<. However, if foreign #an$sA assets in India 6#oth on and off
#alance sheets items9 e&ceed 1:< of the system, RBI may deny licenses to new
foreign #an$s. (*I vide ,onetary -olicy .pril /001 decided to +eep on hold
branch licensing of foreign ban+s in view of current global financial mar+et
turmoil and uncertainties surrounding the financial strength of ban+s around the
world# It was indicated in the Monetary 2olicy Statement of ,pril 4515 that
drawing lessons from the crisis, a disc"ssion paper on the mode of presence of
foreign #an$s thro"gh #ranch or wholly owned s"#sidiary 63BS9 wo"ld #e
prepared #y Septem#er 4515. RBI floated the disc"ssion paper on presence of
foreign #an$s in India in Can"ary 4511 soliciting views.comments from all
sta$eholders, incl"ding #an$s, non)#an$ing financial instit"tions. RBI has stated
in Monetary 2olicy statement May 4511 that the comprehensive g"idelines on the
mode of presence of foreign #an$s in India are #eing form"lated, $eeping in view
the s"ggestions.comments on the disc"ssion paper, received from all concerned.
Capital and functional autonomy 2ercy Mistry committee report
recommended that government give "p its ownership #y 451; and Ragh"ram
Ra0an -ommittee recommended that government to give "p its ownership at
least in few #an$s. %he Standing -ommittee on finance has cleared the proposal
to #ring down the government sta$e in 2SBs from :1< to 88< #"t DBI has
decided to $eep the government e("ity to :1< minim"m. %he recommendation
of =r. -. Rangra0an that holding of p"#lic sector "nderta$ing li$e 7I-, BND- etc.
#e incl"ded in :1< government ownership has also not fo"nd favo"r from the
government. In final stim"l"s pac$age of 455!)5 and also in 455)15 , DBI has
approved capital inf"sion #y way of preferential capital in ten p"#lic sector #an$s
)mostly mid si+ed #an$s so as to help them in improving -R,R as most of these
#an$s have hit the threshold limit of :1< and more dil"tion wo"ld mean going
#elow the thresh hold level. RBI has also permitted #an$s to raise long term
f"nds thro"gh #ond for infrastr"ct"re finance to overcome pro#lem of assets
lia#ility mismatch. '"rther a proposal for comprehensive amendment of the
Ban$ing Reg"lation ,ct, 1; and the Ban$ing -ompanies 6,c("isition E
%ransfer of Fnderta$ings9 ,ct, 1?5 E 1!5 was introd"ced in the 2arliament #y
way of %he Ban$ing 7aw ,mendment Bill 4511 which will incl"de a new section
5@
to override the provisions of the -ompetition ,ct, 4554 and to e&empt the
applica#ility of s"ch provisions to amalgamations .reconstit"tions. mergers.
ac("isitions, etc. of different categories of #an$s meaning that s"ch
mergers.ac("isitions wo"ld not need permission from -ompetition -ommission
of India* voting right to investors as per their share holding in private sector #an$s
which c"rrently is capped to 15< and c"rrent cap of 1< ma&im"m investment in
p"#lic sector #an$ is proposed to #e raised to 15<, ena#ling #an$ing companies
to iss"e preference shares s"#0ect to reg"latory g"idelines #y the Reserve Ban$*
formation of a depositor ed"cation and awareness f"nd* facilitating consolidated
s"pervision* and a provision for s"persession of #oards of directors #y the
Reserve Ban$* and increase in the ("ant"m of penalties. %he proposals relating
to the amendment of the Ban$ing -ompanies 6,c("isition E %ransfer of
Fnderta$ings9 ,ct, 1?5 E 1!5 incl"de raising the a"thorised capital of
nationali+ed #an$s and ena#ling them to raise capital thro"gh Grights iss"eH or #y
iss"e of #on"s shares.
Setting up of Holding company: B"dget 4514 proposes to set "p an holding
company to hold government sta$e in #an$s, a move that will overcome the
tro"#le of periodic capital investment into p"#lics sector #an$s that "psets fiscal
calc"lations. %his initiative may also eliminate the em#arrassment of $noc$ing at
the doors of 7ife Ins"rance -orporation at it did last year to #ail o"t the
government #y investing policy holdersA f"nd , a move that also raised the iss"e
of corporate governance standard in India. %he proposed str"ct"re may #e #y
way of corporate set "p #y an act of parliament so that it is away from the glare
of reg"lator.
Redefining NBC structure: ,s per draft recommendation vide notification of
4515, any change in control or transfer of NB'- /N= 6 non deposit ta$ing NB'-9
or NB'- 6=9 6 deposit ta$ing NB'-9 #eyond 4:< of paid "p capital will need RBI
approval, -R,R to move to 1:< , assets classification norms at par with #an$s
wo"ld #e applica#le and #enefits of S,R'ES,I wo"ld #e availa#le to NB'-s.
NB'-s with assets of Rs. 1555 crores and a#ove wo"ld #e s"#0ect to
comprehensive s"pervision incl"ding inspection at predetermined intervals.
!ssue of preference shares" other hybrid instruments) RBI has permitted
#an$s to raise capital thro"gh preference share ro"te so that government holding
in #an$s is not dil"ted #elow :1<. 2resent legislation also caps the ma&im"m
5>
ten"re for which preference shares can #e iss"ed. RBI has recently allowed
#an$s to iss"e hy#rid instr"ments li$e perpet"al #onds, as it will not re("ire any
legislative change. RBI has also permitted #an$s to iss"e these #onds with GcallH
and Gstep)"pH option. 2erpet"al #onds are those in which investor does not have
the right to as$ for the money #ac$ #"t the iss"er has the right to pay #ac$
investor. %ypically ins"rance companies and pension f"nds s"#scri#e to these
#onds. Ban$s are now sco"ting with the finance ministry for ta& #enefits on these
#onds# as these are long)term instr"ments.
$eregulation of lending interest rates ,ll lending rates 6e&cept for e&port
credit, loan to staff mem#ers and lending "nder interest s"#vention of
Dovernment of India9 have #een de)reg"lated. Ban$s have introd"ced floating
and fi&ed interest rate prod"cts and are more aggressive in their offering.
$eregulation of deposit interest rates Interest rates on deposits are
dereg"lated 6 RBI dereg"lated savings deposits in Bcto#er, 4511 and Non)
resident Indian deposits in =ecem#er, 45119 and #an$s en0oy complete interest
rate freedom. Ban$s are also free to offer differential interest rate on high)tic$et
deposit of Rs.1: la$h and a#ove.
Base Rate: Fnder RBI directive, Base rate system was introd"ced w.e.f. 1
st
C"ly,
4515. Ban$s have #een advised to declare their #ase rate each ("arter and they
can not lend #elow #ase rate. '"rther #ase rate will #e applica#le across the
#oard and #an$ will not #e in a position to discriminate #etween old and new
#orrowers. RBI has also made lending rate disclos"re mandatory for #an$s to
#ring greater transparency and has also advised #an$s to anno"nce Base Rate
after ta$ing into consideration 6a9 the cost of deposit , 6#9 ad0"stment for
negative carry of cash reserve ratio and stat"tory reserve ratio, 6c9 "nallocata#le
overhead cost for #an$s and 6d9 average ret"rn on net worth.
%hasing out of statutory preemption %he S7R re("irement has #een #ro"ght
down from 8!.:< in 11)4 to 48< in 4514 and -RR has #een #ro"ght down
from 1:< in 11)4 to ;.4:< in 4514. ,fter passing of Reserve Ban$
6amendment9 #ill 455> legislative cap of 8< -RR and 4:< S7R has #een
removed. However RBI has decided that no interest will #e paid to #an$s on
minim"m -RR limit of 8<.
Capital &de'uacy ( -R,R of < prescri#ed with effect from end March 4555
against !< laid down in Basel II. .
5B
Credit $elivery -redit a"thori+ation scheme 6-,S9 has #een withdrawn.
Selective -redit -ontrol 6S--9 has #een rela&ed e&cepting s"gar. Norms for
assessment of Ma&im"m 2ermissi#le Ban$ 'inance 6M2B'9 as per 4
nd
method of
lending has #een rela&ed. Mandatory formation of consorti"m has #een
dispensed with. Ban$s have #een given freedom to decide norms of assessment
of M2B' and they en0oy complete freedom to decide their credit policy as per
approval of their #oard.
E)posure norms RBI has advised #an$s to fi& e&pos"re norms for individ"al
as well as gro"p so as to $eep the e&pos"re within pr"dential limits. It has also
advised the #an$s to fi& e&pos"re for ind"stry specific ris$ for pr"dential credit
ris$ management as per international #est practices. RBI vide monetary policy
,pril 4514 advised #an$ fi& individ"al e&pos"re to NB'- having more than :5<
gold loans.
!ncome Recognition and %rudential Norms 3ith a view to adopting the
international #est practices in regard to Income recognition, asset classification
and provisioning, n"m#er of policy changes have #een made vi+. prescription of
provisioning re("irement of 5.4:< to 1< in respect of standard 6or performing9
assets, red"ction of the time period for classification of do"#tf"l assets from 1!
months to 14 months from March 81, 455:, introd"ction of 5 days norms for
classification of non performing assets w.e.f. March 81, 455;, stip"lating ?5<
minim"m provision coverage ratio #y 85
th
Septem#er 4515. %he provisioning
norms are more pr"dent, o#0ective, transparent, "niform and standardi+ed as per
glo#al norms to avoid s"#0ectivity.
Securitisation and Reconstruction of inancial &ssets and Enforcement of
Security !nterest *S&R&ES!+ &ct Sec"ritisation and Reconstr"ction of
'inancial ,ssets and enforcement of Sec"rity Interest ,ct 4554 allows setting "p
of ,sset Reconstr"ction -ompanies 6,R-9 #y #an$s with "nprecedented powers
to ta$e over the management of a defa"lting company or ta$e over and sale
distressed loans. %he ,ct provides for >5 days notice to #orrower to discharge
the lia#ility in f"ll failing which a #an$ can ta$e possession of
mortgaged.hypothecated assets and sale them for li("idation of d"es.
&ssets Reconstruction Companies / ,R-s set "p "nder Sec"riti+ation and
Reconstr"ction of 'inancial ,ssets and Enforcement of Sec"rity Interest ,ct have
#een empowered to ta$e over N2, from #an$s, engage in innovative corporate
5C
finance s"ch as merger, sale of #rands or plants, in0ect new capital, convert
distressed companies into new companies and even ta$e o"t an I2B. ,R- will
have to wor$ within RBI g"idelines and s"#0ect to registration.license from RBI.
,R-s sho"ld have minim"m owned f"nds of Rs. 155 crores and maintain
minim"m capital ade("acy of 1:< at all times. ,R-s are hardly a s"ccesses
story since they have #een a#le to #"y only a fraction of N2,s and #an$s are
complaining that they are not offering right price to them. %his pro#lem is
e&pected to #e solved with setting "p of few more ,R-s #eca"se it will increase
competition.
Central Registry of Securiti,ation &sset Reconstruction and Security
!nterest of !ndia ( , -entral Electronic Registry, incorporated "nder section 4:
of the -ompanies ,ct, 1:>, as the -entral Registry of Sec"ritisation ,sset
Reconstr"ction and Sec"rity Interest of India 6-ERS,I9 to give effect to the
provisions of the Sec"ritisation and Reconstr"ction of 'inancial ,ssets and
Enforcement of Sec"rity Interest 6S,R',ESI9 ,ct, 4554 has #een set "p as not)
for)profit company in which -entral Dovernment is holding :1< share . %he
o#0ective of the central registry is to prevent fra"ds in loan cases involving
m"ltiple lending from different #an$s on the same immova#le property. %he
registry #ecame operational from March 4511 and its 0"risdiction covers the
whole of India. ,s many as 1>> lending instit"tions are placing their mortgage
related information with this registry.
-ransparency in financial statements RBI has advised #an$s to disclose
certain $ey parameters s"ch as -apital to Ris$ ,ssets Ratio, percentage of
N2,s, movements of N2,s, movements of provisions towards N2,s, movement
of provisions held towards depreciation of investments, the total amo"nt of
standard.s"#)standard assets s"#0ected to -orporate =e#t Restr"ct"ring ,
mat"rity pattern of deposits, #orrowings, investments and advances, foreign
c"rrency assets and lia#ilities, lending to sensitive sectors, Net val"e of
investment, Ret"rn on ,ssets, 2rofit per employee and interest income as
percentage to wor$ing f"nds etc. '"rther the Coint 2arliamentary -ommittee
4551 wanted the ann"al reports of #an$s to carry the RBIAs comments arising
from its inspection reports to ens"re greater transparency and to ma$e s"re that
the shareholders get a fair idea of the operations of a #an$. ,fter fail"re of
5?
Dlo#al %r"st Ban$, the demand has #een made again which if placed "p front
might help the ordinary depositor and shareholder of the danger ahead.
&ccounting Standards RBI has "nveiled new acco"nting norms for #an$s,
which see$ to move towards f"ll compliance #y #an$s with the acco"nting
standards iss"ed #y Instit"te of -hartered ,cco"ntants. %he new norms see$ to
#ring intangi#le assets within the p"rview of the Ban$ing Reg"lation ,ct. %he
acco"nting standard 4; and 4! has #een made effective from 1
st
,pril 455;.
%enal &ction( %he RBI has decided to p"#lish penal actions against the #an$.
%he #an$s will have to p"#lish s"ch penalties in the note on acco"nt of their
#alance sheets with effect from 1
st
Novem#er 455;.
Scheme of Banking .mbudsman( Ban$ing Bm#"dsman has #een introd"ced
since 1!: to loo$ into and resolve c"stomer grievances. RBI has f"rther
widened the scope of the #an$ing om#"dsman scheme to cover all individ"al
cases.grievances relating to non)adherence to the fair practices code evolved #y
IB, and adopted #y individ"al #an$s and also the credit cards.,%M cards.
-omplainants have #een permitted to file e-omplaint after down loading the
complaint form from RBI site.
Hiving off of regulatory and supervisory control Board for 'inancial
S"pervision 6B'S9 was set "p "nder the RBI in 1; after #if"rcation of
reg"latory and s"pervisory f"nctions. ,n independent =epartment of Ban$ing
S"pervision 6=BS9 has #een set "p in RBI to assist the #oard.
Risk /anagement Systems In view of the diverse financial and non)financial
ris$s confronted #y #an$s in the wa$e of the financial sector dereg"lation, RBI
has p"t the ris$ management system in place. Ban$s have #een as$ed to adopt
sophisticated techni("es li$e IaR, ="ration and Sim"lation model)#ased
approaches as also credit ris$ modeling techni("es as part of ris$ management
meas"res.
Risk Based Supervision *RBS+ RBI has iss"ed detailed g"idelines for RBS
and have advised #an$s to develop ris$ assessment processes in accordance
with their ris$ profile and control environment which will s"#0ected to review and
s"pervisory intervention #y RBI as necessary. %he emphasis will #e on
eval"ating the ("ality of ris$ management and the ade("acy of ris$ containment.
5A
%he transaction #ased internal.e&ternal a"dit wo"ld #e replaced #y Ris$ Based
Internal ,"dit 6RBI,9 system.
%rompts Corrective &ction / RBI has evolved a framewor$ of 2rompt
-orrective ,ction 62-,9 with vario"s trigger points. %he framewor$ is #ased on
three parameters vi+. capital ade("acy, asset ("ality and profita#ility. %he
framewor$ contemplates a set of mandatory and discretionary actions #y
reg"lator 6RBI9 for dealing with #an$s that cross the trigger points.
Regulation Revie0 &uthority / %he p"rpose of this ,"thority is to provide an
opport"nity to the p"#lic at large to see$ 0"stification for and s"ggest deletion or
modification of any reg"lation, circ"lar or ret"rn iss"ed, or re("ired #y the
Reserve Ban$. ,nyone can apply to the Reg"lations Review ,"thority / a
citi+en, a non)resident Indian, an instit"tion 6incl"ding #an$s9, an association, an
academic or even an RBI employee. It is not necessary for the applicant to #e
an affected party. %he applicant may simply p"t down the details on a plain white
paper and give his s"ggestions stating 0"stification, in as m"ch detail as possi#le,
with an ill"stration to ena#le the ,"thority to ta$e an e&peditio"s view on the
application.
&ppointments of business correspondents) Ban$s are now allowed to
o"tso"rce lending and deposit ta$ing activities NDBs, micro)finance agencies,
post offices, NB'-s, ,gents of small savings schemes.ins"rance companies,
individ"als who owns petrol p"mps, individ"al p"#lic call office 62-B9 operators,
individ"al $irana.medical.fair price shops, cooperative societies, retired #an$
employees, e&)servicemen and retired government employees, so as to reach
r"ral and remote areas. RBI has clarified that instit"tions for profit can also #e
appointed #"siness correspondents as earlier notion was that #an$s will appoint
only non)profit organi+ations. Fnder the scheme #an$s will have to prescri#e
s"ita#le limits for receipt and payment #y #"siness correspondent and
transaction done thro"gh agent will have to acco"nt for either on the same day or
ne&t wor$ing day. Ban$s will #e responsi#le to c"stomer for any act of omission
or commission for their agent. B- model is considered as e&tremely vital for
achieving the goals of financial incl"sion.
!nclusive gro0th drive( DBI and Reserve Ban$ are wor$ing in tandem to p"sh
the agenda of incl"sive growth and to #ring villages of pop"lation of 4555 and
a#ove within #an$ing fold. DBI has anno"nced setting "p a f"nd of Rs. !55
34
crores to compensate #an$s for cost inc"rred in reaching credit to "n#an$ed
areas. %his will #e in addition to e&isting Rs. 1555 crores financial incl"sion f"nd
and financial incl"sion technology f"nds set "p with N,B,R=. RBI and DBI has
identified ?48: villages that will #e covered in another two years. 2"#lic sector
#an$s have #een as$ed to prepare the financial incl"sion plan6'I29 to tap the
fort"ne of @#ottom of pyramidA.
Bancassurance) !nsurance business by !ndian banks( DBI iss"ed notification
that ins"rance is permissi#le #"siness "nder Ban$ing Reg"lation ,ct section >
619 6o9 followed #y RBI g"idelines dated !
th
,"g"st 4555 for entry into ins"rance
#"siness with ris$ sharing model and with fee #ased #"siness. 3hile few #an$s
have started ins"rance #"siness thro"gh s"#sidiary ro"te, other #an$s have
entered in the #"siness thro"gh agency ro"te or "nder referral model.
/oney 1aundering and inancing of terrorism / India has #een sharing the
increasing international concern on the "se of the financial system for money
la"ndering and financing of terrorism. RBI has set o"t the policy, proced"res and
controls to #e introd"ced #y #an$s. %hese incl"de strict adherence to 23no0
4our Customer5 *34C+ proced"res for prevention of mis"se of #an$ing system
for money la"ndering and financing of terrorist activity, reporting of s"spicio"s
transaction and developing in #"ilt system in the #an$s to monitor cash
transaction a#ove thresh hold limit.
6uidelines on securiti,ation of standard assets ) RBI has iss"ed g"idelines
for sec"riti+ation of standard assets with a view to have @fit and proper criteriaA on
contin"o"s #asis. RBI has also decided to prescri#e a minim"m loc$ in period
and minim"m retention criteria for sec"riti+ing the loans originated and
p"rchased #y #an$s so as to avoid s"# prime li$e sit"ation in India.
Code of conduct for credit cards( In view of growing complaints against
vario"s malpractices for iss"ing of credit cards, RBI has decided that code of
cond"ct for iss"e and transparency in service charges evolved #y IB, in
cons"ltation with leading #an$s will #e adopted #y all credit card iss"ers. %here
is also de#ate of introd"cing anti)tying reg"lations, which will prohi#it #an$s to
force c"stomers from #"ying "nwanted prod"cts.services.
Setting up of Banking Codes and Standards Board of !ndia( In ann"al policy
of ,pril, 455:, RBI has proposed to set "p a Ban$ing -odes and Standards
Board of India on model of the mechanism in the FJ in order to ens"re that
35
comprehensive code of cond"ct for fair treatment of c"stomers are evolved and
adhered to. %he said #oard has #een esta#lished in 'e#r"ary 455> "nder the
chairmanship of former RBI dep"ty governor Mrs. J C Fdeshi. It is now
mandatory for every #an$ to adopt a compensation policy to ma$e "p for losses
inc"rred #y c"stomers d"e to mista$es committed #y #an$ employees once it
signs the charter of the Ban$ing -odes and Services Board 6B-SB9. %he gam"t
of retail #an$ing services, incl"ding savings acco"nts, term and demand
deposits, credit cards, de#it cards, foreign e&change remittances, and loan
acco"nts will have to #e covered #y the compensation policy.
-a) Sops for i)ed deposits) Fnion B"dget 455> has permitted fi&ed deposit of
five years a#ove as eligi#le investment for ta& e&emption "nder !5 - 6prescri#ed
ceiling is Rs. 155,5559 #ringing it at part with NS-.22' etc. Dovernment has
f"rther rela&ed the r"les and allowed payment of money to second 0oint depositor
in event of death of first depositor #efore loc$ in period of five years. It is
e&pected ta& sops on deposits will help the #an$s to garner larger share of
savings from ho"seholds.
Bank7s investment in non(finance companies: RBI iss"ed g"idelines 6BS
18.14.45119 for capping investments #y #an$s in non)finance companies to 15<
of companyAs paid "p capital or 15< of #an$As paid "p capital and reserves. %he
investment already made #y #an$s in @held for tradingA category wo"ld #e
incl"ded in this cap.
Core investment companies to register 0ith RB!) Investment companies with
assets si+e of Rs. 155 crores are considered systemically important and have
#een as$ed to get them registered with RBI8 ,s per notification s"ch companies
will have to o#tain RBI registration within si& months. It is stip"lated that leverage
ratio 6ratio of o"tside lia#ility to tangi#le net worth9 sho"ld not e&ceed 4.: and
these companies m"st maintain minim"m capital ratio where #y the ad0"sted net
worth shall not #e less than 85< of ris$ weighted assets.
Corporate 6overnance / ,n ade("ate instit"tional and legal framewor$ is in
place in India for effectively implementing a code of so"nd corporate governance
in #an$s. %he stat"tes have #"ilt in legal provisions that prohi#it or strongly limit
activities and relationships that diminish the ("ality of corporate governance in
#an$s. ,s a ma0or step towards strengthening corporate governance in #an$s,
#an$s have #een as$ed #y RBI to place #efore their Board of =irectors the
33
Report of the -ons"ltative Dro"p of =irectors of #an$s and 'Is 6=r. Dang"ly
Dro"p9 set "p to review the s"pervisory role of Boards of #an$s. %he
recommendations incl"de the responsi#ility of the Board of =irectors, role and
responsi#ility of independent and non)e&ec"tive directors, etc. 3ith n"m#er of
#an$s now listed on stoc$ e&change and acco"nta#le to shareholders, it is
necessary to foc"s on corporate governance in letter and spirit as ("ality of
decision ma$ing will #e cr"cial in enhancing share)holdersA val"e.
inancial stability and development council( ,s a follow "p of #"dget
proposal of 4515)11 to set "p 'inancial Sta#ility and =evelopment -o"ncil
6'S=-9, DBI thro"gh Sec"rities and Ins"rance 7aw amendment ordinance
645159 has set "p a monitor macro pr"dential s"pervision a"thority incl"ding
s"pervision of large financial conglomerates and to deal with inter reg"latory
coordination. 'inance Minister has clarified that government will maintain
a"tonomy of all reg"lators and ordinance will play its role only when there is
conflict of interest among two reg"lators on hy#rid prod"cts. 'S=- has #een
made f"nctional to deal with financial sta#ility, financial sector development,
inter)reg"latory coordination, financial literacy, financial incl"sion, macro
pr"dential s"pervision incl"ding f"nctioning of large financial conglomerates.
Banking out of purvie0 of Competition Commission of !ndia ( %he DBI has
finally decided that #an$ing sector incl"ding the mergers and ac("isitions of
#an$s will #e o"t of p"rview of the -ompetition ,ct 4554.
%repayment penalty in home and other loans( %he practice of #an$s imposing
pre payment charges in home, a"to and other loans was "nder scr"tiny #y
competition commission of India as it is alleged that it restricts the choice of
#orrowers to move to other #an$ and is against competitive opport"nity for
#orrowers. RBI vide monetary policy of ,pril 4514 mandated that #an$ can not
charge prepayment charges in case of floating rate home loans.
EMERGING ISSES!
inancial sector legislative reforms commission *S1RC+( 'inance Minister in
#"dget speech 'e#r"ary 4515 has anno"nced that government will rewrite financial
sector laws thro"gh 'S7R-. %he aim is to simplify and streamline the legal
framewor$ to possi#ly s"ggest a completely new reg"latory str"ct"re. DBI has now
floated a cons"ltation paper citing response from vario"s reg"lators. %he commission
33
mandate will #e to e&amine the $ind of inconsistencies and overlap in financial sector
laws and wor$o"t standard principle #ased financial reg"lation.
inancial Sector &ssessment %rogram *S&%+ ( , comprehensive self
assessment of the financial sector in 455 "nder a committee on 'inancial Sector
,ssessment -hairman =r Ra$esh Mohan and -o)chairman Shri ,sho$ -hawla was
done #ased on the IM')3B methodology. RBI has now decided to set "p a tas$
force to ta$e steps for implementation of the recommendation of D 45 wor$ing
gro"ps vi+. Enhancing So"nd Reg"lations and Strengthening %ransparency and
Reinforcing International -ooperation and 2romoting Integrity in 'inancial Mar$ets
and will also s"ggest an implementation sched"le.
Basel !!!( Ban$s will have to adhere to internationally agreed phase)in period
6#eginning Can"ary 1, 45189 for implementation of the Basel III framewor$. ,s per
proposal, #an$s will #e re("ired to $eep 9: core capital i.e e("ity, reserves and
s"rpl"s and systemically important #an$s will have to $eep additional ;8<:
additional core capital. %here are f"rther s"ggestions for ma$ing provision for
additional capital as =counter cyclical provision7 to overcome sit"ation li$e glo#al
crisis of 455)15. %he Reserve Ban$ is st"dying the Basel III reform meas"res for
preparing appropriate g"idelines for implementation. It is ta$ing steps to disseminate
information on Basel III and help #an$s prepare for smooth implementation of the
framewor$.
!! cap in %S> banks( 2resently a cap of 45< e&ists for s"#scription in #an$s e("ity
for foreign instit"tional investors. DBI is considering to raise this cap "p to 4;< as in
most of the #an$s 'II cap has hit the "pper ceiling. ,s per legal provision, 'II cap
#elow 4>< will #e non)controversial as neither the 'II will get a #irth in #oard nor
does it have a"thority to #loc$ any move #y calling e&tra)ordinary general meeting. It
may #e recalled that Indian Ban$ ,ssociation has recommended to government to
hi$e the 'II cap and also to $eep ,=R.D=R o"t of p"rview of 'II cap.
Regulatory oversight over credit rating agencies( It is arg"ed that all credit rating
agencies whose ratings are "sed for reg"latory p"rposes sho"ld #e s"#0ect to a
reg"latory oversight regime that incl"des registration and that re("ires compliance
with s"#stance of the IBS-B code of cond"ct '"ndamentals. It is arg"ed f"rther
that RBI sho"ld loo$ into c"m"lative defa"lt rate and transition matri& of the rating
agencies to contin"e accreditation.
3@
Regulation over /icro finance institutions ( -ommercials #an$s who have lent
more than Rs. 1!555 crores to M'Is are facing great stress d"e to reg"latory
restrictions p"t forth #y ,2 ,ct on interest rate restrictions, periodicity of repayment
not earlier than month and restr"ct"ring o#ligations. -entral government is
contemplating legislation to ens"re reg"latory frame wor$ and to overcome threat of
N2, which is already high in agric"lt"re sector.
Si,e /atters( >rge to /erge ( ,fter merger of Dlo#al %r"st #an$ with Briental Ban$
of -ommerce and I=BI Ban$ with parent I=BI, the e&perts opine that more mergers
and amalgamations will ta$e place in the ne&t ;): years to create Mega)#an$s. %he
#an$ing sector is now moving from a regime of 2large number of small banks5 to
2small number of larger banks85 Hardening yields and conse("ent fall in val"e of
sec"rities and lesser treas"ry income co"pled with higher re("irement of capital d"e
to Basel III are the main triggers of merger and consolidation. Btherwise also there
are s"fficient reasons for consolidation in the #an$ing sector li$e increased efficiency
res"lting from economies of scale, red"ced intermediation cost, greater capacity to
access the capital mar$et and greater capacity to meet competition with international
players. It may #e recalled that Narsimhan -ommittee ) I recommended mergers
and ac("isitions of #an$s so as to ma$e ;): world)class #an$s that wo"ld compete
in glo#al mar$et. Indian Ban$s ,ssociation report on M E , in #an$ing has
s"ggested corporati+ation that wo"ld ma$e all #an$ coming "nder -ompanies ,ct
1:> and therefore "nder common legal framewor$. It has also recommend
amendment of section ?4, of Income %a& ,ct to e&tend the #enefit of set off of
acc"m"lated losses and "n)a#sor#ed depreciation.
$epositors7 protection fund( %his f"nd is to #e set "p #y crediting deposits
remaining "nclaimed for more than ten years and f"nd to #e "sed for promotion and
protection of depositorsA interest. %he "nclaimed deposit $itty of #an$ing sector was
Rs 4;55 crores as on =ecem#er 81, 4511 6BS 85.5?.45149.
-ransforming $eposit !nsurance system( RBI is e&amining the transforming the
=eposit Ins"rance and -redit g"arantee -orporation 6=I-D-9 from a @pay #o&A
system to a one attending to all aspects of the #an$ fail"re resol"tion process. Non)
involvement of =I-D- in the fail"re resol"tion process is considered a ma0or area of
concern. @2ay #o&A system in #an$ing parlance means that deposit ins"rer serves
only as an agency to reim#"rse depositors. -entral government #"dget proposal
4554)58 proposed to covert =I-D- into B=I- 6Ban$ deposit Ins"rance -orporation9.
3>
Separate Common !nsolvency Code for banks( -ommittee on financial sector
assessment has s"ggested that a separate common and comprehensive insolvency
code for #an$s. Separate code is considered vital in view of financial glo#al
"ncertainty and legal comple&ities. So for 2SBs are concerned there are no
solvency iss"es as sovereign is more than :5< shareholder #"t for private sector
#an$s this $ind of legislation is considered necessary.
Bank7s entry into /erchant trading (%he RBI has proposed an amendment in the
Ban$ing Reg"lation ,ct, ; to allow #an$s to #ecome mem#ers of stoc$ e&changes
and "nderta$e merchant trading) to do trading on #ehalf of others. %his will #e
followed #y an amendment in Sec"rities -ontract Reg"lation ,ct that will permit
#an$s to cond"ct this #"siness. ,s per present r"les, #an$As can ta$e e&pos"re "p
to :< in e("ity mar$et. It may #e recalled that RBI recently anno"nced to consider
rela&ation in :< norms on case)to)case #asis.
Removal of cap on ?@ year fi)ed deposit( Ban$s are re("esting RBI to remove
cap on more than 15)year deposits so that they have no asset)lia#ility management
pro#lem to finance long term loans li$e ho"sing and infrastr"ct"re. 2resent
g"idelines permits to accept deposits more than 15 years only from minors and that
too "nder certain conditions.
Changes in financial system( High level panel on financial sector reforms chaired
#y 2rofessor Ragh"ram D Ra0an has recommended 6E% ?.;.455!9 that the
government sho"ld li#erali+e the interest rate regime of priority sector lending, sell
loss ma$ing small state r"n #an$s, enco"rage ta$eover of #an$s and red"ce the
oversight that the government maintains on state #an$s in addition to the controlling
their #oards. %he committee has also made a strong case of removing the
restrictions on opening of #an$ #ranches and ,%Ms and for rewriting financial sector
reg"lations. It has also recommended that government sho"ld legislate to remove
the oversight of #odies s"ch as -I- over p"#lic sector #an$s for #etter and speedy
decision ma$ing.
E)emption from Company Bill provisions( %he Reserve Ban$ of India has so"ght
e&emption from the provisions of the new company #ill 455! following the strong
conflict with the Ban$ing Reg"lation ,ct 1;?. 'or e&ample new -ompany Bill has
not made any specific provisions for #an$s as was the case in erstwhile -ompanies
,ct 1:>. ,mong ma0or items which will get affected witho"t a s"ita#le amendment
to the -ompanies Bill is the preparation of #an$ #alance sheet. 3hile p"#lic deposit
3B
#y companies as treated as #orrowing for #an$s they are only deposits. Similar
pro#lem is in case of off #alance sheet items .contingent lia#ilities. 3hile it is normal
for companies to have preference share, #an$s "s"ally maintain preference shares
at e&ceptional cases and that too with RBI approval. =erivative items which are
hedging prod"cts are some time shown off #alance sheet or on #alance sheet if they
are mar$ed to mar$et for losses. -orporate de#t restr"ct"ring which is "ni("e to
#an$s and not to companies is other st"m#ling #loc$. ,nother pro#lem is e&cl"sion
of government nominee director in company #ill from the category of independent
director.
!nternational financial reporting system *!RS+:) RBI has recently constit"ted a
tas$ force to address implementation iss"es of I'RS convergence with #an$ing
system #y ,pril, 1, 4518. It may #e mentioned that #an$s will also have to adhere to
vario"s ris$ reporting dead lines incl"ding transition to internal)rating #ased 6IRB9
#ased approach for credit ris$ #y March 81, 451;. 7eading m"ltinational #an$
o"tside India are implementing Basel II initiatives that are I'RS compliant for loan
loss provisioning.
%riority sector lending: -ommittee headed #y Mr. M.I.Nair, -hairman E Managing
=irector, Fnion Ban$ of India has recommended to revise priority sector targets of
foreign #an$ to ;5< 6 present 84<9, to do away with s"#)target of direct and indirect
agric"lt"re targets, introd"ce s"#)target of < of ,NB- for marginal and small
farmers and ?< of ,NB- for micro and small enterprise and to increase the ("ant"m
of ed"cation loan to Rs. 1: la$hs for st"dy in India and Rs. 4: for st"dy overseas and
one property per individ"al 6 instead of Rs. 4: la$hs9 as ho"sing loan. RBI vide
monetary policy of ,pril 4518 anno"nced adoption of the recommendations .
Summing >p
'inancial sector reform is a contin"o"s process that needs to #e in t"ne with the
emerging macroeconomic realities and the state of mat"rity of instit"tions and mar$ets.
So far, Indias approach to financial-sector reforms has served the country well, in
terms of aiding growth, avoiding crises, enhancing efficiency and imparting
resilience to the system. It is e&pected that ongoing reform process will help "s to #"ild
glo#ally competitive #an$ing sector in India.
3C
%ha"ter @3
RBI Monetar" #o$ic"
Monetary policy space needs to be created through fiscal adjustment and
structural measures to improve supply conditions and boost the investment
climate so that revival is supported in a non inflationary manner.
- !I "uarterly review of monetary policy
/onetary %olicy( an overvie0
%he monetary policy statements of the RBI governor are window of policy
changes of the central #an$ in India. %he #road o#0ectives of the monetary policy in
India relate to maintenance of a reasona#le degree of price sta#ility and the need to
#ring a#o"t ade("ate e&pansion of credit to foster faster growth. B"t the relative
emphasis on these o#0ectives has differed in vario"s phases of IndiaAs development. In
the "ltimate analysis, monetary policy has to #e eval"ated in an integrated framewor$ in
terms of inter)relationship among money, credit, o"tp"t and prices. It is seen that the
monetary policy statement has of late #een more m"ltidimensional than foc"sing merely
on monetary aggregates. It contains policy perspectives in respect of growth of
economy, inflationary e&pectations, fiscal position, trade and capital flows, e&change rate
scenario, interest rate instance and over all lending direction for #an$s. %ill 1?)!
monetary policy in India "sed to #e cond"cted with #road money 6M89 as an
intermediate target. %he aim was to reg"late money s"pply consistent with two
parameters namely 6a9 the e&pected growth in real income and 6#9 a pro0ected level of
inflation. However ("estions were raised a#o"t the appropriateness of s"ch a framewor$
vis)K)vis the changing interrelationship #etween money, o"tp"t and prices in the wa$e of
the financial sector reforms and the opening "p of the economy. In line with this thin$ing
RBI has switched over to a m"ltiple indicator approach "nder which interest rates or rate
of ret"rn in different mar$ets 6money, capital and government sec"rities mar$ets9 along
with data s"ch as on c"rrency, credit e&tended #y #an$s and financial instit"tions, fiscal
position, trade, capital flows, inflation rate, e&change rate, refinancing and transactions
3?
in foreign e&change availa#le on high fre("ency #asis are 0"&taposed with o"tp"t data to
draw policy perspectives. Since, ,pril, 455: RBI has started ("arterly review in
accordance with international #est practices.
Changes in operating procedure of /onetary %olicy
In C"ly 4515 RBI constit"ted a wor$ing gro"p to review the operating proced"re of
monetary policy "nder -hairmanship of Mr. =eepa$ Mohanty, E&ec"tive =irector. Based
on the recommendations, following changes to the operating proced"re of the monetary
policy has #een madeL
'irst, the weighted average overnight call money rate will #e the
operating target of monetary policy of the Reserve Ban$.
Second, there will henceforth #e only one independently varying policy
rate, and that will #e the repo rate. %his transition to a single
independently varying policy rate is e&pected to more acc"rately signal
the monetary policy stance.
%hird, the reverse repo rate will contin"e to #e operative, #"t it will #e
pegged at a fi&ed 155 #asis points #elow the repo rate. Hence, the
reverse repo rate will no longer #e an independent varia#le.
'o"rth, a new Marginal Standing 'acility 6MS'9 will #e introd"ced.
Ban$s can #orrow overnight from the MS' "p to one per cent 6now
e&tended to two percent as per monetary policy 45149 of their
respective net demand and time lia#ilities or N=%7. %he rate of interest
on amo"nts accessed from this facility will #e 155 #asis points a#ove
the repo rate.
,s per the a#ove scheme, the revised corridor will have a fi&ed width
of 455 #asis points. %he repo rate will #e in the middle. %he reverse
repo rate will #e 155 #asis points #elow it, and the MS' rate 155 #asis
points a#ove it.
RB! &NN>&1 %.1!C4 ;@?;(?A
1. Economic indicators( %roBections for ;@?;(?A
3A
,ss"ming a normal monsoon and t"rnaro"nd in II2 growth , D=2 is pro0ected to
grow at ?.8< 6 7owered forecast to >.:< in C"ly, 14 in 1
st
("arter review9
Inflation rate >.:< 6e&pected to remain range #o"nd9 / Raised to ?< in 1
st

("arterly review
-onsistent with growth and inflation M8 pro0ected at 1:<
;8 /onetary measures (
Ban$ rate stand ad0"sted to < 6at par with MS'9
-RR stays ;.?:< Red"ced to ;.:5< w.e.f.44.5.4514. '"rther red"ced to ;.4:<
w.e.f.
Repo rate red"ced #y :5 #ps to !< with immediate effect
Reverse repo rate stand ad0"sted to ?< 6155 #ps #elow repo rate9
Marginal standing facility at < 6155 #ps a#ove repo rate9
S7R red"ced to 48< w. e. f. ,"g"st 11, 4514 6vide 'irst M"arter review of
monetary policy 45149
A8 %olicy stance
,d0"st policy rates to levels consistent with the c"rrent growth moderation
D"ard against ris$s of demand led inflationary press"res re)emerging
2rovide a greater li("idity c"shion to the financial system
C8 Risk factors
%he o"tloo$ for glo#al commodity prices, especially of cr"de oil is "ncertain. %his
will have implications for domestic growth, inflation and the fiscal and c"rrent
acco"nt deficits.
%he fiscal deficit since 455!)5 has remained very high and there had #een
significantly high slippage in 4511)14. Even tho"gh Fnion B"dget envisages a
red"ction in fiscal deficit in 4514)18, several "pside ris$s to the #"dgeted fiscal
deficit remains having implication for inflation.
'iscal deficit has led to large #orrowing re("irements of the government. %he
#"dgeted net #orrowing thro"gh dated sec"rities for 4514)18 at Rs. ;.! trillion
programme of government have the potential to crowd o"t credit to the private
sector.
34
Inflation in protein #ased items contin"es to #e in do"#le digit with little sign of
trend reversal. %his has ris$ factor for food inflation.
D8 E)pected .utcome
Ma0or o"tcomes are e&pected from policy actionL)
Sta#ili+e growth aro"nd its c"rrent post crisis level,
-ontain ris$s of inflation and inflation e&pectations re)s"rging and
Enhance the li("idity c"shion availa#le to the system
7. !mportant announcement (
'inancial sta#ility is on top of the agenda. RBI stress tests revealed that
#an$sA capital ade("acy remained a#ove reg"latory re("irements #"t
deterioration in asset ("ality is ma0or ris$s faced #y #an$s.
'inancial incl"sion plans 6'I29 will now foc"s on more in n"m#er and val"e of
transactions in no frill acco"nts and credit dis#"rsed thro"gh information and
comm"nication technology 6I-%9 #ased B- o"tlet. Ban$s have #een directed
to disaggregate plans at controlling office and #ranch levels.
S7B- has #een mandated to prepare roadmap covering all "n#an$ed
villages of pop"lation less than 4555 and notionally allot these villages to
#an$s for providing #an$ing services in a time #o"nd manner.
2riority sector classification will #e re e&amined in the light of Nair committee
recommendations and feed #ac$ received #y RBI.
Based on recommendation of Ra$esh Mohan committee on 'inancial sector
assessment, RBI in cons"ltation with N,B,R= has cond"cted the e&ercise
and have identified cooperative #an$s not meeting licensing criteria. RBI will
#e initiating action accordingly.
F-B to grant loan loans "p to 1:< of total assets to meet ho"sing loan "pto
Rs. 4: la$hs as per priority sector norms.
Ban$s have #een directed not to levy foreclos"re charges.penalties on
floating rate home loans.
Ban$s have #een directed to have #oard approved transparent policy on
pricing of lia#ilities and they sho"ld also ens"re that variation in interest rates
35
on single term deposit of Rs. 1: la$hs and a#ove and other term deposit in
minimal.
Ban$s have #een directed to initiate steps to allot Fni("e c"stomer
identification code to all of its c"stomers and complete the e&ercise #y end
,pril 4518.
Ban$s to offer a @#asic savings #an$ deposit acco"ntA with certain minim"m
common facilities and witho"t the re("irement of minim"m #alance to all their
c"stomers.
Ban$s have #een directed to red"ce their reg"latory e&pos"re ceiling in a
single NB'- having gold loan to the e&tent of :5< or more and also fi&
internal s"# limit on their e&pos"re to NB'- having gold loan in e&cess of
:5<.
Ban$s have #een directed to complete the process of ris$ categori+ation and
compiling."pdating profiles of all of their e&isting c"stomers in a time #o"nd
manner and in any case not later the end March 4518.
Ban$s have #een mandated to p"t in place ro#"st mechanism for early
detection of signs of distress and meas"res incl"ding prompt restr"ct"ring in
case of all via#le acco"nts to protect economic val"e of assets and also to
maintained system generated data on segment wise N2, acco"nts, write
offs, compromise, recovery and restr"ct"red acco"nts.
Ban$s have #een directed to have #oard approved policy on classification of
"nclaimed deposits* grievances redressal mechanism for ("ic$ resol"tion of
complaints and period review of s"ch acco"nts.
Raised provision for restr"ct"red standard loan #y .?:< to 4.?:< 68rd
("arterly review9. Mahapatra committee recommended to raise provisioning
of restricted loan to :<.
Eay &head
%he glo#al financial t"rmoil has reinforced the importance of p"tting special
emphasis on preserving financial sta#ility. ,t the same time, RBI has responsi#ility to
ens"re price sta#ility as persistent high inflation creates "ncertainty for investors and
drive inflationary e&pectations. Hence, the central tas$ for the cond"ct of monetary
policy has #ecome increasing comple&, very sophisticated and forward loo$ing
warranting a contin"o"s "p gradation of monitoring scan and technical s$ills. %he
33
c"rrent challenge is to stri$e an optimal #alance #etween preserving financial sta#ility,
anchoring inflation and s"staining the growth moment"m. It also re("ire complementary
meas"res #y Dovernment of India #y initiating meaningf"l efforts in fiscal discipline,
controlling e&cessive #orrowing #y government, contain s"#sidy #y raising administered
prices of diesel and "rea and go ahead with pending legislation of economic reforms.
%ha"ter-
Foreign Trade #o$ic" %&&'!%&()
India has not been affected to the same e!tent as other economies of the world,
yet our e!ports have suffered a decline the last 20 months due to contraction in demand
in the traditional mar+ets# The protectionist measures being adopted by some of these
33
>$gh4$ght
#ro't( tar&et of 5>* for
ne,t t'o year and 3>*
&ro't( rate after t'o years
and e,%e$t to double India9s
e,%orts of &oods and servi$es
by 345@6
+,%ort tar&et of $ 344 billion
set for 34540556
+,tension of so%s for e,%ort
oriented units till mar$(
34556
Obli&ation under e,%ort
%romotion $a%ital &oods
s$(eme rela,ed6
Permission for ta, refund
s$(eme for ;e'ellery se$tor6
/o fee on &rant of in$entives
to $ut transa$tion $osts6
Plan for diamond bourses in
t(e $ountry6
Sin&le0'indo' s$(eme for
farm e,%orts6
:'enty0si, ne' mar8ets
added to fo$us mar8et
s$(eme6 So%s under fo$us
mar8et s$(eme (i8ed from 36>
%er$ent to 3 *6
/umber of duty0free sam%les
for e,%orters raised to >4
%ie$es from 5>6
Sero duty under te$(nolo&y
u%&rade s$(eme6
countries have aggravated the problem#$
3hri .nand 3harma4ommerce ,inister
!ntroduction( %he 'oreign %rade 2olicy 455)1;
was anno"nced on 4?
th
,"g"st 455 at a time
when the world was emerging from the shadow
of challenging economic period, worst we have
seen last seven decades. Economics and
mar$ets thro"gho"t the world were in t"rmoil,
ca"sing sharp contraction in international trade,
adversely impacting glo#al investment flows and
world witnessed an "nprecedented contraction
of over 14<.
%he o#0ectives of the 'oreign %rade 2olicy
455)1; areL)
19 %o do"#le IndiaAs percentage share of glo#al
trade #y 451;*
49 %o arrest the declining e&ports and reverse the
trend*
89 %o enco"rage e&ports thro"gh mi& of meas"res
incl"ding fiscal incentives, instit"tional changes,
proced"ral rationali+ation and efforts for enhance
mar$et access across the world and
diversification of e&port mar$ets and
;9 %o provide a special thr"st to the employment
oriented sectors which have witnessed 0o#
losses in the wa$e of recession, especially in the
field of te&tile, leather and handicrafts.
Strategy (%he $ey strategies areL
19 Fnshac$ling of controls*
49 -reating an atmosphere of tr"st and transparency*
89 Simplifying proced"res and #ringing down transaction costs*
;9 ,dopting the f"ndamental principle that d"ties and levies sho"ld not #e e&ported*
3@
:9 Identifying and n"rt"ring different special foc"s areas to facilitate development of
India as a glo#al h"# for man"fact"ring, trading and services and
>9 Mar$et diversification strategy to reach o"t non traditional destinations in ,frica ,
7atin ,merica and ,sia since o"r traditional mar$et witnessed a sharp contraction.
Special focus initiatives
Sectors with significant e&port prospects co"pled with potential for employment
generation in semi)"r#an and r"ral areas have #een identified as thr"st sectors, and
specific sectional strategies have #een prepared. '"rther initiative in other sectors will #e
anno"nced from time to time. 'or the present, Special 'oc"s Initiatives have #een
prepared for agric"lt"re, handicrafts, handlooms, gems and 0ewelry and leather and
footwear sectors. %wenty si& mar$ets have #een added to foc"s mar$et scheme in
'oreign %rade 2olicy of 45)1; and sops "nder foc"s mar$et scheme hi$ed from 4.:<
to 8<.
%ackage for &griculture
%he Special 'oc"s Initiatives for agric"lt"re incl"deL
6a9 , new scheme called Iishesh Jrishi Fpa0 1o0ana has #een introd"ced to #oost
e&ports of fr"its, vegeta#les, flowers* minor forest prod"ce and their val"e added
prod"cts.
6#9 ="ty free import of capital goods "nder E2-D scheme.
6c9 -apital goods imported "nder E2-D for agric"lt"re permitted to #e installed
anywhere in the agri e&port +one.
6d9 ,SI=E f"nds to #e "tili+ed for development for agri)e&port +ones also.
6e9 Import of seeds, #"l#s, t"#ers and planting materials has #een li#erali+ed.
6f9 E&port of plant portions, derivatives and e&tracts has #een li#erali+ed with a view
to promoting e&port of medicinal plants and her#al prod"cts.
Single window scheme for farm e&ports has #een proposed in '%2 of 455)1;.
6ems F Ge0elry
6a9 ="ty free import of cons"ma#les for metals other than gold and platin"m allowed
"pto 4< of 'BB val"e of e&ports.
6#9 ="ty free re)import entitlement for re0ected 0ewellery allowed "pto 4< of 'BB
val"e of e&ports.
6c9 ="ty free import of commercial samples of 0ewellery increased to Rs.1 lac.
6d9 Import of gold of 1! carat and a#ove shall #e allowed "nder the replenishment
scheme.
3>
'%2 455)1; has proposed permission for ta& ref"nd scheme for 0ewellery sector
and to open diamond #o"rses in the co"ntry.
Handlooms F handicrafts
6a9 ="ty free import of trimmings and em#ellishments for handlooms and handicrafts
sectors increased to :< of free on #oard 6'BB9 val"e of e&ports.
6#9 Import of trimmings and em#ellishments and samples shall #e e&empt from -I=.
6c9 Handicraft E&port 2romotion -o"ncil a"thori+ed to import trimmings,
em#ellishments and samples for small man"fact"rers.
6d9 , new handicraft special economic +one shall #e esta#lished.
1eather F foot0ear
="ty free entitlements of import trimmings, em#ellishments and footwear
components for leather ind"stry increased to 8< of free on #oard 6'BB9 val"e of
e&ports. ="ty free import of specified items for leather sector increased to :< of free on
#oard 6'BB9 val"e of e&ports. Machinery and e("ipment for effl"ent treatment plants for
leather ind"stry shall #e e&empt from c"stoms d"ty. '%2 455)1; has proposed allow re)
e&port of "n"sed leather s"#0ect to :5< d"ty.
E)port promotion schemes
-arget %lus:
, new scheme is accelerate growth of e&ports called @%arget 2l"sA has #een
introd"ced. E&porters who have achieved a ("ant"m growth in e&ports wo"ld #e entitled
to d"ty free credit #ased on incremental e&ports s"#stantially higher than the general
act"al e&port target fi&ed. 6Since the target fi&ed for 455;)5: is 1><, the lower limit of
performance for ("alifying for rewards is pegged at 45< for the c"rrent year9.Rewards
will #e granted #ased on tiered approach. 'or incremental growth of over 45<, 4:< and
155<, the d"ty free credits wo"ld #e :<, 15< and 1:< of 'BB val"e of incremental
e&ports.
Hishesh 3rishi >paB 4oBana
,nother new scheme called Iishesh Jrishi Fpa0 1o0ana 6Special ,gric"lt"ral
2rod"ce Scheme9 has #een introd"ced to #oost e&ports of fr"its, vegeta#les, flowers,
minor forest prod"ct and their val"e added prod"cts. Iishesh Jrishi Fpa0 1o0na 6IJFC9
has #een f"rther e&panded to cover village and cottage ind"stries to promote e&port of
soy#ean, cocon"t oil, fr"its, vegeta#les, flowers, and forest prod"ce, dairy, po"ltry and
other val"e added prod"cts. E&port of these prod"cts shall ("alify for d"ty free credit
3B
entitlement e("ivalent to :< of 'BB val"e of e&ports. %he entitlement is freely
transfera#le and can #e "sed for import of a variety of inp"ts and goods.
=Served from !ndia7 Scheme
%o accelerate growth in e&port of services so as to create a powerf"l and "ni("e
@served from IndiaA #rand instantly recogni+ed and respected the world over, the earlier
='E- scheme for services has #een revamped and recast into the @Served from IndiaA
scheme. Individ"al service providers who earn Rs.: lac, and other service providers who
earn foreign e&change of at least Rs.15 lacs will #e eligi#le for a d"ty credit entitlement
of 15< of total foreign e&change earned #y them. In case of stand)alone resta"rants, the
entitlement shall #e 45<, whereas in the case of hotels, it shall #e :<. Hotels and
resta"rants can "se their d"ty credit entitlement for import of food items and alcoholic
#everages.
E)port %romotion of Capital 6oods *E%C6+
6a9 ,dditional fle&i#ility for f"lfillment of e&port o#ligation "nder E2-D scheme in
order to red"ce diffic"lties of e&porters of goods and services.
6#9 %echnological "p)gradation "nder E2-D scheme has #een facilitated and
incentivised.
6c9 %ransfer of capital goods to gro"p companies and managed hotels now
permitted "nder E2-D.
6d9 In case of mova#le capital goods in the service sector, the re("irement of
installation certificate from -entral E&cise has #een done away with.
6e9 E&port o#ligation for specified pro0ects shall #e calc"lated #ased on concessional
d"ty permitted to them. %his wo"ld improve the via#ility of s"ch pro0ects.
6f9 Import d"ty for capital goods "nder E2-D has #een #ro"ght down to 8< from
:<. So e&porters can import machinery which otherwise they co"ld have
imported at 14.:< d"ty.
'%2 455)1; proposes to rela& o#ligation "nder e&port promotion of capital goods
scheme.
Ne0 status holder categori,ation
, new rationali+ed scheme of categori+ation of stat"s holders as Star E&port
Ho"ses has #een introd"ced as "nderL
-ategory / %otal performance over three years
Bne Star E&port Ho"se L Rs.1: crore
%wo Star E&port Ho"se L Rs.155 crore
3C
%hree Star E&port Ho"se L Rs.:55 crore
'o"r Star E&port Ho"se L Rs.1:55 crore
'ive Star E&port Ho"se L Rs.:555 crore
Start E&port Ho"ses shall #e eligi#le for a n"m#er of privileges incl"ding fast)
trac$ clearance proced"res, e&emption from f"rnishing of #an$ g"arantee.
E)port oriented units *E.>s+
6a9 EBFs shall #e e&empted from service ta& in proportion to their e&ported goods
and services.
6#9 EBFs shall #e permitted to retain 155< of e&port earnings in e&port earners
foreign c"rrency acco"nts.
6c9 Income ta& #enefits on plant and machinery shall #e e&tended to =%, "nits,
which convert to EBFs
6d9 Import of capital goods shall #e on self)certification #asis for EBFs.
6e9 'or EBFs engaged in te&tile and garment man"fact"re left over materials and
fa#rics "p to 4< of -I' val"e or ("antity of import shall #e allowed to #e
disposed of on payment of d"ty on transaction val"e only.
6f9 Minim"m investment criteria shall not apply to #rass hardware and handmade
0ewelry EBFs 6this facility already e&ists for handicrafts, agric"lt"re, floric"lt"re,
a("ac"lt"re, animal h"s#andry, I% and services9.
ree trade and 0arehousing ,one *-EI+
6a9 , new scheme to esta#lish 'ree %rade and 3areho"sing None has #een
introd"ced to create trade)related infrastr"ct"re to facilitate the import and e&port
of goods and services with freedom to carry o"t trade transactions in free
c"rrency. %his is aimed at ma$ing India into a glo#al trading)h"#.
6#9 '=I wo"ld #e permitted "pto 155< in the development and esta#lishment of the
+ones and their infrastr"ct"re facilities.
6c9 Each None wo"ld have minim"m o"tlay of Rs.155 crores and five lac s(.mt. B"ilt
"p area.
6d9 Fnits in the '%3Ns wo"ld ("alify for all other #enefits as applica#le for SEN
"nits.
!mport of second(hand capital goods
Import of second)hand capital goods shall #e permitted witho"t any age
restrictions. Minim"m depreciated val"e for plant and machinery to #e re)located into
India has #een red"ced from Rs.:5 crore to Rs.4: crore.
3?
Services e)port promotion council
,n e&cl"sive Services E&port 2romotion -o"ncil shall #e set "p in order to map
opport"nities for $ey services in $ey mar$ets, and develop strategic mar$et access
programs, incl"ding #rand #"ilding, in co)ordination with sectoral players and recogni+ed
nodal #odies of the services ind"stry.
Common facilities center
Dovernment shall promote the esta#lishment of common facility centers for "se
#y home)#ased service providers, partic"larly in areas li$e engineering E architect"ral
design, m"lti)media operations, software developers etc. in State and district level
towns, to draw in a vast m"ltit"de of home)#ased professionals into the services e&port
arena.
%rocedural simplification and rationali,ation measures
6a9 ,ll e&porters with minim"m t"rnover of Rs.: crores and good trac$ record shall
#e e&empt from f"rnishing #an$ g"arantee in any of the schemes, so as to
red"ce their transactional costs.
6#9 ,ll goods and services e&ported, incl"ding those from =%, "nits, shall #e e&empt
from service ta&.
6c9 Ialidity of all licenses.entitlements iss"ed "nder vario"s schemes has #een
increased to a "niform 4; months.
6d9 N"m#er of ret"rns and forms to #e filed have #een red"ced. %his process shall
#e contin"ed in cons"ltation with -"stoms and E&cise.
6e9 Enhanced delegation of powers to Nonal and Regional Bffices of =D'% for
speedy and less c"m#ersome disposal of matters.
6f9 %ime #o"nd introd"ction of Electronic =ata Interface 6E=I9 for e&port
transactions. ?:< of all e&port transactions to #e on E=I within si& months.
'%2 455)1; has proposed setting "p of inter)ministerial gro"p to address iss"es
raised #y e&porters.
%ragati /aidan
In order to showcase o"r ind"strial and trade powers to its #est advantage and
leverage e&isting facilities, 2ragati Maidan will #e transformed into a world)class
comple&. %here shall #e state)of)the)art, environmentally controlled, visitor friendly
e&hi#ition areas and marts. , h"ge -onvention -entre to accommodate 15555
delegates with fle&i#le hall spaces, a"ditori"m and meeting rooms with high)tech
3A
e("ipment, as well as m"lti)level car par$ing for 555 vehicles will #e developed within
the envelop of 2ragati Maidan.
1egal &id
'inancial assistance wo"ld #e provided to deserving e&porters, on the
recommendation of E&port 2romotion -o"ncils, for meeting the costs of legal e&penses
connected with trade)related matters.
6rievance redressal
, new mechanism for grievance redressal has #een form"lated and p"t into
place #y a Dovernment resol"tion to facilitate speedy redressal of grievances of trade
and ind"stry.
Juality policy
6a9 =irector Deneral of 'oreign %rade 6=D'%9 shall #e a #"siness driven,
transparent and corporate oriented organi+ation.
6#9 E&porters can file digitally signed applications and "se Electronic '"nd %ransfer
Mechanism for paying application fees.
6c9 ,ll =D'% offices shall #e connected via a central server ma$ing application
processing faster. =D'% HM has o#tained ISB 555 certification #y
standardi+ing and a"tomating proced"res.
Biotechnology parks
Biotechnology par$s to #e set "p which wo"ld #e granted all facilities of 155< EBFs.
-o)acceptance introd"ced as e("ivalent to irrevoca#le letter of credit to provide wider
fle&i#ility in financial instr"ment for e&port transaction.
Special stimulus package ;@?@
In an effort to #oost the co"ntryAs merchandise e&ports and s"stain growth, the
government in Can"ary 4515 offered stim"l"s worth Rs. :55 crores to select e&port
sectors. %he high light of the stim"l"s pac$age areL
6a9 %he stim"l"s is for sectors li$e engineering prod"cts, electronic goods, r"##er,
chemicals, plastics, machine tools, electrical and power e("ipments, steel t"#es,
a"to components and cotton woven fa#rics etc.
@4
6#9 44: new prod"cts were incl"ded in the 'oc"sed prod"ct Scheme and special
foc"sed prod"cts scheme.
6c9 -hina and Capan have #een added in the mar$et lin$ed foc"s programme "nder
which e&portes are provided additional #enefits.
6d9 Benefits "nder mr$et lin$ed foc"s prod"ct scheme have #een e&tended to e&port of
1!8? new prod"cts.
6e9 Some of the sectors incl"ded in M7'2S are steel t"#es, earth moving e("ipment,
iron and steel str"ct"res, three wheelers, transmission towers, steel pipes and
compressors.
6f9 ,dditional s"pport wo"ld #e given for e&port of handicrafts "nder Mar$et ,ccess
initiative scheme #y E&port 2romotion -o"ncil for Handicrafts to set "p wareho"ses
in 7atin ,merica.
&nnual supplement of foreign trade policy ;@?@(??
*?+ Higher support for market and product diversification
,dditional #enefit of 4< #on"s, over and a#ove the e&isting #enefits of :<.4< "nder
foc"s prod"ct scheme, allowed for a#o"t 18: e&isting prod"cts li$e handicrafts item, sil$
carpet, %oys and Sports goods, leather prod"ct and leather footwear, Handloom
prod"cts etc. which have s"ffered d"e to recession in e&ports. '"rther 4:> prod"cts
have #een added "nder foc"s prod"ct scheme for 4< #enefits.
*;+ Support for technological up gradation
Nero d"ty E2-D scheme valid "p to 81.8.11 has #een e&tended for one more year "p
to 81.8.4514 and in order to give #oost to technological "p gradation, the #enefit has
#een e&tended to cover paper and paper #oard, ceramic prod"cts, refractory, glass
and glassware, plywood and allied prod"cts, sport goods toy etc.
*A+ Benefit and fle)ibility to status holders
1< stat"s holder scheme has #een e&tended #y one more year "p to 81
st
March 4514.
*C+ Stability and continuity of foreign trade policy
="ty entitlement pass#oo$ 6=E2B9 scheme has #een e&tended till 85.5>.4511. It has
however, #een indicate that scheme will not #e e&tended f"rther. Interest s"#vention of
@5
4< pre)ship credit to e&port namely handloom, handicraft, carpet and SMEs have #een
allowed till 81.8.11 as per #"dget proposals8 %he facility has now #een e&tended for
C"te, te&tile, engineering and leather.
*<+ %rocedure simplification
E&porters have #een given fle&i#ility to get high val"e E2-D a"thori+ation, cl"#
advance a"thori+ation with a"thori+ation of ann"al re("irement, chartered engineer
certificate for advance a"throisation has #een waived.
*D+ E$! initiative
In order to red"ce the cost and time, the scope and domain of E=I has #een
contin"o"sly #roadened. ,n e)R-M- scheme has #een commenced and many other
initiatives are proposed to ma$e the E=I more cost effective and convenient.
*9+ Sector specific measures
Sector specific meas"res for leather, handloom, te&tile, gems and 0ewellery, handicraft,
service sector and agric"lt"re have #een initiated to ma$e the e&port of these sectors
competitive.
E)port optimism
B"r e&ports have faced contraction of ;.?< in 455)15 d"e to glo#al recession
and s"#se("ent protectionist policies of developed co"ntries #"t cheerf"l news is that
d"ring 4511)14 e&port grew 41< and crossed O855 #illion mar$.
7oo6$ng 0orward
,t present, o"r e&ports to E"rope, FS and Capan amo"nt to 8><, 1!< and 1><
respectively of IndiaAs total e&port of O1>! #illion in 455!)5. E&port in 4511)14 grew
41< reaching O858.? #illion th"s s"rpassing target of O855 #illion. ,sia, 7atin ,merica
and ,frica are main contri#"tor to this growth and signing of -E-, and '%, with ,sian
co"ntries is set to raise ,siaAs share in o"r e&ports to ::< #y 451;.
%ime has come to have a re)loo$ to e&port #as$et in view of dramatic change in
world trading pattern. Slow recovery of FS and recession in E"ro +one has added f"rther
dimension to this change. %his shift has also ta$en place from e&port of traditional
items li$e te&tiles, clothing, food and chemical to high end prod"cts li$e I.%., a"tomo#iles
and intermediates. Bther important pattern in e&port growth is that -hina has emerged
as third ma0or destination of e&ports. Hence foc"s sho"ld shift to -hina specific strategy.
It is also $nown that '=I has played a dominant role in e&port growth of -hina. '=I
@3
f"nded "nits have several advantages over domestic ind"stries in promoting e&ports
partic"larly they act as catalyst of R E = and technology transfer.
%ha"ter-5
C*anging com+$e,ion of Bank Credit
Emerging o++ortunities- issues and c*a$$enges
At the rate at which the economy is growing, a 10% growth looks
inevitable for next 25 years. If the economy grows at this rate, the banking
systems assets have to grow 25!"0%. If this ha##ens, the banking system in the
@3
next five years will be three times bigger than what it is to$ay. %ome banks may
be fo&r to five time bigger than what they are to$ay.'
%hri (.).*hatt! +ormer ,hairman, %*I
%,&/*: .,(A:> B% ?(?C
%&&.!&' %/
t*
Fe01 %&(&
Non food credit gro2t* ('1/ (31'
(1 Agricu$ture %(1% %)1)
%1 Industr" %.1( %&1(
41 Retai$ 5oans /1/ )16
41( 7ousing /1) .14
3.2 Advance against fxed deposit 6.8 1.6
3.3 Credit card outstanding 7.9 -28.3
3.4 Education 33.8 31.2
3.5 Consuer dura!"es -22.6 -1.3
) Ser8ices (.16 (31&
4.1 #ransport $perator 17.% 19.5
4.2 &ro'essiona" (ervices 22.4 36.9
4.3 #rade 14.4 19.4
3 Rea$ Estate 5oans 3.1. &1'
/ 5oans to NBFC 461& %31.
Introduction
%he #an$ing reforms and policy changes ta$ing place in India d"ring the last one
decade are grad"ally changing #an$ing landscape and credit mar$et. 'irst visi#le
change is that #an$s are now more c"stomers foc"sed, who is not only more demanding
6#etter pricing of loan9 #"t also for more convenience 6hassle free doc"mentation and
less paper wor$9, more comforts 6prompt sanction and fle&i#ility in "se of loan9 and more
innovations 6tailor made prod"cts9. Second change is that dereg"lation has made the
#an$s free to form"late their own schemes and prod"cts as per their mar$et segment
and this has forced them to redesign #"siness process and lending policies and
proced"res to meet changing e&pectations of the c"stomers and the mar$et. %hirdly,
introd"ction of ris$ management practices and target implementation of Basel III
recommendations have #ro"ght in more professional approach in credit delivery process
which is now more ris$ foc"sed and has made pricing of loan)prod"cts dependent on
ris$ perception of the #orrower and li$ely hood of defa"lt. 'o"rth visi#le change is that
#an$s are moving from so called la+y #an$ing to #"sy #an$ing #y aggressively
e&panding credit to retail, agric"lt"re and MSME segments. 'ifth visi#le change is that
#an$s are grad"ally #ecoming s"per mar$et where they will not only lend #"t also offer
@@
whole gam"t of financial prod"cts incl"ding third party prod"cts so that c"stomer gets
opport"nity to select #est prod"ct at competitive price. Si&th, a"tonomy given to p"#lic
sector #an$s #y government in the area of HR and other operational matters has come
as a #oom. %he fo"r year #reather given #y RBI for opening "p #an$ing sector for
foreign #an$s m"st #e "tili+ed #y them to thoro"ghly restr"ct"re their credit policies to
p"t them on par with new private and foreign #an$s. Seventh, retail #an$ing wo"ld
#enefit immensely from the Indian demographic dividend and mortgages are li$ely to
cross Rs. ;55,555 crores #y March 4545, Eight, the #ottom of the pyramid or @ne&t
#illionA segment wo"ld emerge as largest n"m#ers and will accent"ate the demand of
low cost #an$ing sol"tions, and 'inally, #an$ing sector is growing m"ch faster than
D=2 as loan)D=2 ratio grew from 81< in 455; to :;< in 455 #"t concern is on assets
("ality.
,ll these changes are on the one hand creating new #"siness opport"nities and on
the other hand also creating new challenges.
Credit Scenario! emerging o++ortunities
Shift to farm sector( %he li#erali+ation in ind"strial goods and services has
#ypassed agric"lt"re, where growth rates have #een far lower. ,s a res"lt, share of
agric"lt"re in national income has dropped from aro"nd ;5< in early !5s to 45<
today. ,nd d"e to this, economic gains of the co"ntry remained "ne("ally distri#"ted
among society as 4.8
rd
of o"r pop"lation contin"es to #e dependent on sharply
declining national income. 7i#erali+ation of ind"stry and service sector has made
them glo#ally competitive. In agric"lt"re, however, government has #een chief
demand stim"l"s #y offering ass"red off ta$e of prod"cts at prices higher than
mar$et driven. Having reali+ed that credit is one of the constraining factor of growth
of agric"lt"re and in many cases farmers have reported to have committed s"icide
d"e to h"ge inde#tedness to local money lenders, DBI directed p"#lic sector #an$s
in C"ne 455; to initiate steps to do"#le the agric"lt"re credit within three years with
the res"lt agric"lt"re lending #y sched"led commercial #an$s 6S-B9 has tripled
d"ring the last three years and to"ched Rs. 15,555 crores from Rs. !!,555 crore.
="ring 455)15, #an$s agric"lt"re credit growth has #een s"#stantially higher at
4;.;< as on 4> 'e# 15 against 41.4< as year ago. %o achieve this target, #an$s
are adopting new #"siness models li$e "sing infrastr"ct"re of post offices, NDBs,
r"ral $ios$s and e)cha"pal. '"rther many #an$s have started "sing low cost
@>
technology li$e #iometric ,%M to reach o"t r"ral pop"lation. RBI has also initiated
other meas"res to enco"rage agric"lt"re financing li$e easing of N2, norms for
agric"lt"re 6crop loan9, rela&ation in service area approach, granting 4< s"#vention
on < reg"lated interest rate of farmersA credit card "p to Rs. 8 la$hs, e&tending of
de#t waiver and de#t relief scheme "p to 85
th
C"ne 4515. -he agricultural loan#
0hich has been bane of banks# has overnight turned into a boon.
/S/Es: a ne0 focus /SMEs have #een playing a critical role in developed and
developing economies. %here are more than 18.; million MSMEs in India at the end
of March 455 contri#"ting aro"nd ;:< of man"fact"red o"tp"t, ;5< of e&ports
and provides employment to >5 million persons 6 B S 85.8.159 . MSMEs also act as
the seed#ed for the development of entreprene"rial s$ills and innovation. %h"s role
of MSME in economic development of the co"ntry is well esta#lished. In order to
enco"rage #an$s to aggressively finance the MSME sector, 2erformance and credit
rating scheme of SME has #een la"nched on ?
th
,pril, 455: and si& credit rating
agencies / -risil, Icra, ="n E Bradstreet, Bnicra, -are and 'itch / have agreed to do
their credit rating. , separate rating agency)SMER,) a 0oint vent"re of Sid#i and ="n
and Bradstreet has also #een set "p. SMER, has signed MBF with almost all the
#an$s. It has also #een decided that ?:< of the fee paid #y SSI for rating will #e
reim#"rsed #y the government s"#0ect to ma&im"m Rs. 4:,555.). RBI has also
decided to set "p a de#t str"ct"ring mechanism for SMEs on the line of -=R. RBI
f"rther permitted the #an$ to do second time restr"ct"ring as a e&ceptional
reg"latory meas"re to overcome the pro#lem of glo#al slowdown. =r. J -.
-ha$ra#arty =ep"ty Dovernor of the Reserve Ban$ of India 6 B"siness 7ine
14.15.4559 said ,H to day, there is no ban+ in this country which will refuse money#
5very ban+ is sitting on tones of money# *eing from the (eserve ban+, I can tell you
there is no dearth of credit# The problem is ,3,5s dont re"uire credit, they re"uire
money#$ ,s per RBI data, MSME credit rose #y 4>.< d"ring 455!)5 reaching
o"tstanding of Rs. 4.: la$h crores .Big corporate have m"ltiple options for financing
and are very demanding in price and #an$ are therefore finding #etter opport"nity in
MSME #y way higher ret"rns.
Retail lending ( %he retail loan growth was s"#d"ed to ;.?< in end of 'e# 4515
from >.>< in 455!)5. %he decline is contri#"ted #y decline in advance against fi&ed
deposit, negative growth in credit card and cons"mer d"ra#les loans. Ho"sing
@B
loan mar$et has grown !.8< followed #y car loan financP. 3ith changed interest
rate scenario d"e to introd"ction of #ase rate and RBI contin"o"s reservation on
teaser rates, retail loans growth d"ring 4515)11 is e&pected to #e sl"ggish. B"t
#an$s do not want to give "p on retail lending considering that the #"siness is
l"crative as ris$ is diversified* spread is #etter and cost of operation is less. It is
e&pected that #an$s will restr"ct"re innovative retail prod"cts to retain the growing
class of clients with high disposa#le incomes and to harness demographic dividend.
Bank credit through /icro finance institutions */!+( %he term micro)finance is
defined @as provision of thrift, credit and other financial services and prod"cts of very
small amo"nts to the poor in r"ral, semi)"r#an and "r#an areas for ena#ling them to
raise their income levels and improve living standards.A M'I also provide other non
credit services also s"ch as capacity #"ilding, training, mar$eting the prod"ce of
SHDs, micro)ins"rance etc. It is now h"ge ind"stry in India with more than Rs. 1555
crores lending #y commercial #an$s to M'Is. Many #an$ers are ama+ed at the
s"ccess of the micro)finance as m"ch as even private sector is reporting s"#stantial
dis#"rsement "nder micro)finance. ,nd, the s"ccess is not only a#o"t delivery of
credit #"t also almost 155< recovery, which is "nheard in priority sector lending.
Since formal credit instit"tions li$e #an$s cannot directly reach to the poorer
sections, there was a need to search for alternative methods of financing to the r"ral
poor. B"dget of 455:)5> has empowered micro)finance instit"tions 6M'Is9 as
intermediary #etween #an$s and #eneficiaries and has proposed to enhance the
target of credit lin$age to 4.: la$h SHD d"ring 455:)5>. However recent events of
p"tting caps of interest rate, fi&ing periodicity of repayment not earlier than monthly
interval and restr"ct"ring o#ligations thro"gh , 2 ,ct, has raised concern over M'I
f"t"re prompting the -entral government to speed "p microfinance act.
/icro(mortgage( Micro)mortgage is evolving area. NHB st"dy has fo"nd that there
are over ;5 ho"sing developers across India offering ho"sing "nits.apartments at
cost #etween Rs. 8 la$hs to Rs. 15 la$hs which are afforda#le to ho"se holds
earning as little as Rs. ?:55 per month. B"t c"stomer of this segment is not a#le to
#"y ho"se d"e to financial constraints giving opport"nities to micro)mortgage
companies. It is "nderstood that #esides =ewan Ho"sing and 'inance co. and Dr"h,
many other companies li$e M,S 'inancial Services, Micro Ho"sing 'inance
-orporation etc. are targeting micro)mortgage mar$et. Diven that micro)mortgage is
@C
collaterised, afforda#le and commercially s"staina#le, mar$et is poised for
significant growth.
E)ports and imports business( E&port growth d"ring 455;)5: has #een 4;.;1<
and e&ports have reached FS O ?.: #illion #y March end 5:. E&ports are
targeted to reach FS O 1: #illion #y March end, 5. Imports have shown a growth of
8:.>4< and have reached FS O 15> #illion. DBI has ta$en slew of meas"res to
improve e&ports #y esta#lishment of special economic +one 6SEN9, agri)e&port +one,
e&port hardware technology par$ 6EH%29 etc. Bpening of economy has opened
h"ge aven"es to #an$s for e&port and import #"siness.
inancing infrastructure ,s per RBI data, #an$As lending to infrastr"ct"re sector
rose #y :4< to Rs. :>,?5 crores as on March end 455: from Rs. 8?,44; crore a
year earlier. Roads, transport, comm"nication, ports, energy, hospital, telecom,
healthcare, ed"cational instit"tion and storage facilities for farm sector incl"ding cold
storage form infrastr"ct"re. %o"rism infrastr"ct"re financing is the ne&t #ig thing.
Infrastr"ct"re is core strength of o"r economy. In the past government did
infrastr"ct"re financing #"t limited #"dget reso"rces have opened option for private
sector and hence financing aven"es have now opened for #an$s. Infrastr"ct"re is
capital intensive and high cost oriented. '"nds re("irement of this sector is h"ge.
3or$ing capital re("irement is relatively less. Repayment period is long incl"ding
gestation period, which creates pro#lem in asset E lia#ility mismatch. %o overcome
,7M pro#lem, RBI has permitted #an$s to raise long)term f"nds thro"gh #onds for
infrastr"ct"re financing. Sec"riti+ation and ta$e o"t financing has emerged as other
s"ita#le option to #an$s for infrastr"ct"re financing. ,ccording to -entre for
Monitoring Indian Economy report, infrastr"ct"re spending is li$ely to grow more than
do"#le to Rs. !.8; la$h cores in 455>)5? from Rs. 8.: la$h crores in 4558)5;.
Ban$s are #an$ing on the growth prospects of this emerging sector.
Corporate credit / %ill now this segment was meeting its demand thro"gh e&ternal
commercial #orrowings, foreign c"rrency converti#le #onds, local #onds placements
with financial instit"tions, m"t"al f"nds, ins"rance companies, commercial papers
etc. ,s per RBI data 6BS dated 1;.51.45159 , reso"rce flow from domestic so"rces
6other than #an$ #orrowing9 to corporate "p t5 Bcto#er 5 was higher at Rs.485,555
crores from other so"rces and from #an$s was lower #y Rs.15?,!51 crores. Since
advances to highly)rated corporate re("ire less ris$ weight "nder Basel II norms,
they are ("ite attractive to #an$s for financing. -ompetition among #an$s is very
@?
fierce #"t #"l$ financing and other #enefits are very strong incentives for the #an$s to
loo$ toward this sector aggressively even on s"#)27R pricing. It is estimated that
#iggest inta$e co"ld come from power, infrastr"ct"re, metal, telecom, a"to and a"to
ancillaries, coal and coal related ind"stries, te&tile, port and shipping.
Capital /arket product)D"arantee to stoc$ and commodity dealers is #ecoming #ig
#"siness. %hese g"arantees are iss"ed in favor of stoc$ e&changes on #ehalf of
#ro$ers to meet shortfall in margins, which #ro$er has to deposit with e&changes for
trading in e("ities or commodities. ,s per ind"stry practices #esides g"arantee
commission at 5.?:< to 4.:5< pl"s processing charges, #an$s get cash cover "p to
:5< of the g"arantee. 3hile direct lending in the capital mar$et is considered as
high)ris$ activity, g"arantees are comparatively considered safe #y #an$s as
e&changes rarely invo$es the #an$ g"arantee.
Service sector) Service sector has emerged as most important segment of the
economy. It is contri#"ting a#o"t >5< of D=2 at c"rrent prices. ,ct"ally service
sector is $ey to IndiaAs growth process. It is the sector that has h"ge opport"nities to
lend. %here are certain reasons, which have #loc$ed seamless flow of credit to this
sector. Bne is lac$ of primary sec"rity li$e stoc$ #y which #an$s are traditionally
drawing comforts. %here are also psychological #loc$s #eca"se pro0ects li$e %I
serials, software etc. is s"ch that their via#ility is diffic"lt to 0"dge. %he rate of
o#solescence is high and salvage from sale of prod"ct is almost +ero. ,nother
pro#lem is of c"stomi+ation of financial prod"cts as each segment of service sector
is having its own "ni("eness and old str"ct"ral way of assessing wor$ing capital
finance and pricing of loan is not wor$a#le. In selected financing of am"sement
par$s, ed"cational instit"tions, travel agency, hotels, I% sector etc. #an$sA past
e&perience is not good. %he perceived ris$ in financing service sector is high #"t
ret"rn 6interest9 is capped d"e to 27R pl"s pricing. Ient"re capital is one ro"te.
Hy#rid prod"cts li$e interest pl"s royalty is another way of pricing ris$y vent"res. %he
challenge #efore #an$s is to either innovate or lose mar$et. %his re("ires proper
lending policies that not only factor in methodology to assess credit and pricing the
prod"cts #"t also to la"nch c"stomi+ed prod"cts after assessing ris$s factors for
vario"s segments of service sector.
Commodity finance business( , credit revol"tion is sweeping the co"ntryside, as
commodity financing #ecomes the new #"++word among #an$s. ,s per data
@A
availa#le, the #an$s d"ring 455;)5: have lent more than Rs. 15,555 crores to
farmers, traders and e&porters against farm prod"ces stored in wareho"ses. IndiaAs
commodity trading is worth Rs. ;55,555 crores ann"ally and still a long way to get
the sat"ration. -ollateral managers now assist #an$s in "nderta$ing d"e diligence
6credit ris$9, g"aranteeing ("ality and safety of the commodity 6operational and
performance ris$9, proper doc"mentation 6legal ris$9 and ins"rance 6defa"lt ris$9.
Ban$s are in process of esta#lishing tie)"p with commodity e&changes to lend to
farmers and traders. National -ollateral Management Services 7td. 6N-MS79 has
#een #y National -ommodities ,nd =erivate E&change 7td. 6N-=E79 , I''I-B and
,"dit -ontrol E&pertise, Denava, with o#0ective of creating a safe and li("id
wareho"se receipt mar$et in India. 7oo$ing to the si+e of the commodity mar$et,
there is h"ge #"siness opport"nity waiting for the #an$s. %he commodity financing
will #e part of priority sector and agric"lt"ral lending.
-rade in commodity future( %he conto"r of the commodities mar$et are set to #e
redrawn with DBI and RBI finali+ing proposal to allow #an$s to trade in commodity
f"t"re and to ma$e wareho"se receipt eligi#le sec"rity. DBI has proposed to amend
Ban$ing Reg"lation ,ct 1; to ena#le #an$ to get into commodity f"t"res and also
the Negotia#le Instr"ments ,ct 1!!1 to ma$e wareho"se receipt a negotia#le
instr"ment. It may #e mentioned that Ban$ing Reg"lation ,ct permits #an$s to trade
only in #"llion. 3areho"se Reg"lation ,ct is also in process that wo"ld create a
reg"latory a"thority for accreditation of wareho"se and setting standard to #e made
applica#le for scientific grading, pac$ing, storage, preservation and certification of
commodities. It is also proposed to introd"ce demat wareho"se receipts. Ban$s
have also ta$en "p sta$e in commodity e&change and are ready to set "p trading
des$s.
Channel financing or Supply Chain inancing( S-' is emerging as one of the
fastest growing segments in the #an$ing sector. S-' is an innovative finance
mechanism #y which #an$ meet the vario"s f"nds re("irements of
s"ppliers.distri#"tors, th"s helping them seamless cash flow along the arteries of the
enterprise. Fnder channel financing, the s"ppliers.distri#"tors can leverage on the
relationship with rep"ted companies in so"rcing low cost credit with s"pport from his
co"nterparts. It is a more advanced and sophisticated version of the age old wor$ing
capital financing. It covers the entire gam"t of financing of #oth the s"ppliers and
vendors side. Fnder the S-' model, #an$s are loo$ing at val"e chain aro"nd
>4
man"fact"ring companies to finance the s"ppliers and distri#"tors of their val"e
chain. %his type of financing helps all the parties of the val"e chain as prod"ction and
material movement #ecomes smoother #ac$ed #y ready and cheap financing.
Fnder S-', the #an$ opens a line of credit for s"pplier in cons"ltation.
recommendation of the man"fact"ring company. %he line of credit is very specific to
the prod"cts, which vendor s"pplies to the man"fact"ring company. ,fter s"pply, the
man"fact"rer ro"tes the payment thro"gh an escrow acco"nt which gives comfort to
the #an$er. Bn distri#"tion side, #an$s finance the distri#"tors on the
recommendation of the man"fact"rer. Bften there is arrangement of escrow acco"nt
$ind of mechanism where the sale of the distri#"tors is ro"ted thro"gh the #an$.
Fnder S-' following credit facilities are availa#le)
1. =isco"nting of trade #ills accepted #y the dealer.distri#"tor.
4. 7imited overdraft facility to dealer.distri#"tor for his #"siness dealing with
large corporates.
Risk free income( Basel II implications are forcing #an$s to move to ris$ free
income li$e ins"rance and m"t"al f"nds. In the credit areas, #an$s are innovating #y
leveraging on their credit dispensation strength to a"gment ris$ free income thro"gh
variety of ways li$e)
o .riginator of loan) Ban$s will mo#ili+e loan #"t will not carry in their #oo$s.
Earn income as originator. 7I- has h"ge corp"s of f"nds #"t cannot directly
lend. Here, the originator has an opport"nity to lend.
o /onitoring fee( %ransfer loan to S2I or other #an$s thro"gh sec"riti+ation
process #"t contin"e to earn fee)#ased income for monitoring of loan. Even in
case of sale of distressed assets to ,R-, #an$ has an opport"nity to earn
monitoring fee, as they $now the assets #etter than the #"yer.
o :a6e o#t f$nance- In case of infrastr"ct"re pro0ects* the loan is ta$en "p #y
other instit"tion after a specified period to over)come the pro#lem of assets
lia#ility mismatch.
o 0$nanc$a4 ad-$sor0 Ban$s are now offering discretionary portfolio management
services) investment in art, philanthropy, real estate, and f"nds within co"ntry
and in offshore f"nds ) for its affl"ent c"stomers, all "nder one roof.
o *nformat$on 'er-$ce- Fnder S-' mechanism #an$ generate all data of
shipment from s"ppliers to the man"fact"rer and from man"fact"rer to
>5
distri#"tors and offers information service li$e data of prod"ct, #rand, dealer
wise dispatch and payment to and from c"stomers.
Issues 9 C*a$$enges!
Credit Risk /anagement( -redit Ris$ is also $nown as defa"lt ris$. %he credit ris$
depends on #oth e&ternal and internal factors. %he e&ternal factors are the state of
the economy, wide swings in commodity.e("ity prices, foreign e&change rates and
interest rates, trade restrictions, economic sanctions, government policies etc. %he
internal factors are deficiencies in loan policies.administration, a#sence of pr"dential
credit concentration limits, inade("ately defined lending limits for loan officers.-redit
-ommittees, deficiencies in appraisal of #orrowersA financial position, e&cessive
dependence on collateral and inade("ate ris$ pricing, a#sence of loan review
mechanism and post sanction s"rveillance etc. %he effective credit ris$
management necessitates that #an$sA have to #e pr"dent to $eep on reading not
only Indian economy #"t also the entire glo#e that have #earing on the money
mar$et, capital mar$et, stoc$ mar$et, commodity mar$et and fore& mar$et and
integrate its lending operations proactively in terms of mar$et realities. %hey sho"ld
also p"t in place proper mechanism to address vario"s ris$s arising o"t of deficiency
in lending policy, incorrect prod"ct str"ct"ring, inade("ate loan screening, loop holes
in doc"mentation, ineffective post sanction monitoring.follow)"p and wea$ness in
collection. recovery mechanism. In fact in segment li$e retail lending, channel
financing etc. #an$s are going thro"gh learning c"rve and there is strong need to p"t
in place effective policies of sanction and monitoring of loan and $eep them "pdated.
-RISI7 has recently stated 6BS 5;.5:.5>9 that Indian companies have #eg"n to
show a downward movement of creditworthiness. It may #e recalled that modified
credit ration 6M-R9 #eing prepared #y -RISI7 has shown a decline for the first time
in three years. %his may #e a warning signal for the #an$s to $eep trac$ on asset
("ality.
%ricing( -ompetition among #an$s to tap the low ris$ #orrowers is driving down the
price. 7oans to corporate and p"#lic sector "nderta$ings are at s"#)27R. In certain
segments, s"ch as home loan and car, the competition is so steep that #an$s are
offering loan at interest rates, which are almost 455);:5 #asis points #elow the 27R.
>3
Even processing charges or doc"mentation charges are waived. %ill Basel II
#ecomes act"ally effective, there is incentive for #an$s to ar#itrage interest income
#y roping in high)ris$ #orrowers. Even mid)segment #orrowers have started
demanding s"#)27R loans. %he competition among #an$s in this segment is hotting
"p forcing the #an$ to p"t in place S"#)27R interest rate policy so that #an$ may
not lose prime c"stomers in mid)segment. ,ll this has made loan pricing a very
comple& process. ,s a r"le pricing sho"ld #e done scientifically on ris$ grading of the
#orrower on pl"s 6or min"s9 27R #asis #"t mar$et comp"lsions are s"ch that #an$s
are forced to lend at rates dictated #y mar$et leader, otherwise there are chances of
losing #"siness.
/arketing ( 3al$ in #"siness is the thing of past. %he c"stomers are now demanding
on price 6interest rates9, on prod"ct 6("ality9, place 6home delivery, internet #an$ing9,
pac$aging 6#rand affinity9, people 6c"stomer service9, partnering 6#"siness alliances,
direct selling agents9, and promotion 6disco"nt, free#ies etc.9 ="e to this, old
#"siness model of @capt"ring c"stomer thro"gh aggressive sellingA has given way to
new #"siness model of @captivating the c"stomer thro"gh innovationA. In the area of
credit, #an$s are "nder press"re to devise new prod"cts, develop delivery channel
incl"ding e)channel, #"ilding #rands, partnering alliance and appointing direct selling
agents, giving promotional offers, and reorienting man)power to ma$e them c"stomer
friendly. 'or p"#lic sector #an$s, it is a challenging tas$ #"t there is not other option.
Capacity building( =eveloping s$ill level of credit officer, mar$eting and I% people
and designing training programme to develop these s$ill is a ma0or HR challenge.
Introd"ction of Basel II, which re("ires ris$ rating of #orrower thro"gh highly technical
tools, has made this tas$ even more challenging. It is #elieved that #an$s will have to
invest lot of reso"rces and money in #"ilding this capacity in new environment where
they will #e re("ired to #e Basel II compliant not only from reg"lators perspective #"t
also from perspective of international investors.
N%& management( %he growth in Non)performing assets of Indian Ban$s has largely
followed a cyclical pattern in relation to the growth in credit off ta$e. , st"dy of RBI
has indicated that N2, growth follows credit growth with a lag of two years. %his is a
$ind of warning to #an$s to watch o"t N2,s following good year of credit growth.
>3
&pproach to lending( %here was the time when assessment of wor$ing capital
meant to #e on 4nd method of lending s"ggested #y the %andon committee and
assessment of term loan "sed to #e #ased on intricate calc"lation of IRR, =S-R,
disco"nted cash flow, N2I etc. Even for term loan to a farmer for #"lloc$ or a crop
loan to a farmer, the detailed cash flow statement co"pled with cash s"rpl"s was
calc"lated to decide eligi#ility. %he approach to lending has now changed with #an$As
having freedom to decide assessment methodologies on their own. 'or e&ample,
#an$s are now having mi& of 4nd method of lending, t"rnover method and cash flow
method depending "pon c"t off points and nat"re of activity for financing traders,
man"fact"rers and service sector. In case of crop loan or Jisan -redit -ard 6J--9
the scale of finance approach is adopted which permits sanction of loan #ased on
land holding and cropping pattern m"ltiplied #y scale of finance fi&ed for that
partic"lar crop. Even scale of finance approach is now #eing made discretionary to
allow finance as per ("ality of land, method of c"ltivation or stat"s of la#o"r 6hired or
family9. ,ll retail prod"cts li$e ho"sing loan, car loan, ed"cation loan, personal loan
etc. are c"stomi+ed and assessment of ("ant"m of loan is simple as m"ch as fi&ed
percentage of ta$e home pay or income from #"siness or profession. 3hile the
simplification of the process has made the tas$ of assessment of need #ased finance
easy, it has made prod"ct development a c"m#ersome process where not only
prod"ct feat"res #"t also its feasi#ility has to #e critically e&amined #efore it is
la"nched.
Credit rating of borro0ers(-RISI7 has recently la"nched #an$ loan rating. In
addition to commenting on the timely payment of principal and interest, the rating will
give an opinion on the e&tent of recovera#ility of the loan post defa"lt, #y capt"ring
the impact of covenants, sec"rity and other repayment protection provided specifically
to lenders. %hese ratings can #e on #ehest of #orrower or lender. %he rating will
strengthen the #an$sA confidence in #orrower. %he rating wo"ld also s"pport Indian
#an$s in implementation of Basel II #y offering an opinion in loan specific ris$ and can
#e "sed #y the #an$ in pricing, capital allocation and portfolio management.
Business process re(engineering( %he drive for greater c"stomer convenience is
forcing #an$s to re)engineer their lending process s"ch as setting "p of Retail ,ssets
>@
-entral 2rocessing -entre 6R,-2-9, Small and Medi"m -redit -ell 6SME--9,
entr"sting 0o# of d"e diligence to -redit Ierification ,gencies etc.
&ssets securiti,ation( 3ith proposed amendment in Sec"rity -ontract Reg"lations
,ct, #an$ will #e a#le to iss"e assets #ased sec"rities 6,BS9 )#oth performing and
non)performing) which will #e at par with any other sec"rities li$e sec"rity or de#t and
will #e trada#le in stoc$ e&change. It will help the #an$s to overcome pro#lem of
assets lia#ility mismatch, enhance their li("idity and lower the cost of loan, as f"nding
cost will go down.
%roduct development( In a #"yers mar$et, the c"stomer satisfaction is a $ey to
s"ccess of new prod"cts. Since c"stomersA needs are repetitive, m"ltiplicative and
dynamic in nat"re, the prod"ct development aims at e&ploring and satisfying these
needs in a contin"o"s manner. 3eaning o"t e&isting non)profita#le prod"ct is part of
this process. %o meet this challenge, each and every #an$ is contin"o"sly la"nching
new prod"cts in the area of retail loan, corporate loan, agric"lt"ral loan, SME loan,
merchant credit etc. Some of the very pop"lar prod"cts are home loan, car loan, loan
against rental, loan against mortgage of immova#le properties, farmerAs credit)card,
artisanAs credit card, trade finance prod"cts for #"siness)men, pro0ect loan for
corporate etc. 3ith all pervasive "se of technology certain e)prod"ct li$e e)home loan,
e)ed"cation loan and e)car loan are also emerging in the mar$et.
1o0 cost delivery model( It is e&pected that @#ottom of pyramidA or @ne&t #illionA
segment wo"ld emerge as largest n"m#ers of #orrowers and will thro"gh a challenge
of low cost delivery model.
Business alliances( Coint vent"re.alliances with pro0ect developers, man"fact"rers,
mar$eters, o"tso"rcing partners, #"ilders, promoters, ed"cational instit"tions,
hospital, ins"rance companies, m"t"al f"nds etc, who together em#ody the e&tended
enterprise has #ecome the order of the day. %he o#0ective is to develop a m"t"ally
s"pportive, val"e)creating mode* #ringing together complimentary forces of alliance
partners to create more val"e together than one can deliver separately. Ban$s are
entering into #"siness alliances with tractor, car and fo"r wheeler man"fact"rers as
their preferred financiers. Ban$s are also o"tso"rcing non)critical 0o# pertaining to
mar$eting of financial prod"cts and recovery and follow "p of loans thro"gh direct
>>
selling agents and recovery agents. %his is not only adding to operational efficiency
#"t also ena#ling the #an$ to foc"s on its core activity more efficiently and effectively.
1enders liability and fair practices code( %ransparency is #"++ word in lending.
RBI is insisting on #an$s to p"t in place anti)tying meas"res not only to ens"re that
lender does not resort to "nfair trade practices #"t also to ens"re that proper
grievance redressal mechanism is in place. It is, therefore, essential that interest rate,
method of compo"nding, penal interest, prepayment penalty, re#ate for prompt
payment, right of #orrowers li$e copy of loan doc"ments, statement of acco"nt, right
of privacy i.e. not sharing his personal profile to #"siness associate.other agencies
are in place to address rep"tation and legal ris$ arising o"t of #an$ing #"siness.
$ue diligence of the loans(3ith fra"d and forgeries on rise, d"e diligence ass"mes
greater importance in conte&t of credit management. %o safeg"ard from fra"ds and
forgeries, credit officials are re("ired to metic"lo"sly follow lending policy, lendersA
lia#ilities and #est practices code, #asic principles of lending, J1- norms etc., for
c"stomers acceptance and identification. %hey sho"ld also strictly monitor the end
"se of loans and other internal control meas"res so as to ens"re that post credit
sanction d"e diligence process is effective eno"gh to chec$ malpractices, if any.
5ooking a*ead!
="ring the last one decade or so, India has made rapid strides in economic
growth, foreign trade, services and more arg"a#ly, in ind"stry. 3hen economy is growing
at !< or so, #an$ing ind"stry is e&pected to grow at 4;< as normal m"ltiplier of D=2 to
credit is a#o"t three times. However impending inflation, increase in money s"pply and
increase in interest rates, credit growth slipped to 1>.>< in 455)15 from all time high
growth of 85< in 455;)5:. So improving credit growth is #iggest challenge that #an$s
are facing at present.
%ha"ter -6
>B
Cas* F$o2 Ana$"sis
Reading Borro2er:s 7ea$t*
!ntroduction
, s"ccessf"l #an$er was once as$ed a#o"t secret of his decision)ma$ing. He
replied that #efore ta$ing any lending decision he wanted the prospective #orrower to
satisfy him on two #asic pointsL firstly how he is going to pay #ac$ the money and
secondly what sho"ld he 6#an$er9 do to $now that his plans on which repayment
depends are really materialising. B#vio"sly there sho"ld #e a system for the #an$er to
$now a#o"t the health of his #orrowerAs #"siness. -ash flow is one of the tools to have
this information and more precisely #orrowerAs a#ility to meet his o#ligations as and
when they mat"re. Fnfort"nately, the system has not #een given d"e importance in
credit appraisal in Indian conte&t.
1i'uidity and Solvency
7i("idity refers to #orrowerAs a#ility to meet his c"rrent o#ligations i.e. how fast
the c"rrent assets are converted into cash to pay for c"rrent lia#ility. Solvency on the
other refers to #orrowerAs a#ility to service the de#t i.e. a#ility to meet interest cost and
repayment of term loan. , #orrower may have eno"gh assets #"t may not have eno"gh
cash to meet his o#ligation 6for the reasons which we shall analyse afterwards9. %h"s,
there is a need to loo$ into li("idity in depth.
1i'uidity and %rofitability
Denerally spea$ing the health of a #orrower is ga"ged #y his a#ility to earn. B"t
sometime a #orrower tho"gh showing profits may not #e in a position to meet his
o#ligations #eca"se profits always does not mean li("idity. 2rofita#le companies can #e
cash #ro$e and "nprofita#le companies may have rich cash loads. , #orrower in
distress may resort to window dressing to hide his real state of affairs #y resorting to
certain acco"nting conventions. %he changes in val"ation of inventory 6last in first o"t
67I'B9 to first in first o"t 6'I'B9 or vice)versa9, "nder provision of lia#ility, reval"ation of
assets etc. are "s"ally adopted practices to inflate.manip"late profits. Hence there is a
need to $now what cash is e&actly generated #y the #orrower from operations to see his
a#ility to service the de#t and to meet c"rrent o#ligations.
>C
Cash 6eneration Ehat does it represent K
Refer cash generation most pro#a#le reply wo"ld #e Gprofits add #ac$
depreciationH. 7et "s analyse the statement with the help of a simple e&ampleL
Sales 155
-ost of salesQ 6!59 Qe&cl"ding depreciation
=epreciation 6159
2rofit 15
So, profit pl"s depreciation means that cash generation is 45. =oes it represent the
cash generatedR In fact, it is not so #eca"se L)
6a9 Sales incl"de sales on credit, which very often are not realised in all.
6#9 -ost incl"des e&penses, which very often not paid in all.
6c9 2rofit incl"des ta& and other items tho"gh provided #"t not paid.
Hence, there is a need to loo$ #eyond what we normally conceive as cash generated.
Cash lo0 Statement a source of vital information
-ash flow statement provides information regarding so"rces 6where got9 and
"ses 6where gone9 of cash. In other words, it provides information of movement of cash
#etween two #alance sheets dates. , reference to G-ash 'low / 'low -hartH will provide
information to the readers that how 2rofit E 7oss and Balance Sheet can #e "sed to
recast cash flow statement. %he a#ility to "nderstand 2rofit E 7oss statement as it
relates to Balance Sheet which relates to cash flow can provide "nder noted val"a#le
information to the #an$erL )
6a9 3hether operating cycle is generating eno"gh cash to meet o"t cost of
operation 6a#ility to meet c"rrent o#ligations9R
6#9 S"rpl"s availa#le after operating cycle is eno"gh to meet o"t interest and
dividend o#ligation. In other words whether company #orrows money to meet
this o#ligationR
6c9 3hat s"rpl"s is left to meet o"t term lia#ility d"e 6solvency9R
6d9 Is there any s"rpl"s left for meeting cost of e&pansionR 6Investment in fi&ed
assets for e&pansion, inventory #"ilt "p etc.9R
6e9 ,t what time, cash flow t"rns negative and how it is financed 6short term loan
or long term loan9R
6f9 Bverall cash management shows management efficiency i.e. how cash is
managedR 6e&cess, ade("ate, inade("ate9.
>?
3ith st"dy of 8); years of cash flow statement, a #an$er can find o"t cash
management position and can see whether cash position is improving or deteriorating.
2ertinent here is that cash flow cannot #e manip"lated #y acco"nting conventions and
there is no way to hide significant flows from a #an$er. It sho"ld #e ta$en for granted
that a company not generating cash will event"ally fail #eca"se e&ternal so"rces 6#an$
loan, e("ity of long term loan9 are li$e fair weather friends whose help is availa#le only
when #orrower is in a position to service them. No investor wo"ld li$e to ris$ his money
if he finds that the #orrower will not #e a#le to repay it. It sho"ld, however, #e noted that
cash cons"ming operating cycle does not always mean @sic$nessA. It is tr"e for growing
organisations also #eca"se, #oth need o"tside finance for their s"rvival. %he difference
is that, while former needs to ma$e "p money eaten "p d"ring operation later re("ires
it to meet growing wants i.e. increased inventory, receiva#les etc. Here, the #an$erAs
perception is cr"cial to differentiate #etween growing and wea$ organisations and to
decide whether he wo"ld li$e to p"t more money.
Cash lo0 Statement ormat
-ash flow statement can #e prepared either directly from #oo$s of acco"nt or
indirectly from financial statements. In practice, cash flow is rarely drawn from cash)
#oo$ directly. It is "s"ally derived from 2rofit E 7oss statement and Balance Sheet.
%here are n"m#er of ways to categorise so"rces and "ses in cash flow statement. Bne
of the most "sef"l and effective way is to categorise so"rces and "ses of cash flow in
fo"r ma0or headsL 6Refer %a#le / 89.
1. Bperating -ash flow
a9 Bperating cycle
#9 M"asi operating cycle
4. 'inancing -ash 'low
8. Investment flow
;. 'inancing 6S%.7%9 flow
Statement Ho0 to prepare !ndirect /ethod
2reparation of cash flow statement from 2rofit E 7oss ,.c and Balance Sheet is
done thro"gh derivation techni("e i.e. information for so"rces and "ses of cash is
derived from these so"rces. %ho"gh the proced"re is simple, it re("ires certain #asic
$nowledge. 'or #etter "nderstanding to prepare the cash flow from 2E7 ,.c and Balance
Sheet and to interpret the information effectively, it wo"ld #e #etter to approach the
s"#0ect with the help of a case st"dy.
>A
Balance Sheet E 2E7 ,.c of ,B- -ompany 7td. are reprod"ced #elow for
preparation of cash flowL)
-&B1E ? L ,B- -o. 7td. / -ondensed Balance Sheet as on 81
st
March
1!&B!1!-!ES ?LLD ?LL9 &SSE-S ?LLD ?LL9
Net 3orth 11;: 1; 'i&ed ,ssets !45 1;>!5
%erm 7ia#ilities 4>:! ?>:: Non -"rrent ,ssets Nil Nil
Current liabilities
Ban$ #orrowing
2aya#le
Bther c"rrent lia#ility
1>;8
4115>
41;?
45:?
45!:8
15?;
Current &ssets
-ash
Inventory
Bther c"rrent assets
=e#tors
4;?5
8:;8:
:81!
44>8>
4;;4
4!44?
;!!
855>
?;1; !5;88 ?;1; !5;88
-&B1E ; !NC./E S-&-E/EN- for the year ended A?
st
/arch ?LL9
Sales ?1?55
Bther Income 8555
-ost of sales ) :1555
=epreciation ) ;!55
Selling e&penses ) 15855
Interest ) :55
%a& ) :55
=ividend ) 1!55
Retailed earnings ;55
Step !L 2repare wor$sheet for change in #alance sheet #etween the two dates. %he
change in #alance sheet items of ,B- -o. 7td. has #een rearranged in wor$ sheet I)
* Eork sheet ! +
,B- -o. 7td. Statement of changes in #alance sheet #etween 1> to 1?
'i&ed ,ssets 6>859
Inventory ?45!
=e#tors 6?;>59
Bther c"rrent assets 885
Net 3orth 619 !5;
%erm 7ia#ility ;?
Ban$ Borrowing ;51;
2aya#le 64:89
Bther c"rrent lia#ilities 615:489
-ash 4!
6'ig"res in #rac$et indicate "se* other so"rce+
Step !! 2repare wor$sheet II after rearranging fig"res from 2rofit and 7oss ,cco"nt
and merging it with 3or$ Sheet / 1. L)
Aor6 sheet @ ** (In !s6)
Sales ?1?55
B4
Bther Income 8555
-ost of sales 6:15559
=epreciation 6#9 6;!559
Selling e&penses 6158559
Interest 6:559
%a& 6:559
=ividend 61!559
'i&ed ,ssets 6#9 6>859
Inventory ?45!
=e#tors 6?;>59
Bther c"rrent assets 885
E("ity 6a9 ?>;
%erm lia#ility 6c9 ;?
Ban$ #orrowing ;51;
2aya#le 64:89
Bther c"rrent lia#ility 6c9 615:489
-ash 6d9 4!
Step !!! 'ollowing ad0"stments have #een made while preparing 3or$ sheet No. II L)
6a9 -hange in net worth is effect of two things* retained profits and increase in
e("ity. In other words, increase in net worth more than profits retained
represents increase in its e("ity. In case of ,B- -o. 7td., increase in e("ity
is Rs.?>; 6!5; / ;559.
6#9 =epreciation is not act"ally an o"tflow in itself* #"t is related with investment
in fi&ed assets. 'or calc"lating total o"tflow, depreciation is added #ac$. In
case of ,B- -o. 7td., total o"tflow of cash in fi&ed assets was Rs.1115
6;!55 S >859.
6c9 -"rrent portion of term lia#ility incl"ded in c"rrent lia#ility needs
read0"stment to $now how m"ch cash flow is associated with loan term and
how m"ch with short term. In case of ,B- -o. 7td., fig"res #alance sheet
have #een shown after ma$ing read0"stment.
6d9 Increase in cash is "se and decrease in cash is so"rce.
Step !H Incorporate the data in the format. -ash flow is now ready. 6Refer %a#le 89.
-&B1E A : C&SH 1.E S-&-E/EN- ?LLD(L9 : &BC Co8 1td8
B2ER,%IND
-1-7E
S,7ES
=EB%BRS
-BS% B' S,7ES
INIEN%BRIES
-RE=I%BRS
?1?55
- ?;>5
) :1555
?45!
) 4:8
>;4;5
) ;;5;:
MF,SI
B2ER,%IND
C&SH R./ .%ER&-!.N
SE77IND ET2. ) 15855
451:
B5
-1-7E B%HER IN-BME
%,T
B-,
B-7
8555
) :55
885
) 15:48 ) 1?8
'IN,N-IND -BS% C&SH R./ .%ER&-!N6
C4C1E
IN%ERES%
=III=EN=
) :55
) 1!55
4454
) ??55
7BND %ERM
'7B3
SBFR-ES S FSES
C&SH &-ER !N&NC!N6
C.S-
'ITE= ,SSE%S
NBN)-FRREN% ,SSE%S
) 1115
5
) :;!
) 1115
'IN,N-IND '7B3
SBFR-ES S FSES
C&SH &-ER 1.N6 -ER/
1.E
7% 7B,N
S% 7B,N
EMFI%1
;?
;51;
?>;
) 1>>!!
1>>>5
IN-RE,SE 6 S 9 =E-RE,SE 6 ) 9 IN
-,SH
) 4!
Now, we can interpret the data availa#le from cash flow statement. It is self)
revealing and need little efforts for interpretation.
Bperating cycle has generated eno"gh cash and after meeting operating
e&penses, ,B- -o. 7td. is left with s"rpl"s of Rs.4454. %his s"rpl"s is, however, not
eno"gh to pay for interest and dividend, the same was paid #y raising short)term #an$
#orrowing. %he investment cost 6p"rchase of fi&ed assets9 has #een met #y raising
e("ity and long term loans. 7% so"rce 6E("ity and 7%9 was also "sed for financing
dividend. %his is not a healthy proposition. %he chargea#le c"rrent assets 6c"rrent
assets / B-,9 of ,B- -orporation has gone down #y Rs.:!4 whereas the #an$
#orrowing has gone "p #y Rs.;51; indicating irreg"larity in the acco"nt. If data for 8);
years is availa#le and it loo$s li$e that ,B- -o. 7td. has s"ch a state of affairs on
contin"o"s #asis, it is certain that the company is facing the li("idity cr"nch. %o
concl"de, all is not well with their cash management.
-E. /.RE !N$!C&-.RS
56 Cash generated to total debt ratioL ) In place of 2B%.%otal o"tside lia#ility ratio,
cash generated from operation to total o"tside lia#ility ratio is more relia#le to 0"dge
de#t servicing capacity of a #orrower. ,B- -o. 7td., has cash generation to de#t
B3
ratio of 8.>;<, whereas 2B%.=e#t ratio is !.>><. B#vio"sly de#t servicing capacity
of ,B- -o. 7td., is only 8.>;< which is not eno"gh even to ta$e care of financing
cost.
36 Common si,e cash flo0L) %o have comparative analysis percent)wise cash flow is
very often prepared to ma$e the analysis easy.
-&B1E C : C.//.N S!IE C&SH 1.E : &BC C.8 1-$8
SBFR-ES ,mo"nt < FSES ,mo"nt <
Cash from operating
cycle
Bank borro0ing
Cash
))))))))))))))))))))))))))))))
1oan term loan
E'uity
4454
;51;
4!
((((((((((((((
;?
?>;
6119
6449
6559
(((((((((
64?9
6;59
inancing cost
6a9 Interest
6#9 =ividend
)))))))))))))))))))))))))))))
!nvestment in i)ed
&ssets
:55
1!55
(((((((((((
1115
6819
659
(((((((
6>59
1!!5 61559 1!!5 61559
It is clear that cash generated from operation 611<9 was not eno"gh to meet
financing the cost 6;5<9. %he ,B- -o. 7td. has raised #an$ loan 644< of total so"rces9
to meet the financing cost. , part of 'inancing cost was financed #y long term so"rces
6E("ity U;5 / 11 / 44 V ? W 9. Ftilisation of this money for payment of dividend.interest is
not a healthy symptom. %his spea$s for inherent cash wea$ness of the company.
Investment in fi&ed assets 6>5<9 was financed #y E("ity 6;5<9 and 7ong term loan
64?<9.
C./%&R!N6 E!-H >N$S 1.E
It is worthwhile to ma$e a reference to f"nds flow analysis. %he o#0ective here is
to foc"s how the cash flow analysis is s"perior to f"nd flow analysis.
und flo0 statement of &BC Co8 1td8 can be dra0n as under:
S.>RCES >SES
Net f"nd generated Short term

2rofit
=epreciation
;55
;!55 :455

Bills paya#les
B-7
=e#tors
4:8
15:48
?;>5 1!48>
Short term so"rces
Inventory
Ban$ #orrowing
B-,
;51;
?45!
885
7ong %erm 1115
B3
-ash 4! 11:!5
7ong term so"rces
E("ity
%erm loan
?>;
;? 14>;>
XXXXX
4;4>
XXXXX
4;4>
%hro"gh this traditional analysis everything loo$s normal for the company. No
diversion is evident and long term so"rces are more than long term "ses. In other
words, cash flow provided "s more deeper insight in financial state of affairs of the
company rather than what is availa#le from f"nd flow.
S>//!N6 >%
By a systematic st"dy of cash flow statement, a #an$er can easily identify
strength and wea$ness of a #orrower. %his is #etter indicator of #orrowerAs solvency and
li("idity. It highlights wea$ness of the #orrower and can #e "sed as instr"ment to identify
incipient sic$ness #eca"se li("idity cr"nch always precedes to losing profita#ility.
)555)
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5oan S"ndication
.rigin
%he Narasimham -ommittee on the 'inancial System, appointed #y the RBI in 11,
e&amined, among the other things, the idea of starting loan syndication. %he report of
the committee states, G3hile the str"ct"red consorti"m did indeed provide, some comfort
to the #orrowing clientele in the sense that it saved them from the responsi#ility of
approaching several instit"tions for arranging their finance, it had two principal
draw#ac$s. 3hen the consorti"m re0ected an application, the #orrower did not have any
f"rther option. Secondly, even tho"gh the formal nat"re of the consorti"m has #een
dil"ted and is now in theory vol"ntary in effect it is mandatory and militates against the
participating instit"tions developing a sense of acco"nta#ility and responsi#ility for a
large portion of their portfolio. ,s a first step, we recommend that the system of
consorti"m lending #e done away with. In its place, where the instit"tions and #orrowers
agree a system of loan syndication or participation with other ='Is and commercial
#an$s co"ld #e consideredH. B"t this idea of formation of 7oan Syndication was not
well appreciated. %herefore, the %rade and Ind"stry contin"ed to voice their concerns
over the diffic"lties faced #y them in complying with the RBI g"idelines on lending
discipline for assessing the ("ant"m of wor$ing capital to #e provided to a #orrower #y
the #an$ing system. S"ch diffic"lties arose mainly on acco"nt of the consorti"m
lending. Hence, the RBI decided to revise the system of lending "nder consorti"m
arrangement to overcome the diffic"lties of trade and ind"stry. ,ccordingly, in 18, it
appointed a committee "nder the chairmanship of Shri C I Shetty, -hairman and
Managing =irector, -anara Ban$ to review the system of consorti"m lending. %he
-ommittee e&amined vario"s alternatives to the system of consorti"m lending, #esides
s"ggesting li#eral and fle&i#le approach in the system of consorti"m lending. %hese
alternatives incl"de inter #an$ participation certificates, commercial paper, de#ent"res,
sec"ritisation of de#ts and syndication of credit. %he committee fo"nd the scope for
introd"cing these alternatives alongwith the consorti"m lending. ,ccordingly, the loan
syndication #ecame part of lending system.
BB
/arket si,e
7oan Syndication mar$et is presently estimated to Rs. 855555 la$h crores #"siness.
Initially mar$et was dominated #y investment #an$s and state owned State Ban$
sponsored SBI cap #"t grad"ally 2SBs have also developed e&pertise and now three
2SBs namely Ban$ of India , Ban$ of Baroda and 2"n0a# National Ban$ fig"res among
top ten loan syndicators. Even smaller #an$s li$e Fco Ban$, ,llaha#ad Ban$,
-orporation Ban$ and Indian Bverseas Ban$ are now vent"ring into this #"siness
segment to leverage on c"stomer relationship which they have #"ilt "p over the years
and to earn fee income. However $ey to s"ccess is #"ilding capa#ilities to originating
the loans and selling down to other #an$s. Both need strong mar$eting a#ilities and
credit eval"ation and assessment s$ills.
Ehat is 1oan SyndicationK
Ban$s may evolve appropriate mechanism for adoption of sole #an$.m"ltiple
#an$.consorti"m or syndication opport"nity framing necessary gro"nd r"les on
operational aspects. It shall #e noted that the level of individ"al #an$As share shall
contin"e to #e governed #y the norm for single #orrower . gro"p e&pos"re. Ban$s in
their own interest, sho"ld endeavor and ens"re to have effective system for appraisal,
flow of information on #orrower among participant #an$s, commonality in approach and
sharing of lenda#le reso"rces, etc., "nder the single window concept. ,s syndication is
an internationally practiced model for financing credit re("irements, #an$s are free to
adopt syndication ro"te, irrespective of the ("ant"m of credit involved, if the
arrangement s"its to the #orrower and the financing #an$s. 3ith the withdrawal of
g"idelines on consorti"m lending, the process of credit decisions will #e f"rther speeded
"p* this will also afford greater mo#ility to the #orrowers in accessing credit at
advantageo"s cost. %h"s, the recent g"idelines of the RBI have given a signal for the
7oan Syndication to #e formed6
%rocess !nvolved in 1oan SyndicationK
%he process of loan syndication starts when a prospective #orrower approaches a #an$
of his choice and re("ests it to arrange for the re("ired credit, on his #ehalf. %he #an$,
here, is referred as 7ead Manager or Mandated Ban$, which first prepares Information
Memorand"m in cons"ltation with the #orrower. %his information Memorand"m
f"rnishes details of the pro0ect and credit re("irements. It also disc"sses a#o"t the
terms of the offer made #y the #orrower s"ch as interest, repayment period, sec"rity etc.
%he Mandated #an$ ta$es o"t the re("ired copies of the Information Memorand"m and
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distri#"tes among the prospective lenders re("esting each one to participate in the
credit offer. Each prospective #an$ ma$es an independent eval"ation of the #orrower,
pro0ect and credit offer. If necessary, it may collect additional information from the other
so"rces as well. ,fter sometime, the Mandated Ban$ convenes a meeting of
prospective #an$s to disc"ss the syndication strategy relating to co)ordination,
comm"nication and control within the syndicated process and finali+e the deal timing,
charges towards management e&penses and cost of credit, share of each participating
#an$ in the credit, etc. In the meeting, #an$s agreeing to participate in the credit offer
form 7oan Syndication and someone within the gro"p is appointed as an ,gent Ban$
6referred as ,gent9. ,gent and prospective credit instit"tions enter into an agreement,
which sets a limit for agency services. %he Mandated #an$ or ,gent comm"nicates the
terms and conditions of the credit to the #orrower who then offers his written consent to
the same. %he #orrower then gives a prior notice of his f"nds re("irements and
accordingly, re("ests the 7oan Syndication for dis#"rsement. Before the dis#"rsement,
the ,gent has to get the doc"ments e&ec"ted on #ehalf of all #an$s for which there may
#e a single set of doc"ments or each #an$ may prescri#e a separate set of doc"ments.
Denerally, a single window concept is followed in doc"mentation. ,fter doc"mentation,
each #an$ deposits itAs share in credit with the ,gent who then dis#"rses the amo"nt to
the #orrower. S"#se("ently, the #orrower ma$es the repayment of loan to the ,gent ,
the participating #an$s are entitled to get their share in it on pro)rata #asis. Bnce the
entire d"es are paid, the loan syndication comes to an end. %he process of re)
esta#lishment of the loan syndication is followed when the #orrower ma$es the fresh
re("est.
unctions of the /andated Bank and &gent Bank
%he Mandated Ban$ has to o#tain a letter 6called the Mandate 7etter9 from the #orrower
to arrange for the loan and also necessary details of the offer s"ch as amo"nt of loan,
interest rate, repayment period, sec"rity, etc. %he Mandated Ban$ then prepares the
Information Memorand"m in cons"ltation with the #orrower and sends the same to
prospective credit instit"tions, which may #e interested in it. %he Mandated Ban$
o#tains the written consent of credit instit"tions to 0oin the loan syndication. It is also
e&pected to play a $ey role in forming the 7oan Syndication and loo$ after its wor$ "ntil
the ,gent Ban$ is appointed. If the same #an$ is appointed as ,gent, it has to offer
agency services.
B?
%he ,gent Ban$, wherever appointed, is e&pected to perform only those d"ties, which
are prescri#ed in the ,greement entered with the syndicate mem#ers. %his ,greement
in t"rn protects the interest of mem#er #an$s and sets a #o"ndary for the agent to
perform d"ties. %he agent is e&pected to e&ercise the re("ired s$ill, care and diligence
#efitting its assignment. He has to disclose relevant facts of the credit to the 2rincipal
6mem#er #an$s9. He is not to s"#)delegate his a"thority and ma$e secret profit o"t of
the agency services. ,s per the agreement, the participating #an$s are e&pected to
deposit their share with the ,gent who, in t"rn, ma$es the entire amo"nt availa#le to the
#orrower, when needed. Similarly, repayment amo"nt of the #orrower is deposited in the
,gentAs acco"nt and who then distri#"tes among the mem#ers on pro)rata #asis. %his
acco"nt sho"ld #e of the nat"re of a tr"st acco"nt so that the syndicate can protect itself
against insolvency or misappropriation #y the agent. In order to have the right to claim
from the recipient 6#orrower9 a#o"t any amo"nt mista$enly paid* the ,gent incorporates
a cla"se in the loan doc"ment. '"rther, the ,gent may want to limit his lia#ility #y
incorporating a separate cla"se in this respect which grants imm"nity against lia#ility for
any defa"lt or omission e&cept in the case of its gross negligence and defa"lt or willf"l
miscond"ct of the agents, etc.
Relationship among Syndicate /embers
%he gro"p is generally small and, therefore, the mem#ers can cons"lt one another.
%hey wo"ld li$e to resolve differences, if any, thro"gh m"t"al cons"ltations. Since each
mem#er has reasona#ly a large share, there is no need to insist on ma0ority decision,
every time. Each mem#er is capa#le for ta$ing the matter with the #orrower directly and
protects his interest. In case of defa"lt, the ma0ority of the mem#ers can instr"ct the
,gent to initiate recovery. 3hen enforcement of sec"rities #ecomes necessary, each
mem#er can p"rs"e its own remedies as it pleases. ,s and when the #orrower ma$es
the payments to the ,gent, each mem#er has to get its pro)rata share in it. In any case,
the relationship among the mem#ers has to #e cordial and informal so that the
syndication of credit wor$s effectively. B"t the relationship #etween agent and mem#er
#an$s has to #e formal and in line with the agreement entered #etween the two.
/ethods of 1oan Syndication
%here are two methods of syndication / direct lending and thro"gh participation. In
respect of @direct lendingA, all the lenders sign the loan agreement independently with the
#orrower and agree to lend "pto their respective share. %he o#ligations of the syndicate
mem#ers are several and they do not "nderwrite one another. ,s against this, in
BA
@thro"gh participationA method, the lead #an$ is the only lending #an$, so far as the
#orrower is concerned, that approaches the other lenders to participate in the loan. %his
normally ta$es place witho"t the $nowledge of the #orrower. %he lead #an$ grants a
certain portion of the loan to each participant as agreed. It also agrees to pay to the
participants a pro)rata share of receipts from the #orrower. %here can #e fo"r types of
participation 6a9 S"#stit"tion / %here is an agreement #etween the #orrower and the
lead #an$ and other participants to permit the lead #an$ to dis#"rse the loan on #ehalf of
the participants, 6#9 Fndisclosed agency ) Here, the lead #an$ is appointed as agent #y
the syndicate #efore the loan is signed, #"t does not disclose this fact to the #orrower. It
is, therefore, the principal as far as the #orrower is concerned. 6c9 S"#)loan / Fnder
this method, each participant grants a loan directly to the lead #an$ on the condition that
the lead #an$ repays only to the e&tent of receipts from the #orrower, 6d9 ,ssignment /
%he lead #an$ assigns a proportion of the loan and of the #enefit of the loan agreement
to the participants in consideration of the p"rchase price of pro)rata share of the loan to
#e contri#"ted #y them6
%reparatory Eork
In terms of the RBI g"idelines, each #an$ is e&pected to do necessary preparatory wor$
#efore the loan syndication is formed. %o start with, there has to #e a written policy of
loan syndication in which each #an$ has to indicate its loan policy and #"siness
strategies. In partic"lar, it has to spell o"t its policy in regard to loan amo"nt ceiling for
formation of syndication, e&pos"re limits for individ"al or gro"p #orrowings, charges for
agency services and for preparation of Information Memorand"m etc. It sho"ld also
decide whether it wants to go in for common set of loan doc"ments of syndication or
develop its own set of loan doc"ments. It has also to wor$ o"t its preference for @direct
methodA or @thro"gh participativeA method. '"rther, in case it has to perform certain
agency services "nder loan syndication, necessary details have to #e provided to the
identified #ranches. If necessary, a speciali+ed #ranch may #e opened for offering
agency services as "nder the loan syndication. 'inally, officers going to scr"tini+e credit
proposals "nder loan syndication and follow)"p the credit matters need to #e trained
#esides creating the re("ired infrastr"ct"re and technology #ase for handling of
syndicated loans.
%onc4#s$on
7oan Syndication provides ade("ate fle&i#ility and is more convenient to #oth #orrowers
and #an$s. %his may, in t"rn, res"lt into timely and need #ased credit to corporate
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#orrowers. In a competitive environment, it is essential to avoid delays in credit
sanctions for which there have to #e certain press"res #"ilt within the system of loan
syndication. In other words, mem#ers of loan syndication sho"ld wor$ with competitive
spirit. In regard to the need #ased credit, cash #"dget.cash flow system sho"ld #e
followed in which the #orrower has to spell o"t his cash re("irement precisely. In any
case, #enefits of the loan syndication sho"ld #e mostly shared e("ally #etween
#orrowers and #an$s. In the end, s"ccess of formation and cond"ct of loan syndication
very m"ch depends "pon serio"sness, openness and collective action on the part of
#oth #orrowers and #an$s.
)555)
%ha"ter- 8
Documentation and C*arging of securities
1. !ntroduction) =oc"mentation means e&ec"tion of doc"ments in proper manner and
according to provisions of law. 2roper doc"mentation comes to the resc"e of the
#an$s in a co"rt of law. Section 8 of the Indian Evidence ,ct defines a doc"ment as
Y,ny matter e&pressed or descri#ed "pon any s"#stance #y means of letters, fig"res
or mar$s or #y more than one of these means, intended to #e "sed or which may #e
"sed for the p"rpose of recording that matterY. E&ec"tion of doc"ments th"s interalia
involves a process of ta$ing the signat"re of the #orrowers.g"arantors etc. on the
necessary doc"ments after proper stamping and completion of other formalities say
registration connected therewith. %he doc"mentation esta#lishes a legal relationship
#etween the lending #an$er 6creditor9 and the #orrower 6de#tor9.g"arantor.
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;8 $ifferent types of borro0ers / Borrowers can #e classified into several categories
s"ch as 6 a9 Individ"als in single name and 0oint names, 6#9 'irm)sole
proprietorship firm and partnership firm, 6c9 Hind" Fndivided 'amily, 6d9 7imited
lia#ility companies.corporations etc. vi+. 6i9 2rivate limited company, 6ii9 2"#lic
7imited -ompany and 6iii9 local a"thorities, corporations or "nderta$ings owned #y
State.Fnion Dovernment, 6e9 -l"#s schools non)trading associations and literary
societies, 6f9 -o)operative societies and 6g9 %r"sts.
A8 /ode of creation of charges( -reation of charge on sec"rities is done as per
nat"re of sec"rity thro"gh 6a9 hypothecation 6for mova#le stoc$s s"ch as goods,
#oo$)de#t, plant and machinery9 6#9 2ledge 6for mova#le stoc$s9 6c9 Mortgage in
respect of immova#le property, 6d9 assignment of de#ts li$e life policy and 6e9 lien on
deposit with the #an$ or post office.
;. Capacity to contract and free consent( Before getting the doc"ments e&ec"ted, it
is necessary to ens"re that the parties e&ec"ting doc"ments are having capacity to
enter into contract. Similarly #an$ sho"ld ens"re that #orrower e&ec"ting the
doc"ments and charging the sec"rity or giving g"arantee is doing so with his. her
free will. %o ens"re this, the #ranch manager sho"ld see that doc"ments are
e&ec"ted #y a ma0or only 6a person attain ma0ority at the age of 1! years
e&cepting when the g"ardian is appointed #y the co"rt, age of ma0ority is 41 years9
and, there is no occasion on which #orrower may later claim that he has not signed
the doc"ments with his free will on acco"nt of coercion, "nd"e infl"ence,
misrepresentation or mista$e. ,s a matter of a#"ndant preca"tions, safeg"ard #y
way of witness. letter of affirmation.p"#lic notice etc. are ta$en when illiterates
e&ec"te the doc"ments or third party sec"rity is charged to the #an$.
:. Checkpoints for effective documentation(( E&ec"tion of doc"ment is most cr"cial
part of lending. ,ny la&ity.negligence on the part of #ranch manager.officer may lend
the #an$ in tro"#le when s"it is filed and sec"rity is enforced. It is therefore essential
that "nder noted time tested preca"tions are o#served while doc"ments are
e&ec"ted #y the #orrowers)
6a9 =oc"ment sho"ld #e e&ec"ted in presence of the Manager. other responsi#le
officer.
6#9 =oc"ments sho"ld #e completed in one sitting in the same handwriting in the
same in$.
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6c9 =oc"ment sho"ld #e signed #y the #orrowers in f"ll signat"re in the same
style thro"gho"t the doc"ments. Denerally #orrowers p"t their signat"res
"sing right hand. If however, #orrower signs in left hand, a small note sho"ld
#e anne&ed recording therein that the #orrower has signed in left hand. In
case of illiterate #orrower, a remar$ sho"ld #e made if he.she has p"t his.her
right th"m# or left th"m#. In practice right th"m# impression is o#tained from
lady #orrowers and left th"m# impression from male #orrowers.
6d9 ,ll types of correction, insertion, additions, alterations, c"ttings, overwriting,
erasing, interlining, deletions etc. sho"ld #e avoided. Btherwise, these
sho"ld #e d"ly a"thenticated #y the #orrowers "nder his.her f"ll signat"re
near each of s"ch corrections, addition, interlining etc.
6e9 =ate and place of e&ec"tion sho"ld #e mentioned properly. =oc"ments
sho"ld not #e do"#le dated s"ch as 1.4, .15 etc.
6f9 3hen the doc"ment r"ns into several pages, the #orrowers sho"ld sign s"ch
doc"ments on each and every page. Signat"re sho"ld #e o#tained on the
doc"ments partic"larly across the fold in s"ch a manner that the signat"res
r"n on the #oth pages.
6g9 Fnless there is a specific re("irement, doc"ments sho"ld not #e got attested.
witnessed.
6h9 =oc"ments sho"ld #e ade("ately and properly stamped as per state law,
6i9 No col"mn sho"ld #e left #lan$. Jeeping the doc"ments #lan$ or even one or
two col"mn may invalidate the whole doc"ments. Spelling of name and
address of the #orrowers sho"ld #e ta$en d"e care. Interest rate is very
cr"cial and it sho"ld #e filled correctly stating over or #elow 27R with
("arter.half yearly.monthly compo"nding clearly. No credit facility sho"ld #e
allowed "ntil and "nless all the #orrowers incl"ding g"arantors e&ec"te all the
doc"ments.
609 3hen the #orrower happens to #e a proprietorship firm.partnership firm, the
doc"ments sho"ld #e got e&ec"ted once "nder the seal of the firm and
another individ"ally. 3hen the #orrower happens to #e a company, the
doc"ments sho"ld #e got e&ec"ted once "nder the seal of the company with
the designation of the signatory in the company and another individ"ally
"nder common seal of the company.
6$9 =oc"ments are to #e preserved very caref"lly.
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<8 Special convenants to meet RB! guidelines"regulatory re'uirements(
'ollowing special convenants sho"ld #e added /
6a9 %he #orrowing company will not ind"ct a person who is director on the #oard
of the company which has #een identified as a willf"l defa"lter and that in
case, s"ch person is fo"nd to #e on the #oard of #orrower company, it wo"ld
ta$e e&peditio"s and effective steps for removal of the person from its #oard.
6#9 %he #orrower will not ma$e any ma0or change in the management involving
transfer of ownership witho"t previo"s permission of the #an$ in writing.
6c9 -ertificate . declaration that directors.#orrowers are not related to any senior
e&ec"tive of the #an$.
6d9 Ban$ may withdraw sanction witho"t assigning any reason.
6e9 %he #orrower will not have any o#0ection to the #an$ disclosing its name to
RBI.-IBI7 in case of defa"lt or otherwise so re("ired #y the #an$.
6f9 Borrower will not to pay commission to g"arantors.
D8 $ocumentation (Stamping
,s per Section 46119 of the Indian Stamp ,ct, 1!, a doc"ment is deemed to #e
d"ly stamped if it #ears an adhesive or impressed stamp of not less than the proper
amo"nt and that s"ch stamp has #een affi&ed or "sed in accordance with the law for the
time #eing in force. It is legal re("irement that doc"ments m"st #e stamped properly. If
a doc"ment is either not stamped or "nder)stamped, it is not valid. =oc"ment
sho"ld always #e stamped #efore or at the time of e&ec"tion of the doc"ments. If the
doc"ments are stamped later than the date of e&ec"tion, it is not valid in a co"rt of law.
Every adhesive stamp affi&ed on doc"ments sho"ld #e cancelled as per Section 14 of
the Indian Stamp ,ct. 3riting name of the e&ec"tant is considered as s"fficient
cancellation. ,ll doc"ments contravening the provisions shall #e deemed to #e
"nstamped and the effect can #e remedied #y payment of d"ty and the penalty. ,ll
doc"ments, which are not d"ly stamped, are inadmissi#le in evidence "nless the d"ty
and penalty have #een paid as provided in Sec. 8: of the Indian Stamp ,ct. Section 8:
of the Indian Stamp ,ct, while providing for admitting certain not d"ly stamped
doc"ments in evidence on payment of certain penalties and d"ties specially e&cl"des
other doc"ments 6incl"ding promissory notes9 from its operation. %h"s an "nder)
stamped =2 Note will #e inadmissi#le in evidence for any p"rpose i.e. the writing therein
cannot #e "sed as an ac$nowledgement of claim. %he r"le of strict Inadmissi#ility of a
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pronote comes into play when a transaction merges into a pronote, which #ecomes its
only #asis. ,ny evidence of s"ch a transaction is #arred "nder Sec.1 of the Evidence
,ct and in s"ch a case any deficiency in stamping the pronote will #e fatal to the whole
s"it. 3hen any doc"ment is e&ec"ted in more than one state in India then the
stamp d"ly paya#le on the doc"ment so e&ec"ted will #e higher of the stamp d"ty
paya#le.
98 Registration of documents 0ith R.C
>nder section 14: of the Indian -ompanies ,ct, 1:>, the following charges are to
#e registered comp"lsorily)
6a9 , charge for the p"rpose of sec"ring any iss"e of de#ent"res.
6#9 , charge on "ncalled share capital of the company.
6c9 , charge on any immova#le property wherever sit"ated or any interest
therein.
6d9 , charge on any #oo$ de#ts of the company.
6e9 , charge not #eing a pledge on any mova#le property of the company.
6f9 , floating charge on the "nderta$ing or any property of the company.
6g9 , charge on calls made #"t not paid.
6h9 , charge on goodwill or patent or license "nder a patent on a trademar$ or on
a copyright or a license "nder a copyright.
8. Registration of $ocuments under !ndian Registration &ct# ?L@M( %he doc"ments,
as per detail #elow are comp"lsorily re("ired #y Section 1? of the Indian Registration
,ct to #e registered, at the office of the Registrar or S"#)Registrar within fo"r months
from the date of its e&ec"tion. , registered doc"ment shall operate from the time
from which it wo"ld have commenced to operate if no registration thereof had #een
re("ired or made and not from the time of its registration 6Sec. ;?9. )
6a9 Mortgage of immova#le properties 6e&cept #y deposit of %itle =eeds9.
6#9 Instr"ments of gifts of immova#le properties.
6c9 7ease of immova#le property from year to year or for any term e&ceeding one
year or reserving in yearly rent.
6d9 Non)testamentary instr"ments which ac$nowledge the receipt or payment of
any consideration on acco"nt of the creation, declaration, assignments,
limitations, or e&tinction of any s"ch right, title or interest.
6e9 Non)testamentary instr"ments transferring on assigning any decree or order
of a co"rt or any award when s"ch decree or order or award p"rports or
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operates to create, declare, assign, limit or e&ting"ish whether in present or in
f"t"re, any right, title or interest whether vested or contingent of the val"e of
Rs.155.) and "pwards to or in immova#le property.
6f9 Bther non)testamentary instr"ments which p"rport or operate to create,
declare, assign, limit or e&ting"ish whether in present or in f"t"re any right
title or interest whether vested or contingent of the val"e of Rs.155.) and
"pwards to or in immova#le property.
L8 E)tensionNrevival of period of documents
,ccording to Section 4619 of the 7imitation ,ct, 1>8, period of limitation means
the period of limitation prescri#ed for any s"it appeal or application #y the sched"le and
Zprescri#ed periodZ means the period of limitation comp"ted in accordance with the
provisions of the 7imitation ,ct. %here is a legal relation #etween doc"ments and
limitations act. ,s long as the doc"ments are within the period of limitation a #an$er can
instit"te a s"it, prefer an appeal and apply for legal action for recovery. Bnce the
doc"ment has e&pired #y period of limitation, and then the #an$er will have no legal
co"rse of action to recover the d"es from the defa"lting #orrowers. In other words if the
period of limitation e&pires then the party entitled to file a s"it for enforcement of a right
is de#arred from doing so. 3hen the period of limitation as applica#le in a partic"lar
case has e&pired the doc"ments #ecome time)#arred. , doc"ment can #e revived or its
limitation period can #e e&tended #y )
6a9 2art payment #y the #orrower himself or his d"ly a"thorised agent for this
p"rpose and also s"ch payment is made #efore e&piry of the doc"ments
6Sec.1 of 7imitation ,ct9. S"ch payments sho"ld #e in the handwriting or
"nder the signat"re of the #orrower or his a"thorised agent.
6#9 B#taining ac$nowledgement of de#t in writing across the re("isite reven"e
stamp from the #orrower #efore e&piration of the prescri#ed period of
limitation 6Sec.1! of 7imitation ,ct9.
6c9 3hen a fresh set of doc"ments is ta$en #efore the e&piry of the original
doc"ment, fresh period of limitation will start from the date of e&ec"tion of the
fresh doc"ments. , time)#arred de#t can #e revived "nder Sec.4: 689 of
the Indian -ontract ,ct only #y a fresh promise in writing and signed #y the
#orrower or his a"thorised agent generally or specially a"thorised in that
#ehalf. , fresh promissory note.fresh doc"ments e&ec"ted for the old or a
CB
#arred de#t will give rise to fresh ca"se of action and a fresh limitation period
will #e availa#le from the date of e&ec"tion of s"ch doc"ments.
6d9 Section ; of the 7imitation ,ct states Y3here the prescri#ed period of any
s"it, appeal or application on a day when the co"rt is closed, the s"it appeal
or application may #e instit"ted preferred or made on the day when the co"rt
re)opensY.
6e9 ,s per Section : of the 7imitation ,ct, 1>8 any appeal or any application
other than an application "nder any of the provisions or Brder TTI of the
-ode of -ivil 2roced"re, 15! may #e admitted after the prescri#ed period if
the applicant or the appellant satisfies the co"rt that he had s"fficient ca"se
for not preferring the appeal or ma$ing the application within s"ch period.
S>//!N6 >%
Ban$er sho"ld ta$e "tmost care and preca"tion while getting the doc"ments
e&ec"ted. %hey sho"ld ta$e care to complete the formalities in connection with the
e&ec"tion of doc"ments, stamping, s"#se("ent registration etc. according to the
prescri#ed proced"re laid down in respective ,cts so that there is no pro#lem in getting
the doc"ments admitted in a co"rt of law later on, if need #e, as evidence of claiming
right "nder s"ch doc"ment and s"ch doc"ment shall #e enforcea#le against all the
e&ec"tants. %he d"e date of limitation period sho"ld #e properly diarised and doc"ments
sho"ld #e revived well #efore they get time #arred.
%ha"ter-9
$ocumentation of 1imited 1iability Companies
?8 Company defined(
,ccording to C"stice 7indlay #y a company is meant an association of many persons
who contri#"te money or moneyAs worth to a common stoc$ and employ it for a
common p"rpose. %he common stoc$ so contri#"ted is denoted in money and is the
capital of the company. %he persons who contri#"te it or to whom it #elongs are
shareholders. %he proportion of capital to which each mem#er is entitled is his share.
Essential feat"res of a company are )
6a9 , -ompany is an artificial person created #y law. It can act only thro"gh
agents) Board of directors, Managing =irectors and Managers) who are
representatives of shareholders.
CC
6#9 It has a perpet"al s"ccession. =eath, insanity or #an$r"ptcy of shareholders
does not affect its e&istence.
6c9 E&istence starts only after completion of formalities as per act.
6d9 , -ompany can own property, own money, is creditor to other people and can
#orrow also 6s"#0ect to limitation9.
6e9 It has separate entity to its shareholders.
6f9 %he lia#ility of shareholders is generally limited.
6g9 %he legal relationship of director and company is of principal and agent.
6h9 , company m"st have it registered Bffice. It m"st have a common seal
6p"#lic limited only9. It m"st comply vario"s legal formalities and o#ligations.
;8 %rivate and %ublic 1imited company(
,s per -ompanies ,ct, 1:>, there can #e a private company or a p"#lic
company. 2rivate company means a company which #y its articles 6a9 restrict the
right to transfer its share, 6#9 limit the n"m#er of its mem#ers to :5 not incl"ding 6i9
persons who are in the employment of the company and 6ii9 persons who, having
#een formerly in the employment of the company, were mem#ers of the company
while in that employment and have contin"ed to #e mem#ers after the employment
ceased and 6c9 prohi#its any invitation to the p"#lic to s"#scri#e for any shares in or
de#ent"res of the company. , p"#lic company is one, which is not a private
company. %he difference #etween a private and p"#lic company is /
6a9 %he minim"m n"m#er of mem#ers in a private company is two while that of a
p"#lic company is seven. In a private company, the ma&im"m permissi#le
n"m#er is fifty* #"t in p"#lic company it is "nlimited.
6#9 In a private company, the articles of association restrict the transfer of share
where in a p"#lic company there is no restriction.
6c9 , private company is prohi#ited #y its articles of associations to invite
mem#ers of the p"#lic to s"#scri#e for any shares in or de#ent"res of the
company* #"t a p"#lic company may invite the general p"#lic to s"#scri#e its
shares or de#ent"res.
6d9 %he minim"m n"m#er of directors in a p"#lic limited company is three
whereas in private limited company is two.
6e9 , private company can iss"e its share and de#ent"res witho"t iss"e of
prospect"s #"t a p"#lic company cannot.
C?
6f9 , private company can commence #"siness immediately after o#taining a
certificate of incorporation #"t a p"#lic company has to wait till a certificate to
commence #"siness is granted to it.
6g9 , private company m"st add the word @private limitedA with its name where as
p"#lic limited company is re("ired to add @limitedA with its name.
A8 /emorandum of &ssociation(
'irst step in formation of the company is preparation of its memorand"m
of association. It is a charter of the company. It contains provisions relating to name
of the company 6name cla"se9, address of registered office of the company
6registered office cla"se9, its o#0ect 6o#0ect cla"se9, detail of a"thorised capital 6share
capital cla"se9, lia#ility of the share holders 6lia#ility cla"se9 and signat"res of
promoter directors 6signat"re cla"se9. 3hile processing loan application of the
limited company, the #an$ is re("ired to chec$ that 6a9 the company is a"thorised to
do #"siness for which advance is re("ired, 6#9 the company has necessary
#orrowing powers 6applica#le for non trading company9 and 6c9 if the company is
g"arantor, "nconnected with its #"siness there is specific power in the
memorand"m.
C8 &rticles of &ssociation(
%he articles of association are reg"lation of the internal management of the
company and are s"#ordinate to the memorand"m. %he articles of association define
how the o#0ects of the company will #e carried o"t. , p"#lic company may not have
an article of association and in that event ta#le , of the -ompanies ,ct shall apply.
3hile processing the loan application of the company, the #an$er sho"ld st"dy
articles of association to ascertain 6a9 who is a"thorised to open acco"ntR 6#9 3ho
will e&ec"te the doc"mentsR 6c9 3ho is a"thorised to deposit title deeds to create
valid e("ita#le mortgageR 6d9 How common seal will #e affi&edR %he #an$er sho"ld
also chec$ that 6a9 company has power to #orrow and mortgage the property, 6#9
company has affi&ed common seal wherever re("ired, 6c9 sealing has #een done in
accordance with the proced"re as laid down in the article, 6d9 necessary resol"tion is
passed in the #oard naming officer 6s9 in whose presence, the seal is affi&ed and 6e9
doc"ments have #een e&ec"ted as specified in the article or in the resol"tion. In a
recent 0"dgement HonA#le S"preme -o"rt has o#served G so far as the ("estion of
p"tting "p of the seal of the company is concerned, it is a relic of the days when
medieval #arons, who co"ld not read or write, "sed their rings to ma$e a
CA
characteristic impress. Even in the a#sence of a seal, the company may still #e held
to #e lia#le having regard to the a"thority of those who e&ec"ted it.H
<8 Certificate of incorporation and certificate to commence business(
Bn registration, a company gets a certificate from the registrar, which is
$nown as -ertificate of Incorporation. 'rom the date of incorporation, a company
#ecomes a legal person. It is a concl"sive proof that all formalities for giving #irth of
the company have #een completed. , private company can commence #"siness
immediately on receiving certificate of incorporation #"t a p"#lic limited company has
to o#tain a certificate of commencing #"siness also.
D8 Borro0ing po0ers of a company(
Every trading company has an implied power to #orrow money and give
sec"rity for a loan provided s"ch #orrowing is incidental to the cond"ct of its
#"siness. B"t non)trading companies do not en0oy s"ch a right "nless there is an
e&press power to that effect in the memorand"m of association. %he power to
#orrow, whether e&press or implied, may #e f"rther restricted #y memorand"m of
association or articles of association of the company. In case money #orrowed pl"s
money proposed to #e #orrowed e&ceed the aggregate paid "p capital and free
reserves of the p"#lic company approval of the company in general meeting is
necessary 6Section 48 6I9 6d9. '"rther no p"#lic company can #orrow "nless it has
#een granted certificate to commence #"siness 6Section 1;9. %he #oard of directors
of the company can e&ercise the power to #orrow only #y means of a resol"tion
passed in meeting of the #oard and s"ch resol"tion m"st specify the total amo"nt
o"tstanding at any time "p to which moneys may #e #orrowed #y the delegate 6Sec
449. %he #oard can delegate powers to Managing =irector, Manager or any
employee to e&ec"te doc"ments and complete formalities relating thereto.
98 Registration of /ortgages and charges(
%he -ompany ,ct has specified that charge and mortgages on assets of
the company sho"ld #e registered with the Registrar of the company "nder section
14:. %hese charges are 6a9 to sec"re an iss"e of de#ent"res, 6#9 on "ncalled share
capital of the company, 6c9 Bn immova#le property or any interest thereon, 6d9 on
#oo$)de#t of the company, 6e9 not #eing pledge on mova#le property, 6f9 floating
charge on any property of the company and 6g9 charge on goodwill.trade mar$.patent
of the company. '"rther prescri#ed partic"lars of the charge, together with the
?4
instr"ments #y which it is created or a certified copy thereof, are to #e filed with RB-
within 85 days after creation of the charge with form no. 18 along with either of the
form No. ! 6for fresh or modification of charge9, form no. 15 6for sec"red creditors9 or
form no. 1? 6for satisfaction of charge9. Even when there is any alteration or
modification in terms of sanction li$e change in interest rate, modification of charge
has to #e filed. It is the d"ty of the company to file charge.modification. 3here a
charge is created o"t of India on property sit"ated o"t of India, the period of 85 days
will commence after the date the instr"ment creating charge co"ld have #een
received in India in d"e co"rse of post. '"rther the charge created o"t of India,
permission of RBI is re("ired "nder 'oreign E&change Management ,ct 6'EM,9.
%he company is re("ired to $eep a copy of doc"ment #y which the charge is created
in its registered office. %he copy of instr"ment creating charge filed #y the company
with RB- sho"ld #e verified to #e tr"e copy #y a certificate "nder seal of the
company #y a responsi#le officer or #y a person interested in the charge. Non)
compliance.filing of charge is s"#0ect to penalties.
,ny person 6incl"ding the financing #an$9 who is interested in the charge
can also file charge for registration with RB- and recover the fee spent for
registration from the company. In case of delay, company.interested person can
approach RB-, which can allow for e&tension of 85 days in case company is a#le to
satisfy for gen"ineness of the delay. %ho"gh the RB- has no 0"risdiction to e&tend
the period for filing for registration #eyond the e&tended period of 85 days, still the
creditor holding the charge "nregistered even in the e&tended time is not witho"t a
remedy. Fnder section 1;1 of the -ompanies ,ct, company may approach -ompany
law #oard, which can condone delay in filing of charge if satisfied. If -ompany 7aw
Board also ref"ses* the company or its creditor to file application "nder section >8?)
6#9 to government to condone the delay. Needless to add that even tho"gh e&tension
of time can #e so"ght "nder the law the #ranch manager m"st ens"re that charge is
filed with RB- within initial period of 85 days. %he o#0ect of registration is that
mem#ers of the p"#lic dealing with the company sho"ld have a notice of the
partic"lar properties, which might have #een s"#0ected to mortgage or charges. ,
charge #y way of s"#se("ent mortgage, d"ly registered "nder section 14: will have
priority over a charge "nregistered there "nder. Fpon registration of charge, the
registrar of companies 6RB-9 is re("ired to iss"e a certificate for registration of
charge and this is concl"sive proof that charge has #een registered and cannot #e
?5
challenged on any gro"nd. RB- is re("ired to maintain the register in which all
charges are to #e recorded 6section 1859. %his register sho"ld remain open for
inspection #y any person on payment of prescri#ed fee. In case the charge is not
filed as stip"lated, the charge is void against the li("idator . any creditor of the
company in the event company goes into li("idation. However where the company is
a going concern the sec"rity created #y the charge for which charge has not #een
filed can #e enforced thro"gh co"rt as the defa"lting company itself cannot deny the
lender the cover of sec"rity. %his position of company law is in accordance with the
common law that no man can ta$e advantage of his own defa"lt. In case charge has
#een filed #"t not registered #y the RB-, then charge holder is not responsi#le, as
there is no fa"lt on his part. 6State Ban$ of India Is =epro 'ood 7td E others 1!!
-omp case 8?:,8!; 62 E H9. However a pr"dent #an$er sho"ld always ens"re that
charge is got registered, necessary certificate of registration of charge has #een
o#tained or post registration inspection of RB- record has #een done to confirm
registration of the charge in #an$As favo"r. C"st as it is o#ligatory on the part of the
company to file partic"lars of a charge or modification thereof, the company is also
d"ty #o"nd to file satisfaction of charge. %o protect the interest of charge holder in
the event of a fra"d"lent attempt #y the company to file satisfaction of the creditorAs
charge section 18! 649 stip"lates that RB- shall on receipt of satisfaction of charge,
shall send a notice to the charge holder calling "pon him to show ca"se within a time
not e&ceeding fo"rteen days specified in the notice why payment or satisfaction not
#e recorded as intimated to him. In case no o#0ection is made, RB- will file
satisfaction.
,s a part of governmentAs commitment to governance reforms, DBI "nder M-,
41 programme has introd"ced electronic filing of charge with RB-. 'or "sage of e)
'orms for filing of charges #an$ will have to download it from M-, portal
www.mca.gov.in and the same will have to #e digitally signed #y #oth #an$
manager as well as Managing =irector.Secretary of the company. %he relevant
doc"ment creating charge in favo"r of the #an$ will have to anne& with the form after
scanning. %he pro0ect is e&pected to go on live from 85
th
C"ne 455> #y which time
#an$ officers are e&pected to "nderstand the system as well as p"t in place system
of e)filing of the charge form.
M8 $ocuments to be obtained from company(
?3
6a9 -opy of memorand"m of association and articles of association certified to #e
tr"e and "p to date.
6#9 , copy of -ertificate of Incorporation and -ertificate of -ommencement of
#"siness 6in case of p"#lic limited company only9.
6c9 -ertified tr"e copies of the #oard resol"tion 6i9 to open and operate acco"nt,
6ii9 to #orrow money, 6iii9 to e&ec"te doc"ments, 6iv9 to charge sec"rities, 6v9
to pledge shares.deposit title deeds for e("ita#le mortgage and 6vi9 to p"t
common seal of the company on e&ec"ted doc"ments.
6d9 -ertified tr"e copies of general #ody resol"tion 6i9 "nder section 48 6I9 6d9 of
the ,ct, where the #orrowing e&ceeds the paid "p capital and free reserves 6in
case of p"#lic limited companies only9, or 6ii9 ,n "nderta$ing on prescri#ed
format that director will ens"re to comply with the provision of the act "nder
section 48 6I9 6d9 and 6iii9 "nder section 44 6a9 for creation of mortgage
over fi&ed assets of the company.
6e9 7ist of present directors d"ly certified #y secretary along with general #ody
resol"tion for their election.
6f9 , copy of power of attorney if doc"ments are e&ec"ted #y a"thori+ed signatory
"nder power of attorney.
6g9 -onfirmation "nder section 44 6:9 that powers of the directors in respect of
the #orrowings have not #een restricted or withdrawn in general #ody
meeting.
6h9 -ertificate . Fnderta$ing that directors of the company are not related with any
senior e&ec"tive of the #an$.
6i9 Fnderta$ing that the company will not ma$e any ma0or change in the
management involving transfer of ownership witho"t previo"s permission of
the #an$ in writing.
609 Fnderta$ing that company will not have any o#0ection to the #an$ disclosing
its name to -IBI7 in case of defa"lt or otherwise so re("ired #y the #an$.
6$9 Fnderta$ing not to pay commission to g"arantors.
6l9 7etter of negative lien stating that assets are free and "n)enc"m#ered and the
said assets shall not #e sold, mortgaged, pledged or hypothecated or any way
enc"m#ered witho"t the previo"s consent of the #an$ in writing
?3
6m9 , search report that mova#le and immova#le property offered as sec"rity is
not s"#0ect to prior charge either registered with RB- or pending for
registration.
L8 E)ecution of documents(
6a9 ,ll doc"ments to #e e&ec"ted in presence of #ranch manager or designated
officer.
6#9 %he doc"ments sho"ld #e got e&ec"ted once "nder the seal of the company
with the designation of the signatory in the company and another individ"ally
"nder common seal of the company.
6c9 %he doc"ments to #e e&ec"ted #y the person as a"thori+ed in the article of
association or as per resol"tion. %hey may #e managing director, director or
officer.
6d9 If 2ower of attorney holder e&ec"tes doc"ments, he sho"ld sign as
a"thori+ed signatory or as attorney.
6e9 =emand promissory note 6=2N9) as applica#le either lin$ed to 27R on
floating interest #asis or fi&ed interest #asis has to #e e&ec"ted. -ommon
seal m"st #e affi&ed on =2N.
6f9 %he general letter of hypothecation 6D7H9 sho"ld #e stamped as an
agreement. D7H sho"ld #ear common seal.
6g9 E("ita#le Mortgage) %itle deeds will #e deposited #y the director. officer of
the company specifically a"thori+ed for this p"rpose in presence of witness
6who will witness deposit of title deed9 in p"rs"ance of resol"tion passed #y
the #oard of directors.
6h9 D"arantee)-hec$ that specific power to enter into contract of g"arantee has
#een provided in memorand"m 6incase company is doing #"siness
"nconnected with the #eneficiary9 and also chec$ if s"ch powers are vested
to directors. ,lso o#tain a certified tr"e copy of the resol"tion of #oard
regarding e&ec"tion of g"arantee and also approved te&t of g"arantee.
D"arantee sho"ld #ear common seal.
(i) 4
nd
-harge /%he #orrower, instit"tion en0oying 1st charge and the #an$, will
e&ec"te tripartite agreement. -harge deed m"st #ear common seal. , copy
of the 4
nd
charge agreement to #e held #y the #ranch along with confirmation
that the charge has #een filed.registered with RB-.
?@
?@8 Consortium advances under single 0indo0 system(
%o overcome the delay in dis#"rsement of sanctioned limit d"e to
c"m#ersome proced"re of doc"mentation involving vario"s consorti"m #an$s, RBI
s"ggested introd"ction of single window concept of lending "nder which consorti"m
leader is a"thori+ed #y the mem#er #an$s to complete doc"mentation formalities on
their #ehalf which incl"des charging of sec"rity in favo"r of consorti"m #an$s and
filing. registration of charge with registrar of companies for all the #an$s. =raft of
model doc"ments devised #y IB, which were later were approved #y RBI have #een
adopted #y all the #an$s. Sharing of sec"rity and rights and responsi#ilities of all
consorti"m #an$s is doc"mented thro"gh inter)se agreement.
'ollowing doc"ments have #een prescri#ed "nder the single window
system)
6a9 7etter of a"thority given #y all other mem#er #an$s individ"ally to a lead
#an$.
6#9 7etter of a"thority given #y other mem#er #an$s to second largest #an$.
6c9 3or$ing capital consorti"m agreement.
6d9 Coint deed of hypothecation.
6e9 Inter)se agreement among #an$s.
6f9 Revival letter for the p"rpose of limitation.
6g9 7etter regarding release of wor$ing capital pending creation of second
charge.
)555)
%ha"ter- 10
Monitoring of #otentia$ N#As
!ntroduction
?>
%he follow)"p of advances which is in vog"e in #an$s aims at assessing the wor$ing of
the "nits financed #y them and ens"ring the proper end)"se of f"nds. %his incl"des
stoc$ verification, st"dy of ledger data, factory inspection, st"dy of ("arterly
information system 6MIS9, disc"ssion with the #orrower, st"dy of mar$et report, etc.
'rom the follow)"p e&ercise, it is e&pected to o#tain signals of incipient sic$ness in
the "nits.irreg"larities in #an$ acco"nts and to ta$e appropriate preventive action.
6,n e&ha"stive list of s"ch signals is given in ,ppendi& I9. Fnfort"nately, the present
system follow)"p is not ade("ate and efficient eno"gh to meet the a#ove
e&pectation. %o ela#orate, there are too many signals* one does not $now which
one to #e attended to. '"rther, altho"gh sic$ness.irreg"larity is identified, timely
preventive action is not ta$en. '"rther, in the list of priorities of a #ranch manager,
follow)"p of advances is generally the last item. -onse("ently, preventive action is
not ta$en "p, or action is ta$en with a considera#le delay. 'inally, restr"ct"red
standard assets which is on rise and reflect serio"s concern a#o"t assets slippage,
a proactive approach is necessary. ,s per estimate 6E% 81.5?.45159 standard
restr"ct"red assets of 4! #an$s rose to Rs. 111,5:? crores as on March 4515 from
Rs.>:,:> crores as on March 4515 and are triple the si+e of N2, of these #an$s
and as high as ;< of net worth of these #an$s. %h"s to overcome these
limitations of the e&isting system of follow)"p of advances, G-redit MonitoringH is
s"ggested as a tool to s"pplement the present follow)"p system and not s"pplant
the same.
Suggested Credit /onitoring System *C/S+
-redit monitoring is a contin"o"s process and, therefore, an officer in the #ranch
will have to #e identified e&cl"sively for this 0o#, which may #e designated as
-redit Monitoring Bfficer 6-MB9. He will not #e involved in credit sanctions for
which there will #e a separate officer who will #e responsi#le mainly for
processing of credit proposals.
-MS sho"ld #e applica#le to all acco"nts. B"t initially, it is #etter to cover #igger
advances say, Rs 15 lacs or more. Similarly, this refers to those acco"nts, which
are potentially sic$ SSI "nits wherein loan defa"lt is for less than 14 months.
%he -MB will #e responsi#le for st"dying data.information gathered from vario"s
so"rces for o#taining signals of incipient sic$ness of the potential N2, as well as
potential sic$ SSI "nits and ta$ing "p preventive.remedial action with the help of
Branch Manager and other field staff.
?B
He will also maintain a profile of the #orrowers for which a ZBorrower 2rofile -ardA
is s"ggested in ,ppendi& II.
-redit monitoring ens"res special attention to the high val"e #orrowal acco"nts
en0oying credit limit in e&cess of Rs 15 la$hs so that it wo"ld #e possi#le to ta$e
early preventive action.
Sources of !nformation
%o o#tain the signals of incipient sic$ness or an acco"nt #ecoming an N2,, the -MB
has to refer to vario"s so"rces of information. %hese incl"desL
-ond"ct of cash credit, term loan, #ills, Ban$ g"arantee, letter of credit, =2D,
etc. reflecting o"tstanding e&ceeding the limit.drawing power, defa"lts in loan
installments, ret"rn of #ills, encashment of #an$ g"arantee, devolvement of
letter of credit, diversion of #an$ f"nd, etc.
Bperations in the ledger acco"nt i.e. the #orrower deposits entire sale proceeds
in the cash)credit acco"nt.
Stoc$ inspection report) irreg"larity if any.
'actory visit report)o#servations of adverse nat"re.
Receiva#les management to foc"s age of receiva#les.
Renewal proposal and process note) o#servation of appraising officer.
Min"tes of the meetings held with the #orrower and also with co)#an$s in the
consorti"m meetings.
Mar$et reports) adverse report if any.
-ompliance of terms and conditions of the last credit sanction
Report of the last stat"tory a"dit, RBI inspection report, conc"rrent a"dit and
stoc$ a"dit.
2"#lished ann"al report of the "nit.
!dentification of %otential N%& " Sick >nits in SS! Sector
'rom the a#ove)mentioned so"rces of information, the -MB has to collect data to
identify signals. Here, he sho"ld concentrate on few #"t "sef"l signals which sho"ld
cover operational performance, cond"ct of #orrowal acco"nts, movement in soc$
position, ,geing of #oo$)de#t, mar$et rep"tation, prompt s"#mission of vario"s
statements, non)compliance of terms of the last sanction, diversion of f"nds, collection of
d"es from c"stomers, etc. ,n attempt has #een made to develop a format for
identification of signals as f"rnished in ,ppendi& III. Signals have to #e identified on
?C
monthly #asis. 'or each month , the -MB has to st"dy the acco"nts allotted to
him and has to #ring s"ch signals, if any, to the notice of the #ranch manager. In the
same format, it is attempted to p"t 639 mar$ or 669 mar$ against each signal. 2resence of
a signal is mar$ed #y the sign 639 and the a#sence of a signal is mar$ed #y the sign 669.
If there is a repeat occ"rrence of a signal, preventive action has to #e ta$en "p
immediately* otherwise the acco"nt may #ecome sic$.non)performing soon.
In the format, it is shown that the ,B- Ind"strial Fnit does not e&perience any
signal of sic$ness in the first fo"r months. B"t in the fifth month, sales declined.
-onse("ently, cash credit acco"nt was overdrawn, #ills acco"nt was o"t order and
there was a defa"lt of term loan. In the ne&t month i.e. Month)>, sales once again
pic$ed "p #"t the party did not deposit the entire sale)proceeds in the acco"nt. ,s a
res"lt of this, loan defa"lt and irreg"larly in cash credit and #ills acco"nt contin"ed. In
addition, f"nds were also diverted. Now, this is a potential N2, 6acco"nt is o"t of order
#elow 5 days and installments are overd"e #elow 5 days9 and, there is still on month
left to prevent slippage and retain as standard asset. 'or this p"rpose, preventive action
has to #e ta$en "p.
%reventive &ction
Each signal calls for certain preventive action. Sometimes, it may #e advisa#le to watch
the signal for some time and thereafter ta$e action. In any case, -MB will not only #ring
the presence of signals to the notice of the #ranch manager and also s"ggest the type of
action to #e ta$en "p. He will instr"ct the staff at the co"nter to $eep an eye on
transactions recorded in the ledger #oo$. S"ch action wo"ld depend on the nat"re of
sic$ness. irreg"larity. B"t certain actions are common which incl"de writing of a letter to
the #orrower, disc"ssion with the #orrower, visit to the factory)site, $eeping a close
watch on the transactions recorded in the ledger #oo$, writing a letter to the higher
a"thorities to indicate the developments in the acco"nt, etc. In ,ppendi& II, it is
attempted to disc"ss vario"s actions to #e considered to prevent sic$ness.
Conclusion
It is attempted to show how to o#tain signals of sic$ness or an acco"nt li$ely to #ecome
an N2,. In addition, action points are also s"ggested. Initially, credit monitoring may
#e done for few acco"nts on pilot #asis. %hereafter, other acco"nts may #e covered. It
also calls for creating awareness on credit monitoring among the staff)mem#ers for
which, the #ranch managers have to ta$e initiative.
??
&ppendi) !
Checklist of follo0(up measures to obtain signal of incipient sickness
,. Stoc$ Inspection)irreg"larities.
B. 7edger Boo$) irreg"larities or adverse feat"res.
-. ,dverse mar$et reports.
=. ,dverse feat"res o#tained from financial statements.
E. =isc"ssion with the Borrower in pro#lem areas.
6 Meas"re specific signals are given in -hapter 1)="e diligence in credit management9
&ppendi) !!
;orrower3s Prof$4e %ard
)ame ------------------------------------- ;ranch --------------------- ,(IJ( <------------------
%onst$t#t$on ---------------------------- :9"e of +Ic < '' *I%or"orate I:rad$ng I'er-$ce
Ind"stry 6-ode.S"#)code9L ))))))))))))))))))))))))))))))) 2rod"cts )))))))))))))))))))))))))))
-ontact 2erson L Name)))))))))))))))))))))))) D"arantor L Name )))))))))))))))))))))))))))
,ddress )))))))))))))))))))) ,ddress)))))))))))))))))))))))
))))))))))))))))))))
)))))))))))))))))))))))) %el.No. )))))))))))))))))))) %el.No
))))))))))))))))))))))))
'a& No. )))))))))))))))))))) 'a& No.)))))))))))))))))))))))
e)mail )))))))))))))))))))) e)mail )))))))))))))))))))))))
)sso$iated Firm (if any)D 00000000000000000000 Position of )L$ D Si$8L-!L!e$alledL
.IF!L!:Le$reedLOt(ers
Introd"cer L ))))))))))))))))))))))))))) Ban$ Rating L )))))))))))))))))))))))))))))))))))))))))))

Single.M"ltiple 67ead Ban$ )))))))))))))))))))9 Since when dealing with o"r

Ban$))))))))))))))))))1ear ))))))))))))
=ate of 7ast SanctionL -- ))))))))))))))))))))))) Renewal =ate))))))))))))))))))))))))))))
:7 --------------------- 'anct$on$ng +#thor$t9 <;ranchIJ(I%(
Bthers )))))))))))))))))))))
?A
Sec"rities L 2rimary )))))))))))))))))))) E&piry =ate of Ins"rance 2olicy )))))))))))
-ollateral )))))))))))))))))) E&piry =ate of =oc"mentsL))))))))))))))))))

/(? /(; /(A /(C /(< /(D
1imit"B% .B .B .B .B .B
.B
S.No. -redit 'acility 7imit.=2 )))))) )))))) )))))) )))))) )))))) ))))))))
1. -ash -redit 6Hyp9))))))))) )))))) )))))) )))))) )))))) )))))) )))))))))
4. -ash -redit 62led9))))))))) )))))) )))))) )))))) )))))) )))))) )))))))))
8. Bills ))))))))))))))))) )))))) )))))) )))))) )))))) )))))) )))))))))
;. Bther s 6Short term9)))))))) )))))) )))))) )))))) )))))) )))))) )))))))))
:. %erm 7oan ))))))))))))))))) )))))) )))))) )))))) )))))) )))))) )))))))))
>. Non '"nd Based )))))))))) )))))) )))))) )))))) )))))) )))))) )))))))))
7imits
&ppendi) !!!
!dentification of %otential N%&
63 for presence of a signal 5 for a#sence of a signal9
S8No
8
Signal
Month
/(? /(; /(A /(C /(< /(D
1 'all in sales.cash losses.erosion in networth & & & & 3 &
4 Bverdrawals in cash credit acco"nt & & & & 3 3
8 Bills ,.c o"t of order & & & & 3 3
; Bther short)term loan / defa"lt & & & & 3 3
: %erm loan)defa"lt L Int.2rin. & & & & 3 3
> =evelopment of =2D.7-.BD & & & & 3 3
? =elay.Non s"#mission of stoc$ statement & & & & 3 3
! Incomplete doc"mentation in terms of
creation. registration of charge, mortgage, etc.
& & & & & &
Non f"lfillment of terms of last sanction & & & & T &
15 =iversion of f"nds & & & & 3 3
11 2ayment from c"stomers held "p & & & & 3 3
14 ,dverse mar$et report & & & & T &
18 Fnfavo"ra#le factors affecting the "nit & & T & & &
1; Bthers 6specify9 ) ) ) ) ) )
&ppendi) !H
A4
Credit /onitoring Steps
619 Identify the potential N2,s where loan defa"lt is for two months.
649 St"dy the ca"ses / whether defa"lt is d"e to inherent wea$nesses or d"e to
temporary li("idity or cash flow pro#lem.
689 Bffer contingency help immediately in the form of ad)hoc limits if cash flow mis)
matches are gen"ine.
6;9 If limits are fo"nd to #e inade("ate leading to loan defa"lt d"ring the year, as$
the #orrower to s"#mit the renewal proposal and enhance the limit s"ita#ly.
6:9 If che("es are drawn on parties not related to #"siness or heavy cash drawal
and no corresponding increase in stoc$, pass che("es for payment after a
detailed scr"tiny. Borrowers sho"ld #e advised to state the p"rpose of the
che("e for which it is drawn.
6>9 Iisit the factory immediately, if the stoc$ statement is not s"#mitted and verify
the sec"rities.
6?9 -ollect the interest on monthly #asis. 're("ent visits are called for wherever
there is a defa"lt of interest payment.
6!9 Jeep the doc"ments live, o#tain #alance confirmation, do rectification of
a"dit.inspection irreg"larities .
69 Rectify .attend to the o#servation of conc"rrent a"ditor, stat"tory a"ditor, #ranch
inspector, credit a"dit, regional managerAs report, etc.
6159 Read the local news)paper daily, ascertain the position of acco"nts with other
#an$s, e&change information a#o"t the #orrower in the consorti"m meeting, etc.
6119 Initiate any other steps to prevent slippage in standard asset.
-000-
%ha"ter- 11
Reco8er" Measures
18 !N-R.$>C-!.N
N2, of the #an$ing system is moving "p. Dross N2, of 2SB stood at Rs. 148 la$h
crores at the end of C"n, 14 and have seen an addition of Rs. 11555 crores in last 1:
months 6E% 48.5!.149. In this chapter, it is attempted to disc"ss a#o"t vario"s recovery
A5
meas"res adopted #y #an$s and financial instit"tions 6'Is9 to recover d"es incl"ding
N2,. Bver the years, many initiatives have #een ta$en #y the Reserve Ban$ of India
and the Dovernment of India in introd"cing new meas"res in the light of the pro#lems
e&perienced #y #an$s and 'Is In addition, these #an$s and 'Is have also tried to
come)o"t with innovative ideas for N2, red"ction. =ata in respect of all these meas"res
is not availa#le and hence, it is diffic"lt to point)o"t which of the meas"re is most
effective. B"t e&perience s"ggests that each meas"re is "ni("e in terms of its
effectiveness. Hence, it is worth to review s"ch recovery meas"res. 'or o"r
convenience, these can #e classified into non)legal and legal meas"res.
NON!5EGA5 MEASRES
1. Reminder system
4. Iisit to BorrowerAs B"siness 2remise.Residence
8. Recovery camps
;. Road shows
:. ,ppointment of 2rofessional Recovery ,gents
>. Holding on operations
?. Reha#ilitation of sic$ "nits
!. -orporates =e#t Restr"ct"ring
. 7oan compromise
15. 7o$adalat or 7o$nayalaya
11. -irc"lation of 7ist of =efa"lters
14. ,ppropriation of s"#sidy or e&ercising the right to set)off
18. Recalling of ,dvances
1;. 3rite)off
1:. Recovery thro"gh Speciali+ed Branches 6Recovery #ranches9
5EGA5 MEASRES
1:. Recovery thro"gh C"dicial 2rocess 6'iling of s"it9
1>. =e#t Recovery %ri#"nals
1?. National -ompany 7aw %ri#"nal
1!. Merger and ,malgamation
1. 'inancial Reconstit"tion
45. Recovery "nder Sec"ritisation and Reconstr"ction of 'inancial ,ssets and
Enforcement of Sec"rity Interest ,ct, 4554.
41. Bther 7egal meas"res.
A3
N.N(1E6&1 /E&S>RES
?8 Reminder System
%his is the cheapest mode of recovery #y sending reminders to the #orrowers #efore the
loan instalment falls d"e. Denerally, response to this arrangement partic"larly from
honest #orrowers is enco"raging. B"t efforts need to #e strengthened in #an$s in
sending reminders on timely #asis. Eno"gh care sho"ld #e ta$en to prepare a draft)
letter in informal lang"age 6prefera#ly regional lang"age9 If possi#le* #etter ("ality
stationery may #e "sed to motivate #orrowers to open the letter. 3ith the
comp"terisation of #ranches, this meas"re can #e heavily relied "pon.
;8 Hisit to Borro0er7s Business %remise"Residence
%his is a more dependa#le meas"re of recovery. Iisits need to #e properly planned.
Involvement of staff at all levels in the #an$ #ranch is called for. -osts involved in
recovery need to #e $ept to the minim"m. 're("ent visits are called for in case of
hardcore #orrowers. Bver the years, it is o#served that the n"m#er of visits is going
down d"e to c"t in wor$force in #an$s. -onse("ently, the recovery process is affected.
Branches sho"ld maintain a record of visits made and recovery amo"nt collected. It is
essential to cond"ct visits in a planned manner when limited time is availa#le in this
regard.
A8 Recovery Camps
In respect of agric"lt"ral advances, recovery camps sho"ld #e organi+ed d"ring the
harvest season. %o ta$e ma&im"m advantage, recovery camps need to #e properly
planned. It is also essential to ta$e the help of o"tsiders, partic"larly, reven"e officers in
the state government, local panchayat officials, regional manager in the #an$, etc. It
also calls for a professional approach to give a wide p"#licity of the recovery camp to #e
organi+ed in the local area, mo#ili+e as many farmers as possi#le and motivate the staff
to get involved in the recovery drive. Bn the spot compromise.settlement sho"ld #e
enco"raged which gives positive signals to the #orrowers.
C8 Road sho0s
In case of recalcitrant #orrowers, it is a very effective way of creating press"re on the
#orrower. ="ring road show, a gro"p of employees calls on the #orrower and pers"ades
him to repay #an$As d"es. %he timing of road show is strategically fi&ed d"ring pea$
#"siness ho"rs of the #orrowers so that there is moral press"re on him not only from his
neigh#oring #"sinessmen #"t also from the c"stomers. Many #an$s have very
effectively "sed this tool of recovery, partic"larly from #"sinessmen and salaried class.
A3
%here are certain do and donAt for the road show. %he road show m"st #e organi+ed in
peacef"l and non)violent manner. It sho"ld #e within normal #"siness ho"rs and sho"ld
not #e organi+ed either in the late evening or early morning. Manager sho"ld watch over
the activity of his other officers and see that no #ody ta$es law and order in his hand.
-onfrontation or show down with the #orrower sho"ld #e avoided.
<8 &ppointment of %rofessional &gencies for Recovery
Recently, IB, has framed model policy for #an$s on matters concerning the
appointment of o"tside professional agencies whose services can #e "tili+ed to
ascertain the wherea#o"ts of the #orrowers, enforcement of sec"rities and recovery of
money lent. It is o#served that there is some hesitancy on the part of p"#lic sector
#an$s in engaging them for recovery p"rposes d"e to "npleasant e&periences in certain
cases. B"t loo$ing to rising magnit"de of N2,, #an$s have little option #"t to engage
professional agencies for recovery and enforcement of sec"rities. %his sho"ld, however,
#e done after e&amining the credentials of the agencies and following g"idelines. It is
also essential for the #an$ to $eep a constant vigil on their practices so that there is no
occasion of alleged harassment or intimidation of any $ind, either ver#al or physical,
against any person in their de#t collection efforts, incl"ding acts intended to h"miliate
p"#licly or intr"de the privacy of the #orrowers.g"arantors. or their family mem#ers . In a
land mar$ 0"dgment given #y S"preme -o"rt HonA#le C"stice ,.R. 7a$shmananan and
,ltamas Ja#ir has o#served that G@we are governed #y a r"le of law. %he recovery
co"ld #e done only thro"gh legal means. %he #an$s cannot employ goondas to ta$e
possession.H ,s per draft g"idelines of RBI circ"lated on 85
th
Novem#er 455?, RBI has
s"ggested that Indian Instit"te of Ban$ing and 'inance will introd"ce test for recovery
agents which will have training period of minim"m 155 ho"rs and appoints of recovery
agents after one year will #e s"#0ect to their passing s"ch tests.
/1 7o$ding on o+erations
Holding on operations gives respite to the #orrowers and help them to r"n the
#"siness till finali+ation of reha#ilitation or restricting pac$age. %he facility can #e
permitted in N2, or potential N2, acco"nts which show warning signals.
61 Re*a0i$itation of Sick nits
,t present, there are two types of sic$ "nits financed #y the #an$s and the financial
instit"tions. %hese incl"deL
a9 Ind"strial "nits in the small scale sector.
#9 Ind"strial "nits in the Non)small scale sector.
A@
,s per the Dovernment of India definition, a small scale ind"strial "nit is the one in which
case, the investment in the plant and machinery 6original costs9 does not e&ceeds
Rs.155 la$hs 6 enhanced to Rs. :55 la$hs for certain specified items9 and in the case of
ancillary "nits the same sho"ld not e&ceed Rs.4: la$hs. ,ll those acco"nts, which f"lfill
this definition, are treated as the "nits in small sector. ,ll other ind"strial acco"nts are
treated as "nits in the non)small scale ind"strial sector. Reserve Ban$ of India has
defined a Zwea$A "nit in the non)SSI sector. Sic$ Ind"strial -ompanies 6special
provisions9 ,ct 6SI-,9 also defines a Zsic$A "nit in the non)SSI sector.
De;nition of a Sick nit in t*e SSI Sector
SSI and %iny.=ecentrali+ed "nit / ,ny #orrowal acco"nt which #ecomes s"#)standard
when interest or principal is overd"e for more than > months or, its acc"m"lated losses
e&ceed :5< of net worth and the "nit has #een in commercial prod"ction for atleast 4
years, is considered as sic$ "nit.
$efinition of a Sick >nit in Non(SS! Sector i8e8# Eeak Company
,ccording to the RBI definition Gan ind"strial "nit will #e classified as Zwea$Z at the end of
any acco"nting year if it has acc"m"lated losses e("al to or e&ceeding :5 per cent of its
pea$ net worth immediately preceding : yearsH. %his definition is applica#le to all those
"nits in the non)SSI sector and not falling "nder the p"rview of the Sic$ Ind"strial
-ompanies 6Special 2rovisions9 ,ct, 1!:.
%he section 8 of the Sic$ Ind"strial -ompanies 6Special 2rovisions9 ,ct 1!: defines a
sic$ company as "nderL
2& Sick !ndustrial Company means an industrial company registered as a
company for not less than < years and has accumulated losses e'ual to or
e)ceeding its net 0orth58
Causes of Sickness
-a"ses of ind"strial sic$ness have to #e viewed from the general #ac$gro"nd of
ind"strial economy. ,t a point of time, the pro#lems of ind"stries are not "niform.
However, factors generally responsi#le for the pro#lems can #e divided into e&ternal and
internal. E&ternal factors are those over which the "nit has no direct control and, internal
factors are those which are within the control of the management of the concern.
Sic$ness can originate right from the stage of conception to the stages of crystalli+ation
of the concept and.or implementation of the pro0ect.
A>
<A= Re*a0i$itation of Sick nits not fa$$ing under t*e +ur8ie2 of t*e
SICA
In general, a sic$ "nit is defined #y considering its capacity to generate internal f"nds. ,
sic$ "nit fails to generate internal s"rpl"s on a contin"ing #asis and depends on its
s"rvival on fre("ent inf"sion of e&ternal f"nds. %h"s the n"rsing programme is for
raising the "nitAs capacity to generate ade("ate internal s"rpl"s. , certain portion of
internal s"rpl"s co"ld then #e "sed for red"cing the irreg"larity in the acco"nt. ,
s"ggested approach to n"rsing of sic$ SSI "nit is given in chapter)18.
*B+ Rehabilitation of Sick Companies as under Sick !ndustrial Companies &ct
*S!C&+ (
3here an ind"strial company 6defined "nder Sec 8 of Ind"strial =evelopment and
Reg"lation ,ct of 1:19 has #ecome sic$, the ,ct provides for a reference to the Board
within >5 days of finali+ation of a"dited financial statements for determination of
meas"res that may #e adopted. S"ch meas"res may incl"de merger, financial
reconstr"ction sale or lease of a part or whole of activity, change of management, ta$e
over of ownership etc. It is o#ligatory for the sic$ companies to refer their cases to the
Board. 'inancial instit"tions, RBI and the Dovernment may refer the companies to the
Board for Ind"strial and 'inancial Reconstr"ction, referred to as the Board hereafter.
%he Board determines whether the company has #ecome sic$ and then registers the
case. ,fter registration the Board decides the strategies to #e adopted for revival. %he
scheme is then prepared. %he written s"ggestions and consent from all concerned
parties are o#tained. %hereafter, the legal formalities as stated "nder the relevant ,cts
6s"ch as -ompanies ,ct 1:>, 'oreign E&change and Reg"lation ,ct etc.9 are
completed. ,fter the formalities are completed, the scheme is sanctioned which then will
#e #inding on all the concerned parties. 3here the sanctioned scheme is implemented,
the Board may call for any information from the company for assessing the progress in
implementation of the scheme and effects of the scheme on overall performance of the
company. If necessary, the Board may appoint a Special =irector on the -ompanyAs
Board to safeg"ard the interest of financial instit"tions. 'or any mis"se of f"nds, the
Board can ta$e legal action. %h"s, it is hoped that the Board consists of mem#ers who
have special $nowledge and professional e&perience of not less than 1: years. %here is
a provision to appoint 1; mem#ers on the Board. 3ith the a#ove arrangements it is
hoped that the Board wo"ld #e a#le to deal with the matters of reha#ilitation more
effectively. %he Ind"strial Reconstr"ction Ban$ of India 6IRBI9 performs a similar 0o# #"t
AB
it does not possess as m"ch stat"tory powers as that of the Board. Fnder the ,ct of
1!:, the Board and ,ppellate ,"thority are deemed to #e the civil co"rts and all matters
of reha#ilitation are dealt with legally to safeg"ard interest of sic$ companies and p"#lic.
N"rsing or reha#ilitation programme varies from "nit to "nit. B"t it is essential that
important aspects of n"rsing or reha#ilitation have to #e highlighted in the programme.
In this conte&t, a #road o"tline on n"rsing or reha#ilitation is already disc"ssed earlier.
%o concl"de on reha#ilitation, tho"gh eno"gh arrangements are made in terms of
form"lation of policy g"idelines, reha#ilitation schemes, creation of s"fficient n"m#er of
instit"tions to loo$ after revival of sic$ "nits, the s"ccess rate is very low. Hardly, : per
cent of total sic$ "nits are f"lly revived. %his is mainly d"e to lac$ of serio"sness on the
part of entreprene"rs, lac$ of co)ordination #etween #an$s and financial instit"tions,
s"#stantial delay in release of s"#sidies.relief from the government, etc. B"t o"r efforts
in reha#ilitation of sic$ "nits need to #e strengthened. It is cheaper to revive a sic$ "nit
than starting a fresh one on its clos"re. '"rther, chances of recovery of #an$ d"es are
high if sic$ "nits are revived s"ccessf"lly.
!8 Corporate $ebt Restructuring *C$R+ Body
, need was felt to create a special agency to facilitate de#t restr"ct"ring #eca"se there
has #een some hesitancy on the part of #an$s and financial instit"tions to implement
RBI g"idelines on de#t restr"ct"ring. Recently, a three)tier #ody, vi+., -=R has #een set
"p to co)ordinate the corporate de#t)restr"ct"ring programme. -=R consists of for"m,
Dro"p and -ell. 3hile the 'or"m evolves #road policy)g"idelines, the Dro"p ta$es
decisions on the proposals recommended #y the -ell. Initially, the #orrower approaches
his 7ead Ban$.'I with a re("est to restr"ct"re de#t, which in)t"rn p"ts "p the proposal to
the -ell. %he -=R covers only m"ltiple #an$ing acco"nts en0oying credit facilities
e&ceeding Rs 45 crore. -ases of =R%, BI'R and do"#tf"l and loss acco"nts and s"it)
filed cases are o"tside the p"rview of the -=R. Even cases of willf"l defa"lt can #e
considered e&cepting cases of willf"l defa"lt or diversion of f"nds with malafide intention.
%h"s, standard and s"#)standard acco"nts are only eligi#le to see$ -=R shelter.
=ecisions of the gro"p are #ased on the [s"per ma0orityA principle. If ?: per cent of the
sec"red creditors #y val"e and >5< #y n"m#er agree to the reha#ilitation plan, it is
#inding on the other #an$s.'Is. %he -=R is a vol"ntary system #ased on de#tor)creditor
agreement and inter)creditorsA agreement. No #an$er.#orrower can ta$e reco"rse to any
legal action d"ring the [stand)stillA period of 5)1!5 days. 3hile the arrangements "nder
-=R seem to #e feasi#le from the de#t restr"ct"ring perspective, its s"ccess depends
AC
"pon the cooperation e&tended #y #orrowers and #an$ers, on the one hand, and
"nderstanding among #an$s and 'Is, on the other. =o"#ts are raised a#o"t the
implementation of these agreements ta$ing into the present wor$ing of the loan
consorti"m arrangements. RBI has constit"ted a committee "nder chairmanship of Mr
Iepa Jamesha, =ep"ty Dovernor, RBI to loo$ into operational diffic"lties of the scheme
and to s"ggest meas"res to ma$e the scheme effective. %otal de#t restr"ct"ring is
e&pected to reach Rs.1.: la$h crores at the end of March, 14 from Rs. 1.1.la$h crores at
the end of March, 11.
'1 5oan com+romise
In general, it is e&perienced that filing of s"its and recovery of d"es of #an$s thro"gh the
process of co"rts is a c"m#ersome, e&pensive and time cons"ming tas$ witho"t any
fr"itf"l res"lts in many cases. Bne of the main reasons attri#"ted for non)recovery of
d"es thro"gh the process of law.co"rt is lac$ of proper follow)"p and timely and proper
action. Hence, it wo"ld #e worthwhile to thin$ of other ways to tac$le the sit"ation. %he
tradition of amica#le settlement thro"gh panchyat and ar#itration, leads to thin$ as to
why #an$ loan disp"tes cannot #e settled witho"t having a reco"rse to the co"rt.
, compromise in #an$ loan means agreeing to a #orrowerAs re("est of accepting a part
of o"tstanding of d"es in the #oo$s of the #an$ as f"ll and final payment or allowing for
the non)compliance of the terms of the loan, after analy+ing the alternative co"rses of
action, gen"ineness and capacity to repay. It is also called as vol"ntary de#t red"ction
or scaling data of d"es. In the sit"ation, where the #orrowerAs a#ility.capacity is repaying
the #an$As d"es and the #an$As a#ility to recover the same #y other means are limited* a
compromise proposal can wor$ well.
-ompromise proposals can #e entertained at different stages, which incl"de 6a9 pre)
litigation stage, and 6#9 post litigation.decree stage. ,t the pre)litigation stage,
concessional meas"res s"ch as resched"lement, rephasement, reha#ilitation, etc. can
#e "sed which wo"ld allow some #reathing time and #"ild.strengthen the repayment
capacity of the #orrower. However, when s"ch meas"res initiated in the acco"nt do not
yield any fr"itf"l res"lt and the #orrower inc"rs heavy cash losses, it is #etter to go in for
a compromise or scaling down the d"es. Similarly in other cases, where #"siness loss
has crept in d"e to one or other gen"ine reasons and the #orrower is not a willf"l
defa"lter and re("ests for minor concessions s"ch as waiver of penal interest,
concession in interest rate, etc, the #orrowerAs offer can #e accepted for compromise. In
these cases, resched"lement of "npaid loan installments can also #e considered.
A?
-ompromise at post)litigation.decree stage can also #e entertained so that the
#orrowerAs #"siness or activity is "ninterr"pted. In order to avoid cost, la#o"r and time
involved in litigation matters and to have #etter image in mar$et, #orrowers offer a l"mp)
s"m amo"nt and re("est the #an$ to withdraw the s"its against them. ,t times, it
#ecomes necessary, in some cases, to settle o"tside the co"rt thro"gh an amica#le
agreement and, the antecedents of the defendant are s"ch that co"rts ta$e a
sympathetic view and award a lenient decree against the defendants. Sometimes, after
o#taining decree, if a third party comes forward to p"rchase the assets, the #an$ may
consider the case for compromise. It is also possi#le for the #an$ that it may go in for
compromise if the decreed asset wo"ld not fetch more than the claim the amo"nt. In all
cases, where s"its have #een already field, whatever compromise is to #e made, m"st
#e sorted o"t thro"gh co"rt in the form of a consent decree, so that it will #e #inding on
all defendants. If parties do not f"lfill the promise, remedy thro"gh co"rt or =e#t
Recovery %ri#"nal will always open to the #an$s.
%here can #e two types of compromise. %he Reserve Ban$ of India and the
Dovernment of India wor$ed o"t Bne %ime Settlement Schemes covering loan
o"tstanding "pto Rs. : crores 6s"#se("ently raised to Rs. 15 crores9 and Rs. 4:555
respectively. In addition, each #an$ is given an a"tonomy to evolve Bne %ime
Settlement 6B%S9 Scheme. It is necessary to create awareness on B%S and mo#ili+e as
many compromise proposals as possi#le. %here sho"ld not #e any delays in arriving at
compromise. S"ch proposals sho"ld #e prepared caref"lly $eeping in mind the #an$
g"idelines. Btherwise, this may #ecome a vigilance case. It is #etter to involve all staff
mem#ers in mo#ili+ing compromise proposal. -are sho"ld #e ta$en that the recovery
thro"gh compromise does not give a wrong signal to a good #orrower. Bver the years,
#an$s have s"cceeded to recover thro"gh compromise s"#stantially. B"t there is
eno"gh scope step "p the recovery drive thro"gh this meas"re.
If decided to go in compromise, all iss"es m"st #e sorted o"t thro"gh the co"rt in the
form of a consent decree, so that it will #e #inding on all defendants. In case of more
than one 0"dgement de#tor, the consent of one and all is re("ired for compromise. In
any case, the compromise has to #e decided on the #asis of merit of each case.
In view of the fact that h"ge amo"nt is #eing #loc$ed in non)performing assets for ("ite
a long period with all $inds of ris$s and "ncertainties, compromise for settlement of de#t,
vi+., #y allowing certain concessions to #orrowers, has to #e enco"raged and for that
p"rpose, a cost)#enefit analysis can #e done which on one hand ta$es into acco"nt the
AA
loss which may arise in case compromise is accepted and the #enefit which may accr"e
if the compromise is not made, on the other. In general, it is e&perienced that the #an$s
will #e advantageo"s position in opting for an amica#le settlement rather than for legal
approach. Besides, s"ch compromise wo"ld avoid all legal complications, time lapses
and other inherent ris$s of individ"al loans.
Every #ranch manager has to form"late a compromise proposal in the light of #road
g"idelines iss"ed #y the #an$. %he proposal sho"ld contain ma0or items which incl"de
means or capacity of the party, determination of amo"nt covering o"tstanding amo"nt,
other charges, etc. efforts already made for recovery, staff acco"nta#ility, etc. %he
proposal recommended sho"ld #e referred to the sanctioning a"thority which e&amines
several factors incl"ding f"lfillment of terms and conditions of sanctioning of loan
compromise, any la&ity in cond"ct and post)dis#"rsement s"pervision of the acco"nt,
any act of commission or omission on the part of staff leading to the de#t proving
irrecovera#le, eno"gh recovery efforts p"t in, val"ation of sec"rities, interest to #e
charged in respect of settlement tho"gh installment, etc.
7oan compromise sho"ld #e considered as a last resort of recovery. It sho"ld #e a
vol"ntary e&ercise. It calls for a professional approach in preparing the compromise
proposal for which each #an$ is given a"tonomy #y the Reserve Ban$ of India. In
addition, compromise schemes introd"ced #y the Dovernment of India 6"pto Rs
4:,555.)9, the Reserve Ban$ of India 6in the first instance "pto Rs : crores and then for
Rs 15 crores9, sho"ld #e implemented as per the g"idelines covering the eligi#ility
criterions, the c"t)off date, and nat"re and e&tent of concessions. =ecisions on
compromise proposals sho"ld #e ta$en #y adopting a committee approach. In this
regard, #an$s have #een advised to set "p a Settlement ,dvisory -ommittee. %ho"gh
there are many schemes of compromise, s"ccess in recovery is limited d"e to lac$ of
awareness of s"ch schemes #y small farmers, small traders etc* d"e to stricter vigilance
norms the staff is hesitant to entertain compromise cases* diffic"lties in fi&ing staff
acco"nta#ility #efore recommending a proposal* etc. Efforts sho"ld also #e made not to
enco"rage good #orrowers to see$ compromise. In any case, d"e to high N2,s, #an$s
have to depend on loan compromise as an effective meas"re of recovery.
?@8 1okadalat or 1oknyayalaya
%he concept of 7o$ ,dalat was introd"ced in 1!4 as part of strategy of legal aid. By
now, it is $nown for effecting mediation and co"nselling #etween the parties and to
red"ce #"rden on the co"rt, especially for small loans. 7arge n"m#er of 7o$ ,dalats is
544
#eing organi+ed in different parts of the co"ntry from time to time and it has got
recognition and patronage, partic"larly, every segment of the society. Based on
e&perience of several states, a -entral ,ct $nown as 7egal Services ,"thorities ,ct,
1!? was passed providing legal #asis for the 7o$ ,dalats and 7egal ,"thorities to the
compromise arrived at #etween the parties thro"gh s"ch 7o$ ,dalats. Several people of
partic"lar localities . vario"s social organi+ations are approaching 7o$ ,dalats which are
generally presided over #y two or three senior persons incl"ding retired senior civil
servants, defence personnel and 0"dicial officers. %hey ta$e "p cases which are s"ita#le
for settlement of de#t for certain consideration. 2arties are heard and they e&plain their
legal position. %hey are advised to reach to some settlement d"e to social press"re of
senior #"rea"crats or 0"dicial officers or social wor$ers. If the compromise is arrived at,
the parties to the litigation sign a statement in presence of 7o$adalats which is e&pected
to #e filed in co"rt to o#tain a consent decree. Normally, if s"ch settlement contains a
cla"se that if the compromise is not adhered to #y the parties, the s"its pending in the
co"rt will proceed in accordance with the law and parties will have a right to get the
decree from the co"rt.
%o arrive at compromise with the party, #an$s may provide remission of interest, etc. In
this conte&t, certain g"idelines have #een form"lated #y #an$s in cons"ltation with the
Indian Ban$s ,ssociation 6IB,9. ,ccordingly, the #an$)s"its involving claims "pto Rs :
la$hs 6now raised to Rs 45 la$hs9 may #e #ro"ght #efore the 7o$adalat. %here sho"ld
#e decree for the interest claimed #efore s"it. Now a days, even non)s"it filed cases in
the do"#tf"l and loss categories can #e considered for settlement. =e#t Recovery
%ri#"nals can also organi+e 7o$adalats. 7o$adalats have to finali+e settlements in terms
of #road g"idelines of the concerned #an$.
In general, it is o#served that #an$s do not get the f"ll advantage of the 7o$adalats. It is
diffic"lt to collect the concerned #orrowers willing to go in for compromise on the day
when the 7o$adalat meets. In any case, we sho"ld contin"e o"r efforts to see$ the help
of the 7o$adalat.
11. 1ist of $efaulters of RB! and of C!B!1
-"rrently, the RBI circ"lates the list of defa"lters among 'inancial Instit"tions 6'Is9 and
Ban$s which is fo"nd "sef"l in avoiding wilf"l defa"lters. %he RBI has defined a wilf"l
defa"lter for the first time. It has provided the #road parameters for identification of wilf"l
defa"lters whose list will #e circ"lated among #an$s and 'Is. ,"ditors of companies
have to report in their certificate a#o"t diversion of f"nds, if any. In addition, on Can"ary
545
85, 4551, -redit Information B"rea" of India 7imited 6-IBI79 was set "p to provide
critical data re("ired #y any credit instit"tion #efore arriving at credit decision. -IBI7 was
set "p 0ointly #y State Ban$ of India, H='-, ="n and Bradstreet and %rans Fnion. -redit
Information B"rea"s, li$e credit rating agencies, are critical for the operation of the
financial system and, in many ways, have a privileged relationship with the reg"lator.
Ban$s.'Is to o#tain the consent of all their #orrowers for dissemination of credit
information to ena#le -IBI7 to compile and disseminate credit information. -IBI7 now
has a data#ase of ! million records of credit history of individ"al cons"mers ta$en from
vario"s #an$s, financial instit"tion, micro)finance companies and non)#an$ing finance
companies. -IBI7 also plans to #roaden its scope to store information on #"yers of
ins"rance and services li$e telecom and other "tilities. 'I.Ban$s.NB'- who are
mem#ers of -IBI7 can determine on line whether a prospective #orrower is a disciplined
#orrower or a serial defa"lter on payment of fee of Rs 15 per #orrower.
??8 &ppropriation of Subsidy or E)ercise of Right of Set(off
In some of the sponsored schemes, namely, SEEF1 or SFME, the amo"nt of s"#sidy is
$ept in deposit acco"nts to #e appropriated after a specified loc$)in)period. In s"ch
cases where s"#sidy is availa#le and the acco"nt is li$ely to #ecome N2,, the s"#sidy
amo"nt sho"ld #e appropriated 6$eeping in view the re("irements of loc$)in)period9 in
the loan acco"nt and necessary action sho"ld #e initiated for recovery.write off of the
#alance amo"nt. 3here readily encasha#le sec"rities s"ch as 'i&ed =eposits, 7I-
policies, Dovt. Sec"rities etc. are availa#le and #orrowers are not responding to re("est
for reg"lari+ation of acco"nts, s"ch sec"rities sho"ld #e encashed after giving d"e
notice to the #orrowers, g"arantors etc.
(%1 Reca$$ing of Ad8ances
3hen rigoro"s follow "p efforts do not yield any fr"itf"l res"lt and circ"mstances so
warrant that the their loan amo"nt to #e reali+ed at once and.or facility to #e terminated
in the interest of the #an$, a final recall notice has to #e served as$ing the party to ad0"st
the irreg"larity in the acco"nt immediately. 3herever necessary, the party is also
informed a#o"t the #an$As intention to terminate the facility after the specified time limit.
,s far as possi#le, iss"ing of legal notice sho"ld #e restricted to once only and in case of
small advances, recall notice thro"gh an advocate may #e avoided "nless the
circ"mstances re("ire s"ch a co"rse of action. Recall notice sho"ld #e sent if the
#orrower is a willf"l defa"lter, #an$ lia#ility is significantly "ncovered, death of the
#orrower, dissol"tion of partnership firm, siphoning of f"nds, #orrower ref"sing to renew
543
the credit limit, etc. ,ll normal recovery efforts sho"ld have #een made to p"rs"e the
#orrower and g"arantor to repay the d"es which incl"de personal contacts, pers"asion,
serving demand notice, #ringing local infl"ence, proposal for transfer to recalled
advance, etc. %he proposal sho"ld #e s"#mitted to the appropriate sanctioning a"thority
at least si& months #efore e&piry of 7imitation period. ,s per the -redit D"arantee '"nd
%r"st, re("irement of a recall notice to #orrower.g"arantor sho"ld #e iss"ed providing
therein a 85 daysA time for ad0"stment of the acco"nt. %he notice sho"ld #e served
properly. Bn serving a recall notice and getting the approval of the higher a"thorities, the
acco"nts sho"ld #e transferred to recalled)category to e&ercise "tmost care for effecting
recovery, and to have special control over acco"nts. Branch managers sho"ld initiate
appropriate co"rse of action for recovery depending "pon the case. In respect of
gen"ine #orrowers, the action points incl"de pers"asion, personal contracts,
resched"lement, remission of penal interest, one)time settlement and write off wherein
the amo"nt is small and chances of recovery are almost nil. B"t in respect of willf"l
defa"lters, it is #etter to file a s"it. 3hile sending a proposal to recall the advance to the
higher a"thorities, necessary information sho"ld #e provided in the prescri#ed formats.
S"ch information incl"des statement of acco"nt, -onfidential Report 6-R9 of #orrowers
and g"arantors, latest stoc$ position, val"ation of sec"rities, present activities, reasons
for stopping operations, efforts made for recovery, etc. Interest application in the
acco"nt sho"ld #e stopped as per pr"dential norms #"t m"st #e calc"lated each month
#"t for the p"rposes of filing s"it, -redit D"arantee '"nd %r"st, etc interest and other
charges may #e de#ited to a separate acco"nt i.e. s"ndries or s"spense acco"nt. ,ny
recovery made from the recalled advances, the amo"nt to #e shared with the -redit
D"arantee '"nd %r"st on pro)rata #asis. -orresponding entries have to #e made in the
partyAs recalled advance acco"nt. %h"s, the e&ercise of recalling of advances is one of
the recovery strategies, which are fo"nd effective in respect of gen"ine #orrowers who
avoid facing legal action thro"gh the co"rts.
(41 >rite o?
If it is going to #e "nrem"nerative either to file s"it and.or contin"ing the acco"nt in the
#an$Zs #oo$s, it is advisa#le for the #an$ to go in for waivement of legal action and.or
writing off d"es. By waiver of legal action, #an$s may ta$e a decision not to p"rs"e
recovery thro"gh a -o"rt of 7aw. B"t for write off, the #an$s can decide to close the
acco"nt #y transfer of f"nds from their profits to the loan acco"nt. 3aivement of legal
action is s"ggested when 6i9 the means of the #orrower are negligi#le, 6ii9 #orrowers are
543
#elow the poverty line, 6iii9 cost of recovery is higher, 6iv 9 #eneficiaries are a#sconding,
6v9 it is diffic"lt to o#tain periodic #alance confirmation of de#t c"m)ac$nowledgement of
de#t, and 6vi9 sec"rities are already sold #y the #orrower. 3rite off is proposed "nder
certain circ"mstances s"ch as 6i9 #orrowers are ad0"dicated as insolvents and the #an$
has already reali+ed part of the d"es as a sec"red creditor, 6ii9 Reven"e a"thorities
"nder the State 2"#lic Recovery ,ct have recovered some amo"nt and there no f"rther
chances of any recovery 6iii9 #oth #orrower and g"arantor are "ntracea#le after selling
their assets, and 6iv9 decrees remain "ne&ec"ted several times d"e to reasons #eyond
the control of the #an$. =ecisions to waive legal action or write off are ta$en at
controlling office on recommendation of the Branch Manager. If permission of the -redit
D"arantee '"nd %r"st is re("ired, the same may #e o#tained. 'or write off, vario"s
factors are considered which incl"de 6i9 means or capacity of the #orrower and g"arantor
6ii9 the amo"nt to #e written off 6iii9 efforts of recovery already p"t in and, 6iv9 staff
acco"nta#ility. %he write off e&ercise is internal and the #ranch staff sho"ld $eep the
matter confidential. Even after write off, recovery efforts sho"ld contin"e and if any
amo"nt recovered in this regard, the same may #e shared with the D"arantee '"nd
%r"st on pro)rata #asis. 'inally, the #ranch managers sho"ld comply with the entire
#an$ g"idelines in respect of write off.
?C8 Recovery -hrough Speciali,ed *Recovery+ branches
%o deal with the matters related to tri#"nals, certain e&pertise is re("ired. S"ch
e&pertise is also needed to effect recovery from core N2,s. In this regard, a few p"#lic
sector #an$s have set "p Recovery Branches, which are e&cl"sively concerned, with
the N2,s with a total lia#ility of Rs. 15 la$hs and a#ove. %hese #ranches "nderta$e
certain activities which incl"de creation of data #ase of N2,s, monitoring of the N2,s,
recovery from N2,s thro"gh compromise, follow)"p of the decreed acco"nts etc. and
additional attention to the matters related to special tri#"nals. %hese #ranches are set
"p witho"t creating any #"rden to the #an$ #y "sing the "n"tili+ed premises. , senior
e&ec"tive heads these #ranches. Bfficers wor$ing earlier in reha#ilitation cell in the
controlling office are generally posted to these #ranches. Each #ranch is provided with a
comp"ter to create the data#ase. %hese handle s"it filed acco"nts, recalled advances
and the cases in which legal proceedings are yet to #e initiated. %he n"m#er of
acco"nts in these #ranches is in the range of >5 to 5. %hese #ranches sho"ld $eep a
close contact with the advocates and co"rt a"thorities. E&ec"tion of decree or =R-
certificate is their prime tas$. %hese #ranches e&perience a few pro#lems. %o
54@
ela#orate, response to compromise proposals from #orrower is not enco"raging.
-onse("ently, these #ranches have to go thro"gh the lengthy proced"res for co"rt
settlements. In decreed acco"nts, details of assets of the 0"dgement de#tor are not
availa#le in most of the cases since the time lag #etween the date of filing and the award
of a decree is more than 15 years. ,s a res"lt of this, e&ec"tion is fo"nd to #e diffic"lt.
'inally, it is essential to create the re("ired e&pertise #y providing at least one law officer
in the recovery #ranch. Even after the transfer of acco"nts to the recovery #ranches, the
original #ranches sho"ld contin"e to p"t in their efforts for recovery and assist the
recovery #ranches in finali+ing the compromise deals. 3hile transferring the acco"nts,
the original #ranches sho"ld ens"re necessary details of net worth, sec"rities,
wherea#o"ts of the $ey partners.directors and g"aranteers, etc. In this regard, they may
also prepare a fresh inspection report on the acco"nts to #e transferred to the recovery
#ranches. %a$ing into acco"nt the increasing n"m#er of N2,s and comple&ities of
recovery, these #ranches may engage professional recovery agencies on fee #asis. B"t
it sho"ld #e ens"red that these agencies sho"ld not follow "nlawf"l meas"res. Similarly,
to $now a#o"t the details of the properties of the #orrowers. g"aranteers, services of a
professional detective agency may also #e hired provided their fees are reasona#le.
7astly, wherever good clients are availa#le in the local area, they may also #e pers"aded
to ta$e over the recalled.decreed acco"nts to effect recovery.
?<8 Help of informers: 3ith defa"lters employing new means to siphon off f"nds and
conceal assets, #an$s are also reinventing ways and means to identify assets own #y
defa"lters to ta$e reco"rse to attachment and a"ction. Madras high co"rt vide its 455?
0"dgment has considered legality in engaging informers while r"ling that if #orrows can
find newer methods of evading repayment of #an$ loan, #an$s are 0"stified in devising
newer methods of recovery.
?D8 .ther /easures
It is s"ggested to review the e&isting system of staff incentives for recovery from
hardcore N2,s.de)recogni+ed interest. Incentives may also #e offered to lawyers who
can manage to get a decree in a record time. -lose monitoring of s"it)filed cases with
dealing advocate is also called for. -ertain #an$s are having system of periodical review
with the advocates, which has #een very effective. 'inally, in respect of small advances,
loan write)off may #e considered, if the chances of recovery are not fair and cost of
litigation is disproportionately high to possi#le recovery
1E6&1 /E&S>RES
54>
(61 Reco8er" t*roug* @udicia$ #rocess
3hen #an$As are convinced that all other non)legal recovery meas"res wo"ld not #ring
any positive res"lt and the doc"ments may #ecome time #arred or have fear that the
sec"rities charged might #e alienated to the determent of the #an$, #an$ has to resort
to legal action. Before ta$ing a decision to file a s"it, the #an$ shall ens"re that there
are s"fficient sec"rities availa#le in the acco"nt and the #orrowers and g"arantors are
having ade("ate attacha#le assets to satisfy the decree against them. %he p"rpose of
o#taining decree serves the p"rpose only when it is capa#le of #eing e&ec"ted.
Eno"gh care has to #e ta$en at early stage of recovery thro"gh co"rts. %hese stages in
chronological order incl"de s"mmon servicing, s"#mission of a written statement,
recording the evidences, arg"ments, framing of iss"es, decision and order. 'irstly, the
permission to file s"it has to #e o#tained from the competent a"thority in the #an$.
%hereafter, the #ranch manager to file s"it sho"ld contact the approved advocate.
Before filing the s"its, #ranch manager sho"ld ens"re that doc"ments are live, sec"rities
are properly charged to the #an$, fresh financial report on #orrower . g"arantor is
o#tained, and a complete list of witnesses is prepared. %he #an$er sho"ld e&ercise the
right of set off . appropriations, if any li("id sec"rity.#alance in other acco"nt is
availa#le. %he plaint prepared #y the advocate is chec$ed "p thoro"ghly as to the
correctness of facts and fig"res. ,ll parties and g"arantors are to #e s"ed. Names and
addresses and sec"rities sho"ld #e stated properly and, s"it sho"ld filed in the co"rt of
the specified 0"risdiction. , notice of demand to the #orrower and the g"arantor sho"ld
#e iss"ed #efore commencing any legal action. In respect of a s"it against the
government, stat"tory notice sho"ld #e sent in accordance with the provisions of Section
!5 of -2-.
In partic"lar, to serve the s"mmons, address and other details of the defendant sho"ld
#e collected #y the #ranch manager. Ban$Zs advocate sho"ld #e contacted time and
again to impress "pon him to complete co"rt formalities relating to hearing, s"#mission
of statement, etc. %he #ranch manager sho"ld #rief the advocate on #an$ing aspects.
,fter the decree is awarded, the details of the same sho"ld #e read caref"lly.
%here can #e different $inds of decree s"ch as a9 simple mortgage decree which is for
the reali+ation of money charged on immova#le property #y sale, #9 for recovery of
possession of land* c9 for recovery of any property other than land or money* d9 for
ordering to do some act other than payment of money or to stop from doing some i.e.
54B
"nder this may #e classified decrees for specific performance of contracts, e&ec"tion of
doc"ments, in0"nction, etc.
If it is a conditional decree, condition m"st #e f"lfilled #efore e&ec"tion. , decree which
is on the face of it a n"llify cannot #e e&ec"ted. It m"st not #e #arred #y limitation.
E&ec"tion of decree shall #e in different forms s"ch as delivery of property, appointing a
receiver or in s"ch other manner as the nat"re of relief granted, attachment and sale and
#y arresting of C"dgment =e#tor 6C=9. E&ec"tion #y arrest is not availa#le as a matter of
right and arrest or detention cannot #e ordered "nless it is proved to the satisfaction of
the co"rt that the #orrower is "nwilling to pay inspite of ade("ate means to pay. %he
#"rden of proving this is on the decree holder. -o"rt may ref"se sim"ltaneo"s e&ec"tion
against the person and property of the de#tor.
,ccording to ,rticle 18> of 7imitation ,ct, 1>8 the period of limitation is 14 years for the
e&ec"tion of any decree other than those granted and mandatory in0"nctions or order of
any civil co"rt. B"t an e&ec"tion application made within 14 years, may carry the
e&ec"tion proceedings #eyond 14 years for the p"rpose of final completion. Money
paya#le "nder a decree shall #e #y depositing into co"rt, paya#le o"tside co"rt directly
to the decree holder or his.her #an$er, or as the co"rt directs.
'"rther, the e&ec"tion may also #e applied against the C"dgment =e#tor. If the
C"dgment =e#tor dies #efore satisfaction of the decree . order, the decree holder may
apply for e&ec"tion against his legal representatives. %he legal representative shall #e
lia#le only to the e&tent of the property if the deceased de#tor, which has come to his
hand and has not #een f"lly disposed off. %he co"rt may compel s"ch legal
representatives to provide s"ch acco"nt as it thin$s fit. Similarly, the application for
e&ec"tion is to #e paid #y the decree holder. If he is dead, the legal representatives may
apply for e&ec"tion.
,s soon as the acco"nts are decreed, it sho"ld #e ens"red whether the decree is in
conformity with the claims made #y #an$s in the plaint. In case of any ma0or
discrepancy from #an$As normal claim, steps sho"ld #e ta$en for revision . appeal within
a reasona#le time, say one month from the date of decree. ,s soon as decrees are
awarded , e&ec"tion petition sho"ld #e filed within three months of the date on which
certified copies are made availa#le to the #an$ #ranch. In decreed acco"nts where
certain agric"lt"ral land is to #e attached, #an$ may participate in the a"ction for which
necessary permission from the competent a"thorities within the #an$ is needed. In case
sec"rities are attached #efore 0"dgment and . or after e&ec"tion of decree and $ept in
54C
#an$As c"stody, d"e care sho"ld #e ta$en as to $eep them in tact. 3hen a case is
decided partly or wholly against the #an$, desira#ility of filling of an appeal or otherwise
sho"ld #e considered. If there is a defa"lt cla"se, which states Gwhenever #orrower
fails to pay three consec"tive installment, decree #ecomes a#sol"te or otherwiseH steps
for e&ec"tion of decree for whole amo"nt sho"ld #e initiated on occ"rrence of the
defa"lt. %he 0"dgment de#tor which does not pay in terms of the decree, alternative
steps for e&ec"tion, #y attachment and sale of the properties and.or #y arrest of the
0"dgment de#tor etc. as may #e deemed for, sho"ld #e ta$en promptly. Insolvency law
ena#les a creditor, who has o#tained a decree to reali+e his de#t #y serving insolvency
notice of not less than a month. , de#tor who fails to comply the notice within the
specified period, Ban$ can proceed against him for ad0"dicating him as an insolvent. If
the property to #e attached which is sit"ated o"tside the 0"risdiction of the co"rt, which
has passed the decree, it sho"ld #e got transferred to the other concerned co"rt in
whose 0"risdiction the property is located.
M"ite often, #an$s have to proceed against their #orrowers in a co"rt of law where no
sec"rity is availa#le. It ta$es a long time to o#tain a decree li$e in other cases, and then
proceed for e&ec"tion of the decree so o#tained. In s"ch case, the -ode of -ivil
2roced"res 15!, order 8? offers a ("ic$ remedy $nown as s"mmary proced"re s"it,
which #an$er can "se. %he proced"re of s"mmary s"it can #e availed in applica#le
cases 6s"ch as #ills of e&change, promissory notes, etc.9 and in case of sec"red
advance, the proced"re is not advisa#le as sec"rity held #y the #an$ is not enforcea#le
"nder the order 8?. B"t "nder the 7imitation ,ct 1>8, there is no difference in the
period of limitation #etween s"mmary s"its or other s"its. ,s part of proced"res the
s"mmons of the s"it is iss"ed first and when the defendant appears, the plaintiff is to
serve on defendant s"mmons for 0"dgment. 3hen the s"mmons of the 0"dgment is
served, the defendant has to o#tain the leave co"rt to defend the case. If the defendant
does not t"rn "p for hearing, the claim of the #an$ is pres"me to #e admitted.
%here are certain diffic"lties in respect of recovery thro"gh the co"rts. %he time
cons"med in the entire process is very long. %he long pending civil s"its hamper the
settlement of the new cases. Even after a long waiting period in ma0ority of the cases,
co"rts go on circ"mstantial evidences and technicalities of the case. Even where the
sec"rities can #e enforced, the process ta$es a considera#le time. 3hen #an$s finally
reali+e their d"es, the amo"nt recovered is m"ch less than the amo"nt lent, if inflation is
ta$en into acco"nt. '"rther, s"its filed #y #an$s do not get any priority in the co"rts and
54?
they have to wait for their t"rn for the same to come "p for hearing when sec"rities
deteriorate in val"e and recovery, if at all, is negligi#le. 3hen it is decided to e&ec"te
the decree awarded, there may not #e a p"rchaser or he may offer s"ch a low price,
which may not cover the amo"nt of defa"lt res"lting in a loss to the #an$. 7astly, three is
a feeling amongst defa"lters that they can hold "p recovery as m"ch as possi#le or
e&tract as m"ch monetary concessions as possi#le.
?M8 $ebt Recovery -ribunals *$R-s+
%he proposal for setting "p of special %ri#"nals for recovery of de#ts d"e to #an$s and
financial instit"tions 6'Is9 was the important legal development in the co"ntry. %his
proposal was very m"ch in line with the recommendations of the %iwari -ommittee and
the Narasimham -ommittee. %he need was felt for creation of s"ch %ri#"nals d"e to
considera#le delays in disposal of cases #y the co"rts. ,s on Septem#er end 15,
more than 1: lac cases of p"#lic sector #an$s were pending in vario"s co"rts. %hese
%ri#"nals are set "p "nder the Recovery of =e#ts d"e to Ban$s and 'inancial Instit"tions
,ct, 18.
Fnder the ,ct, two types of %ri#"nals are set "p i.e. =e#t Recovery %ri#"nal 6=R%9 and
=e#t Recovery ,ppellate %ri#"nal 6=R,%9. %he =R%s are vested with competence to
entertain cases referred to them, #y the #an$s and 'Is for recovery of de#ts d"e to the
same. Each =R% consists of a 2residing Bfficer who is appointed #y the -entral
Dovernment who is or has #een or is ("alified to #e a =istrict C"dge. B"t =R,%
constit"tes of only one person who is . has #een . or is ("alified to #e, a High -o"rt
C"dge or, he m"st have, for at least three years, held a post in the Indian Service Drade
I or, he m"st have wor$ed as the 2resenting Bfficer of =R% for at least three years. %he
order passed #y a =R% shall #e appeala#le to the ,ppellate %ri#"nal #"t no appeal shall
#e entertained #y the =R,% "nless the applicant deposits ?:< of the amo"nt d"e from
him as determined #y it. However, the ,ffiliate %ri#"nal may, for reasons to #e received
in writing, waive or red"ce the amo"nt of s"ch deposit.
Fnder the Zde#tA means Gany lia#ility 6incl"des of interest9 which is alleged as d"e from
any person to a #an$ or a 'I d"ring the co"rse of any #"siness activity "nderta$en #y
the #an$ or the 'Is or the consorti"m "nder any 7aw for time #eing in force, in cash, or
otherwise f"rther sec"red or "nsec"red, or whether paya#le "nder a decree or order of
any civil co"rt, otherwise s"#stit"ting on and legally recovera#le on the date of
applicationsH.
54A
,ny case involving de#t e&ceeding Rs 15 la$hs can #e referred to %ri#"nal. However,
the -entral Dovernment may red"ce this ceiling, if need arises. Every s"it or other
proceeding pending #efore any co"rt immediately #efore the date of esta#lishment of a
%ri#"nal "nder this ,ct #eing a s"it or a preceding, the co"rse of action whereon it is
#ased is s"ch that it wo"ld have #een, if it had arisen after s"ch esta#lishment, within
the 0"risdiction of s"ch %ri#"nal shall stand transferred on that date to s"ch %ri#"nal.
Fnder the ,ct, #an$s, ,ll Indian 'inancial Instit"tions and RRBs are eligi#le to approach
the %ri#"nal.
#)ere a* !e t)ree propositions re"ating to procedures. +irst, t)e #ri!una"
and t)e Appe""ate #ri!una" s)a"" not !e !ound !* t)e procedures "aid
do-n under C&C, 19%8. (econd, t)e* -i"" !e guided !* t)e princip"es o'
.natura" /ustice.. #)ird, su!/ect to ot)er provisions o' t)is statute and o'
an* ru"es, t)e* s)a"" )ave ade to regu"ate o-n procedure, inc"uding t)e
p"aces at -)ic) t)e* s)a"" )ave t)eir sittings.
,n important power conferred on the %ri#"nal is that of ma$ing an interim order 6whether
#y way of in0"nction or stay9 against the defendant to de#ar him from transferring,
alienating or otherwise dealing with or disposing of any property and the assets
#elonging to him witho"t prior permission of the %ri#"nal. %his order can #e passed
even while the claim is pending.
,fter the claim is "pheld #y the %ri#"nal, it iss"es a certificate to the Recovery Bfficer
and the latter has vario"s powers in e&ec"tion incl"de attachment, sale, arrest,
appropriation as Receiver and power to re("ire the defendant 6de#tor9 to remit the
money to the Recovery Bfficer. Fnder the ,ct, the Recovery Bfficer possesses the
powers as that of an Income %a& Bfficer for recovery de#ts d"e to the #an$s and 'Is.
%he ,ct provides the %ri#"nal and ,ppellate %ri#"nal the powers of a -ivil -o"rt in
several maters. %hese incl"de s"mmoning of witnesses, discovery and prod"ction of
doc"ments, receiving evidence on affidavits and iss"ing commissions. %he ,ct also
re("ires #oth tri#"nals to dispose of the applications or appeals within a period of >
months.
%he special machinery in the form of de#t recovery tri#"nals and recovery officer will
help in e&pediting the hearing, determinations and recovery of #an$ claims which
generally wait in the ("e"e for years even for reaching a stage of hearing. %he
re("irement of depositing of ?:< of the claim amo"nt for appeal will prevent endless
tri#"nal appeals.
554
2roced"res to #e followed "nder the ,ct are simple. %o start with, the concerned #an$
or 'I is e&pected to ma$e an application to the %ri#"nal within the specified geographical
limits. %he application sho"ld #e accompanied #y s"ch statements or evidence and #y
the prescri#ed fees. Bn receipt of the application, the %ri#"nal shall iss"e s"mmons
re("iring the defendants sho"ld ca"se within 85 days of the service of the s"mmons or
to stay the relief prayed for sho"ld not #e granted. %he %ri#"nal after giving the
applicant an opport"nity of #eing heard, passes s"ch orders on application as it thin$s fit
to meet ends of 0"stice. %he %ri#"nal may ma$e an interim order whether #y in0"nction
or stay and de#arring the defendant from the sale or transfer of assets. %hereafter, the
%ri#"nal iss"es a recovery certificate and passes on to the Recovery Bfficer for recovery
of the amo"nt of de#ts as specified therein. %he Recovery Bfficer sho"ld send a notice
in writing and re("iring the defendant or his related parties to pay the amo"nt within the
specified period. Bn receipt of money, the receipt will #e iss"ed. If the defendant fails to
ma$e the payment, the Recovery Bfficer will then sei+e the property and arrange for
sale. He can even arrest the defendant if the circ"mstances so warrant. %he aggrieved
party may ma$e an appeal within ;: days from the date of the order to the ,ppellate
%ri#"nal, which will then pass an order, confirming, modifying or canceling the order,
appealed against. %here is a re("irement of deposit of ?:< of the claim amo"nt tho"gh
this can #e waived or red"ced at the discretion of the ,ppellate %ri#"nal.
,t present, there are 4 =R%S and : ,ppellate %ri#"nals in the co"ntry. In order to
provide the re("ired infrastr"ct"re to =R%s, the RBI has as$ed #an$s and 'I within the
0"risdiction of the =R% sho"ld set "p a 7ocal ,dvisory -ommittee to interact with the
2residing Bfficer periodically and provide the re("ired infrastr"ct"re.
In Can"ary 4555, the ,ct was amended. %he ma0or amendments incl"deL the
Dovernment has powers to appoint more than one Recovery Bfficer in the =R%. %he
Recovery Bfficer re("ires the de#tor to declare in affidavit the partic"lars of his assets.
=R% can pass an order for recovery of the amo"nt and iss"e certificates in case of the
decrees which have #een passed #"t has not e&ec"ted. , party aggrieved #y order of
Recovery Bfficer can file an appeal #efore the =R% within 85 days from the date, the
order is iss"ed to him. ,s on C"ne 455;, 8:,?55 cases involving Rs. >>,:>! crores were
pending with =R%. %he amo"nt recovered was 0"st Rs. ?,!;: crores.
=R%s are critici+ed in respect of recovery made considering the si+e of N2,s in the
co"ntry. In general, it is o#served that the defendants approach the High -o"rt
challenging the verdict of the ,ppellate %ri#"nal which leads to f"rther delays in
555
recovery. Ialidity of the ,ct is often challenged in the co"rt which hinders the progress
of the =R%s. 7astly, m"ch needs to #e done for ma$ing the =R%s stronger in terms of
infrastr"ct"re.
?L8 National Company 1a0 -ribunal
,s per the anno"ncement made in the B"dget 4551)54, Sic$ Ind"strial -ompanies ,ct
6SI-,9 will #e repealed and Board for Ind"strial 'inance and Reconstr"ction 6BI'R9 will
#e wo"nd)"p. ,s an alternative arrangement, it is proposed to set "p National company
7aw %ri#"nal 6N-7%9 #y amending the -ompanies ,ct, 1:>. In ,"g"st 4551, the Bill
was introd"ced in the 2arliament. ,ccordingly, N-7% is e&pected to consolidate the
powers of BI'R, High -o"rt and -ompany 7aw Board to avoid m"ltiplicity of for"ms. In
matters of reha#ilitation of sic$ "nits, all concerned parties are s"pposed to a#ide #y the
orders of N-7%. %here shall #e 15 #enches, which will deal with reha#ilitation,
reconstr"ction and winding)"p of companies. It is estimated to complete the entire
process d"ring a period of 4)8 years as against 45)4: years presently ta$en. %he
%ri#"nal will have, in addition, powers of contempt of co"rt.
, reha#ilitation and revival f"nd will #e constit"ted to ma$e an interim payment of d"es
to wor$ers of a company declared sic$ or is "nder li("idation, protection of assets of sic$
company and reha#ilitate sic$ companies. 3hile N-7% will #e acting on the lines of
BI'R in the matters of reha#ilitation, via#ility of the pro0ects will #e assessed on [cash
testA and not in the present practice of Znet)worthA. ,nother important change will #e in
respect of time limit for completing each formality relating to reha#ilitation and winding)
"p. %ho"gh the Bill is well drafted to ens"re N-7% to #ecome more effective than BI'R
in respect of reha#ilitation and winding)"p, do"#ts are raised a#o"t the implementation
of the Bill ta$ing into acco"nt the present political set "p.
;@8 /erger and &malgamation
Merger and ,malgamation are the two distant terms. , merger is a com#ination of two
companies where#y only one s"rvives. B"t an amalgamation involves com#ination of
two or more companies where#y an entirely new company is formed. 3hen two
companies of the same si+e com#ine, "s"al mode is amalgamation. 3hen two
companies of different si+e com#ine merger is preferred.
-om#ination of the companies ta$es place for a n"m#er of reasons. Some of the
important reasons are given #elow.
.perating Economics :
553
="plication of facilities is eliminated and all operations can #e consolidated to
achieve economies on overhead cost. 2artic"larly in case of hori+ontal merger,
operating economies can #e #est "tili+ed. In cases of vertical merger, economies in
distri#"tion and p"rchasing are achieved. %here are few operating economies in
conglomerate merger.
/anagement &c'uisition
If a firm lac$s aggressive and competent management, it has two alternatives, either
to grad"ally stagnate or to com#ine with another company having efficient and
effective management.
6ro0th
Sometimes, it is easier and cheaper to have a growth #y merger rather than internal
growth. %he n"mero"s costs and ris$s involved in development of new prod"cts can
#e avoided #y ac("isition of another "nit.
$ebt Capacity
In a co"ntry li$e o"rs where ta& rate is high the de#t f"nds are cheaper than the
e("ity f"nds. If a company #orrows more, the e&pected f"t"re earnings and dividend
per share will increase when all other things remaining the same. %he de#t capacity
of the com#ined entity is greater than the s"m of the individ"al de#t capacities of the
two companies involved in com#ination.
$iversification
, merger is also done with diversification in view. , -ompany may #e a#le to red"ce
the insta#ility of earnings #y increasing the prod"ct line. B"t increasing prod"ct line
is an e&pensive affair for a small firm with low e("ity #ase. , large firm also may not
li$e to "nderta$e ris$ of a new prod"ct line and may prefer ac("isition rather than
developing the prod"ct itself.
-a)ation
In an economy li$e o"rs, where rate of corporate ta&ation is very high at higher sla#s
of profit generation, avoidance of ta& is another ca"se of merger. , financially so"nd
company in a very high corporate ta& #rac$et has an incentive in saving ta& #y ta$ing
over sic$ "nits and, a sic$ "nit can #e made via#le thro"gh merger. Merger helps in
minimi+ing competition, pooling of reso"rces, effecting general economies in
prod"ction, distri#"tion and overheads. Diven #elow are legal provisions of merger,
553
ta& concessions availa#le, mechanism for merger, provisions for approval clearance
of merger, etc.
%rovisions of /erger >nder Companies &ct ?L<D
2rovisions are laid down ".s 85)8> where transfer.p"rchase of shares are
approved #y not less than .15
th
of val"e of shares of transfer company,
merger.amalgamation can #e done witho"t reco"rse to the co"rt.
In case a merger.amalgamation is effected thro"gh the co"rt, the co"rt shall direct a
meeting where 8.;
th
ma0ority approves the arrangement, it shall #e #inding on all on
approval #y the co"rt. %he co"rt will ma$e an order only where the transaction
appears 0"st and fair and where the co"rt is satisfied that sanction of the ma0ority has
not #een o#tained #y fra"d and improper means.
%he scheme is also s"#0ected to caref"l scr"tiny as per standards laid down
0"stifying 0"dicial interference. %he co"rt sees to it that the scheme is reasona#le
and fair to all parties.
Concessions under !ncome -a) &ct
Fnder Sec. ?4), of the ,ct, vol"ntary amalgamation of a sic$ company with a so"nd
company allows the latter to carry forward and set off acc"m"lated losses and
"na#sor#ed depreciation of the former. %he ,ct grants ded"ctions to the so"nd
company in respect of depreciation allowance, capital e&pendit"re etc., in addition to
e&emption from lia#ility to capital gains ta& for #oth the sic$ "nit and its share
holders. %here is also no lia#ility to ta& any deemed profits representing the amo"nt
of #alancing charge or any claim for terminal depreciation in case of the so"nd
company 6i.e. amalgamating company9. ,ll #enefits are s"#0ect to amalgamation
falling within definition of amalgamation contained in this ,ct.
Conditions for &vailing of Benefits
%he amalgamating company sho"ld #e an ind"strial company and the amalgamated
company may.may not #e and ind"strial company. %he #enefits to set off losses and
depreciation allowance to amalgamated company is s"#0ect to satisfaction of the
following conditionsL
,cc"m"lated loss of amalgamating company in the immediately preceding
year in which amalgamation is effected m"st e&ceed : per cent of aggregate
amo"nt of paid "p share capital and reserves of that company as on that
date.
55@
,malgamating company was not financially via#le #efore amalgamation.
'inancial via#ility sho"ld #e determined #y financial e&perts.
,malgamation sho"ld facilitate reha#ilitation.revival of #"siness of
amalgamating company.
In case amalgamating or amalgamated company owns an ind"strial
"nderta$ing registered "nder MR%2 ,ct 1>, the amalgamation m"st #e
approved #y the Dovernment "nder MR%2 ,ct "nless it is e&empted from
s"ch approval.
'or merger with its foreign ma0ority company, the amalgamated company
m"st conform to provisions of 'oreign E&change Management ,ct.
,ssessee sho"ld f"lfil s"ch other conditions as -entral Dovernment may
specify.
%rocedures for Clearance of /erger %roposals
,n application for the p"rpose of Income %a& ,ct sho"ld #e made in prescri#ed form
to Secretary, =epartment of Ind"strial =evelopment. -ompany sho"ld s"pply
information regarding steps ta$en for reha#ilitation and revival of the "nit which
sho"ld #e accompanied #y a certificate.
;?8 inancial Reconstruction
%he essence of a reha#ilitation programme for a sic$ "nit involves resched"ling its
mat"ring o#ligations and matching them with the li("idity e&pected to #e generated in
f"t"re and maintenance of the res"ltant capital str"ct"re thro"gh the period of
reconstr"ction. %he steps involved in the reconstr"ction programme have #een
disc"ssed in the following paragraphs.
%he assets and the lia#ilities, after reconstr"ction, sho"ld properly match and the post
reconstr"ction e("ity and de#t sho"ld #e capa#le of #eing ade("ately serviced in f"t"re
#y internal generation of the "nit. %his may call for red"ction of the e&isting preference
capital, resched"ling of e&isting loans, conversion into e("ity, red"ction, write off or
com#ination of s"ch meas"res, consistent with the contin"ed operation of the "nit on a
via#le #asis.
In considering s"ch meas"res, lia#ilities have to #e scaled down if they are not
represented #y ade("ate tangi#le assets. ,ssets for the p"rpose of reconstr"ction
sho"ld #e val"ed at a reasona#le price considering the "nit as a going concern.
55>
Ind"strial reconstr"ction incl"des change of management. Ban$s, financial instit"tions
and the Dovernment will have to play a vital role in this regard. %he e&isting
management may have to #e reconstit"ted and they may ta$e over the management of
the company "nder the Ind"strial 6=evelopment and Reg"lation9 ,ct.
%he plan of reconstr"ction consists of pro0ected #alance sheet, pro0ected income
statement, statement of so"rces and "ses of f"nds, capital e&pendit"re programme and
management inp"ts and other proposed corrective meas"res in non)financial areas.
Statement of so"rces and "ses of f"nds sho"ld s"ggest the changes in f"nds generated
from operations at different intervals d"ring reconstr"ction period.
-apital E&pendit"re 2rogramme involves L
Revised capital e&pendit"re to achieve pro0ected prod"ction and sales.
Matching payment of its d"es with e&pected li("idity at f"t"re dates.
2ostponement of specific lia#ilities.
%he e&tent of capital restr"ct"ring necessary for the "nit is determined #y its need for
f"nds d"ring the period of reconstr"ction arising o"t of L
2ayment of d"es to pressing creditors.
,c("isition of additional c"rrent assets.
-apital e&pendit"re programme.
'"t"re losses.
2ast lia#ilities s"ch as wor$ersZ d"es* arrears of ta&es, e&cise, electricity #ills etc.
other creditors ) sec"red and "nsec"red.
Even after reconstr"ction many sic$ "nits will contin"e to inc"r cash losses and creditors
will have to finance the losses, and past lia#ilities are never red"ced. -onse("ently,
financial instit"tions will withdraw their s"pport.
%he sic$ "nit has an im#alanced capital str"ct"re, high de#t e("ity ratio and adverse
total e&ternal lia#ility to net worth. %herefore, it is desira#le to consider the financial
reconstr"ction to off load #"rden of e&ternal lia#ilities not matched #y e&isting prod"ctive
assets. Ban$s and financial instit"tions m"st scale down the lia#ilities #y write off. 'or
the p"rpose of capital reconstr"ction, assets sho"ld #e val"ed on c"rrent price
considering the "nit as a going concern.
%he involvement of the Dovernment comes in the form of ta$e)over of the management
"nder I 6=ER9 ,ct 1:1. In this case, the Dovernment appoints a"thori+ed persons to
55B
carry on the #"siness of the company. 'ollowing ma0or changes ta$e place after the
Dovernment ta$e overL
E&isting management vacates the office.
Shareholders #ecome dormant.
Dovernment appoints new management.
Newly appointed management is acco"nta#le to the Dovernment.
Bn the other hand in case of reconstr"ction involving the #an$ and financial instit"tions,
responsi#ility is e("ally with them and the entreprene"rs. 'inancial instit"tions are
responsi#le for appointing s"ita#le management of yield desired res"lt. Normally
reconstr"ction "nder #oth the a#ove styles commences with the inf"sion of fresh f"nds
with an altered management set "p.
=iffic"lties faced at the time of framing acceptance capital str"ct"re are d"e to the lac$
of s"pport from different agencies involved in s"ch reconstr"ction. In the a#sence of
this, it #ecomes diffic"lt to initiate reconstr"ction programme. %he ma0or handicap that a
sic$ "nit poses #efore a reconstr"ction agency is h"ge over #"rden of acc"m"lated
lia#ilities and past losses.
;;8Recovery under the Securitisation and Reconstruction of inancial &ssets and
Enforcement of Security !nterest &ct ;@@;
%he ,ct covers the following three areas vi+.
6i9 Registration and reg"lation of Sec"ritisation -ompany 6S-B9 and ,sset
Reconstr"ction -ompany 6,R-9
6ii9 Enforcement of Sec"rity Interest #y #an$s and financial instit"tions witho"t co"rt
intervention, and
6iii9 Esta#lishment of -entral Registry of sec"ritisation and reconstr"ction of financial
assets and creation of sec"rity interest "nder the act.
%he ,ct provides for setting "p of Sec"ritisation -ompany 6S-B9 and ,sset
Reconstr"ction -ompany 6,R-9. S"ch company #efore commencement of #"siness
sho"ld o#tain a certificate of registration from RBI. %he networth of the company sho"ld
not #e less than Rs. 155 crores or an amo"nt e&ceeding 1:< of the total financial assets
ac("ired or to #e ac("ired. %he S-B or ,R- can ac("ire financial assets of any #an$
or 'I #y iss"ing a #ond or any other sec"rity on m"t"ally accepted terms #etween the
S-B.,R- and the #an$.'I. Bn ac("isition of financial asset #y S-B.,R- from #an$.'I,
the S-B.,R- shall #ecome the deemed lender and all rights of s"ch #an$.'I shall vest
55C
in the S-B.,R- in relation to the financial assets. ,ny s"it, appeal or other proceedings
pending at the time of ac("isition of assets shall #e contin"ed #y S-B.,R-. %he
S-B.,R- can iss"e sec"rity receipt of instit"tional #"yers for s"#scription. %he
S-B.,R- can provide for proper management of the #"siness of the #orrower, sale or
lease of a part of whole of the #"siness of the #orrower, resched"lement of payment of
de#ts #y the #orrower and settlement of d"es paya#le #y the #orrower.
%he ,ct also provides for enforcement of sec"rity #y Ban$s.'Is in their favo"r witho"t the
intervention of co"rt.tri#"nal. 'or this, the #orrowal acco"nts sho"ld have #een
classified as N2, and the Ban$s.'Is iss"e a notice to the #orrower re("esting to repay
the lia#ilities in f"ll within >5 days from the date of notice. %he #an$s.'Is are entitled to
e&ercise all the rights of enforcement of sec"rities s"#0ect to the a#ove compliance.
S"ch enforcement of sec"rity can #e in the form of ta$ing over possession.management
of the sec"red assets and appointing any person incl"ding S-B.,R- to manage the
sec"red assets. If the #an$s feel that there co"ld #e resistance in ta$ing possession of
the charged assets, #an$ can s"#mit an application in writing to the =istrict
Magistrate.-hief Metropolitan Magistrate in whose 0"risdiction* the sec"red assets
sit"ate, to ta$e possession of the assets and doc"ments and forward to the sec"red
creditor 6#an$9. In the case of 0oint financing of financial assets, the sec"red creditor can
e&ercise the rights only if agreed "pon #y creditors whose share in the acco"nt is
minim"m ?:< #y val"e. In case #orrowers raise any o#0ection or ma$e a representation,
the #an$ will have to consider s"ch o#0ections on merit and will have to comm"nicate
within one wee$ of receipt of s"ch representation. No ca"se of action will #e availa#le to
the #orrower merely on the gro"nd that his o#0ection has not #een accepted #y the #an$.
%he #an$ is, therefore, free to ta$e the possession of the mova#le or immova#le sec"red
assets after complying with the proced"re after e&piration >5 days of notice and after
reply of the o#0ections, if any. However after ta$ing possession #y the sec"red creditors,
the #orrowers may ma$e an application to =R% which shall #e dealt #y =R% as
e&peditio"sly as possi#le and to #e disposed of within >5 days. If the application is not
disposed within period of ; months, any party may ma$e an application to the =R,% for
directing the =R% for e&peditio"s disposal of the application. ,ggrieved #y the decision
of =R%, #orrower can appeal to =R,% only after depositing with it :5< of the amo"nt
d"e as claimed #y the #an$ or determined #y the =R%, which ever is less, however,
=R,% may red"ce the amo"nt "p to 4:<of the de#t if satisfied.
55?
'or the p"rpose of registration or transactions of sec"ritisation and reconstr"ction of
financial assets and creation of sec"rity interest "nder the act, the Dovernment of India
may set "p a -entral Registry and its #ranches opened in different places d"ly defining
the territorial limits of s"ch #ranches. ,ny transaction relating to sec"ritisation,
reconstr"ction of financial assets, and creation of sec"rity interest is to #e recorded in
the -entral Register $ept at the Head Bffice of the -entral Registry. %he filing of s"ch
transaction with -entral Registry is to #e made on payment of a fee prescri#ed within 85
days. %he fail"re to register sec"rity interest with -entral Registry attracts penalty in the
form of fine of Rs. :555 per day.
%he ,ct arms the lenders with powers to directly initiate recovery proced"res #y ta$ing
possession of the sec"red assets of the #orrowers which wo"ld incl"de the transfer of all
"nderlying assets. %he lender co"ld, in effect, attach, sell or a"ction any of the assets
ta$en over #y them. %hey can also decide to ta$e over the management of the assets,
appoint any person to manage the assets ta$en over and also order settlement of d"es
from any person who has ac("ired the sec"red assets from the #orrower.
%he new law wo"ld not only help in recovering the e&isting N2,s of the Ban$s.'Is, #"t
also c"r# the instincts toward willf"l defa"lts in f"t"re. %he legislation protects #an$s.'Is
from "nnecessary legal hassles from defa"lting companies and also from cross
legislation among the 'Is since many companies had sec"red loans from m"ltiple
financial instit"tions.
%he ,ct empowers lending instit"tions with enhancement rights in the recovery of N2,s.
Fnder the ,ct, lenders have reco"rse to several options in dealing with non)performing
advances witho"t 0"dicial intervention.
%he provisions of the ,ct shall not apply in case of loans "pto Rs. 1.55 lacs and in
respect of any sec"rity interest created in agric"lt"re land. 7i$ewise the cases where the
amo"nt d"e is less than 45 per cent of the principal amo"nt and interest thereon, the
same is o"tside the p"rview of the ,ct. %he new law is viewed as an important step
forward towards addressing the need for a via#le legal framewor$ to "nderta$e
sec"ritisation and.or asset reconstr"ction in India. %he legislation co"ld #e "sed #y
competitors to #"y o"t assets of ailing rivals tho"gh it wo"ld also open "p secondary
mar$et and p"t press"re #oth on #orrowers and lenders to settle their disp"tes. %he ,ct
will provide greater fle&i#ility to the Indian financial system in managing its non
performing assets more effectively and efficiently. %he ,ct is e&pected to correct the
im#alance #etween #orrowers and lenders in this co"ntry, a conse("ence of which has
55A
#een the acc"m"lation of non)performing assets on a massive scale. By allowing #an$s
to sell off assets charged to them witho"t having to see$ the permission of a co"rt of law,
the ,ct empowers #an$s to reali+e their d"es e&peditio"sly, avoiding the endless delays
in the legal system.
;A8 .ther 1egal /easures
Bther 7egal meas"res mainly incl"de the recovery "nder State 'inance -orporation ,ct,
1:1, -o)operative Societies ,ct, 1:5 and recovery "nder state act of sponsored
scheme cases.
Section 4 of the State 'inance -orporation ,ct, 1:1 empowers State 'inance
-orporations 6S%-s9 to ta$e)over the management or property or #oth of the ind"strial
concern which has defa"lted loan installments covering interest and principal. %his right
applies to the property mortgaged, pledged, hypothecated or assigned to the 'inancial
-orporation. Bn ta$e)over of the property, the corporation gets all the rights of the
owner. %his also refers to goods man"fact"red or prod"ced wholly or partly from goods
forming part of the sec"rity held #y it. Bn receipt of sale proceeds of the property, the
corporation is entitled to reim#"rse first all costs.e&penses inc"rred in holding the
property and arranging for s"#se("ent sale and recovery of d"es. If any s"rpl"se left
over, the same shall #e paid to the person entitled thereto. 3here 'inancial -orporation
has ta$en any action against and ind"strial concern "nder provisions of s"#)section 6I9,
the 'inancial -orporation has shall #e deemed #y the owner of s"ch limited company for
the p"rpose of s"its #y or against the concern, and shall then and #e s"ed.
=espite the a#ove wide ranging powers, the 'inancial -orporations has not #een a#le to
recover m"ch effectively #eca"se of non)cooperation from the management of the
ind"stries concern. 3or$ers also agitate and prevent any ta$e)over of the property.
%h"s, what is important is to create a cond"cive recovery environment and not 0"st
vesting the additional powers to the 'inancial -orporation as disc"ssed a#ove.
Recovery "nder the Maharashtra -o)operative Societies ,ct, 1>5 is also possi#le.
-redit instit"tions in co)operative sector have to apply to the Registrar to see$ his
assistance in recovery of d"es from the mem#ers. %he Registrar, after receiving
necessary partic"lars, will ma$e s"ch in("iries, as he deems fit, and then grant a
certificate for the recovery amo"nt d"e as arrears. %he certificate granted #y the
Registrar shall #e final and a concl"sive proof and the same shall #e enforcea#le
according to the law li$e land reven"e. -redit instit"tions in co)operative sector are
ta$ing f"ll advantage of the facility provided "nder the ,ct. ,s disc"ssed a#ove, the
534
recovery process is also slow in this conte&t, #eca"se of recovery climate which is not
cond"cive #esides lac$ of co)operation from defa"lting mem#ers.
In certain states there is separate law to deal with small loan and agric"lt"ral loans.
Ban$s may ta$e advantage of these legal reco"rses and file recovery certificates with
the designated officers. , reg"lar follow)"p of the certificate file cases is essential.
CONC5SION
%he list of recovery meas"res may go on when we refer to additional innovative
strategies adopted #y #an$s and 'Is, in this regard. %h"s, there is no dearth of schemes
for recovery. ,de("ate n"m#ers of instit"tions are set "p to assist in recovery matters.
Both the RBI and the DBI are #"sy in anno"ncing new policy g"idelines relating to
recovery from N2,s. Ban$s are feeling press"re on asset ("ality d"e to 6a9 massive
credit e&pansion in past fo"rs years 6#9 Rising delin("ency in retail loans, 6c9 Slow down
in the economy and conse("ential pro#lem with sectors li$e real estate, MSME etc. 6d9
slow down in e&ports and 6e9 massive restr"ct"ring done d"ring 455!)5 which may add
fresh N2, in coming years. 'itch has forecasted that 1: to 4:< of #an$sA restr"ct"red
loan 6whopping Rs. 1.48 la$h crores were restr"ct"red d"ring 455!)59 may t"rn N2,
d"ring 4515)11 6E% 18.51.4559. %o arrest this trend, eno"gh care has to #e ta$en to
prevent slippage in standard assets more partic"larly in restr"ct"red loans and "pgrade
the N2, loan "nder s"#)standard category. More importantly, recovery drive sho"ld #e
ta$en "p on a war)footing. 'or this p"rpose, #an$s will have to ta$e advantage of all the
possi#le recovery meas"res #y involving their staff and other o"tside agencies. In
addition, there sho"ld #e coordinated efforts #y #an$s and 'Is in recovery in those cases
where #oth of them are involved. Recovery f"nction in #an$s and 'Is needs to #e
strengthened #y ind"cting a professional approach. %here sho"ld #e ade("ate staff in
the field to contact defa"lters time and again. Staff involvement in recovery drive has to
#e ens"red #y offering s"fficient incentives to them. ,ctive lawyers may also #e
rewarded properly. ,ssistance from the professional agencies sho"ld li#erally #e so"ght
for. ,#ove all, 0"dicial machinery has to #ecome more efficient to dispose off cases
pending #efore them for years together. Similarly, =R%s have to gear)"p to assist #an$s
and 'Is in their recovery effort. 7astly, the Dovernment of India has to facilitate the
process of sei+"re of assets of the defa"lters and their s"#se("ent sale for which the
-entral Registry sho"ld #e set "p immediately. 7astly, in view of the proposed stricter
N2, identification norm of 5 days introd"ced since March 455;, it is high time for #an$s
535
and 'Is to loo$ ("ality of credit rather than ("antity and ta$e effective and timely steps to
chec$ delin("ency as soon as symptoms of N2, are visi#le.
%ha"ter-12
5oan Com+romise An e?ecti8e reco8er"
measure
!ntroduction
In general, it is e&perienced that filing of s"its and recovery of d"es of #an$s thro"gh the
process of co"rts.=R%s is a c"m#ersome, e&pensive and time cons"ming, and tas$
witho"t any fr"itf"l res"lts in many cases. Bne of the main reason attri#"ted for non)
recovery of d"es thro"gh the co"rt.=R% is lac$ of proper follow)"p and timely and proper
action. Hence, it wo"ld #e worthwhile to thin$ of other ways to tac$le the sit"ation. %he
tradition of amica#le settlement thro"gh panchayat and ar#itration, leads to thin$ as to
why #an$ loan disp"tes cannot #e settled witho"t having a reco"rse to the co"rt.=R%.
Bf late, loan compromise as a recovery meas"re is #ecoming pop"lar. Hence, it wo"ld
#e appropriate to $now all a#o"t loan compromise.
Salient eatures of 1oan Compromise
7oan compromise in a #an$ means agreeing to a #orrowerAs re("est of accepting a part
of o"tstanding of d"es in the #oo$s of the #an$ as f"ll and final payment or allowing for
the non)compliance of the terms of the loan, after analy+ing the alternative co"rses of
action, gen"ineness and capacity to repay. It is also called as vol"ntary de#t red"ction
or scaling down of d"es. In the sit"ation, where the #orrowerAs a#ility.capacity in
repaying the #an$As d"es and the #an$As a#ility to recover the same #y other means are
limited, a compromise proposal can wor$ well.
-ompromise proposals can #e entertained at #oth stages of loan, which incl"de 6a9 pre)
litigation stage, and 6#9 post litigation.decree stage. ,t the pre)litigation stage,
concessional meas"res s"ch as resched"lement, rephasement, reha#ilitation, etc. can
#e "sed which wo"ld allow some #reathing time and #"ild.strengthen the repayment
capacity of the #orrower. However, when s"ch meas"res initiated in the acco"nt do not
yield any fr"itf"l res"lt and the #orrower inc"rs heavy cash losses, it is #etter to go in for
a compromise or scaling down the d"es. Similarly in other cases, where #"siness loss
has crept in d"e to one or the other gen"ine reasons and the #orrower is not a willf"l
533
defa"lter and re("ests for minor concessions s"ch as waiver of penal interest,
concession in interest rate, etc. his offer can #e accepted for compromise.
-ompromise at post)litigation.decree stage can also #e entertained so that the
#orrowerAs #"siness or activity is "ninterr"pted. In order to avoid cost, la#o"r and time
involved in litigation maters and to have #etter image in the mar$et, #orrowers offer a
l"mp)s"m amo"nt and re("est the #an$ to withdraw the s"its against them, which may
#e entertained. ,t times, it #ecomes necessary, in some cases, to settle o"tside the
co"rt thro"gh an amica#le agreement and, the antecedents of the defendant are s"ch
that co"rts.=R%s ta$e a sympathetic view and award a lenient decree against the
defendants. Sometimes, after o#taining decree, if a third party comes forward to
p"rchase the assets, the #an$ may consider the case for compromise. It is also possi#le
for the #an$ may go in for compromise if the decreed asset wo"ld not fetch more than
the claim the amo"nt. In all cases, where s"its have #een already field, whatever
compromise is to #e made, m"st #e sorted o"t thro"gh co"rt in the form of a consent
decree, so that it will #e #inding on all dependents. If parties do not f"lfil the promise,
remedy thro"gh co"rt or =R% will always open to the #an$s.
-ypes of Compromise
%here can #e two types of compromise. %he Reserve Ban$ of India and the
Dovernment of India independently introd"ced Bne %ime Settlement Schemes covering
loan o"tstanding "pto Rs. : crores 6s"#se("ently raised to Rs. 15 crores9 and Rs. 4:555
respectively. Now, #oth these schemes are not in operation since they were p"rely
temporary meas"res. Hence, each #an$ is given a"tonomy to evolve its own Bne %ime
Settlement 6B%S9 Scheme, well s"ited to profit position. 3hat is importantR It is
necessary to create awareness on B%S and mo#ili+e as many compromise proposals as
possi#le. %here sho"ld not #e any delays in arriving at compromise. S"ch proposals
sho"ld #e prepared caref"lly $eeping in mind the #an$ g"idelines. It is #etter to involve
all staff mem#ers in mo#ili+ing compromise proposal. -are sho"ld #e ta$en that the
recovery thro"gh compromise does not give a wrong signal to good #orrowers. Bver the
years, #an$s have s"cceeded to recover thro"gh compromise s"#stantially. B"t there is
eno"gh scope to step "p the recovery drive thro"gh this meas"re.
Ho0 to ormulate Compromise %roposal
%o start with, a #orrower sho"ld e&press his interest in loan compromise in writing. He
may also indicate the terms of compromise, well s"ited to his e&pectations. B"t #ranch
manager may not agree. Hence, he has to form"late a compromise proposal in the light
of #road g"idelines iss"ed #y the #an$. %he proposal sho"ld contain ma0or items which
533
incl"de means or capacity of the party, determination of amo"nt covering o"tstanding
amo"nt, other charges, etc. efforts already made for recovery, staff acco"nta#ility, etc.
More importantly, the sec"rities offered to the #an$ need to #e val"ed #y an approved
val"er. %he #ranch manager has to carry o"t a costL #enefit analysis which on one hand
ta$es into acco"nt the loss that may arise in case compromise is accepted and the
#enefit which may accr"e if the compromise is not made, on the other. %he proposal
recommended sho"ld #e referred to the sanctioning a"thority which e&amines several
factors incl"ding f"lfillment of terms and conditions of sanctioning of loan compromise,
any la&ity in cond"ct and post)dis#"rsement s"pervision of the acco"nt, any act of
commission or omission on the part of staff leading to the de#t proving irrecovera#le,
eno"gh recovery efforts p"t in, val"ation of sec"rities, interest to #e charged in respect
of settlement tho"gh installment, etc. =ecisions in respect of loan compromise sho"ld #e
ta$en #y a committee consisting senior e&ec"tives e&cepting small loans where powers
are delegated to #ranch heads. ,fter receiving the necessary sanction of the proposal,
the #ranch manager is e&pected to as$ the #orrower to f"lfil the terms incl"ding the
down payment. In general, one time settlement is preferred to settlement in
installments. In case of s"it filed acco"nts, the settlement is p"t thro"gh the co"rt and a
consent decree is drawn. In non s"it filed cases, it is #etter if the terms of settlement is
drawn thro"gh a memorand"m of "nderstanding and if the amo"nt is paya#le in
instalment, post dated che("es are o#tained from the #orrowers so that there is
ade("ate press"re on him to $eep his promise and in case of dishno"r of che("es #an$
may have option to proceeds legally "nder section 18! of Negotia#le Instr"ments ,ct,
1!!:. In case of small #orrowers, #an$ are also offering fresh loan so that the #orrowers
can start their activity afresh.
Conclusion
7oan compromise sho"ld #e considered as a last resort of recovery. It sho"ld #e
a vol"ntary e&ercise. It calls for a professional approach in preparing the compromise
proposal. In terms of amo"nt involved in N2,s, s"ccess of #an$s in recovery thro"gh
loan compromise is limited d"e to lac$ of awareness of s"ch schemes #y small farmers,
small traders etc* stricter vigilance norms #eca"se of which the staff is hesitant to
entertain compromise cases* diffic"lties in fi&ing staff acco"nta#ility #efore
recommending a proposal* etc. %he -ompromise proposals from willf"l defa"lters sho"ld
not #e entertained. %hese need to #e addressed. %h"s, appreciating the growing
53@
importance of loan compromise, =R%s have rightly started organising the 7o$adalats
which dispose off small cases thro"gh compromise. It is desired to $eep "p this tempo.
04440
%ha"ter-13
RE7ABI5ITATION OF SICA SSI NITS

I. !dentification of a Sick SS! >nit
,s per the Dovernment of India definition, a small)scale ind"strial "nit is the one in which
case, the investment in the plant and machinery does not e&ceed Rs.155 la$hs
6enhanced to Rs. :55 la$hs for certain specified items9 and in the case of ancillary "nit
the same sho"ld not e&ceed Rs.4: la$hs. Identification of a sic$ SSI "nit has to #e
done $eeping in mind the official definition as provided #y the Reserve Ban$ of India.
,ccordingly, any #orrowal acco"nt, which #ecomes s"#)standard when interest or
principal is overd"e for more than 8 months or, its acc"m"lated losses e&ceed :5< of
net worth and the "nit has #een in commercial prod"ction for at least 4 years, is
considered as sic$ SSI "nit.
II6 Causes of Sickness
-a"ses of ind"strial sic$ness have to #e viewed from the general #ac$gro"nd of an
ind"strial economy. ,t any point of time, the pro#lems of ind"stries are not "niform.
However, factors generally responsi#le for sic$ness can #e divided into e&ternal and
internal. E&ternal factors are those over which the "nit has no direct control. B"t,
internal factors are those which are within the control of the management of the "nit.
Sic$ness can originate right from the stage of conception of an idea to set "p the "nit till
the stage of crystalli+ation of the concept and.or implementation of the pro0ect.
53>
0ora""*, no account 'a""s sic1 a"" o' a sudden. 2e'ore t)e account 'a""s sic1,
-e do get signa"s 'ro various sources -)ic) inc"ude3
a9 7edger Boo$
#9 Stoc$ Inspection
c9 =isc"ssion with Borrowers
d9 Mar$et Reports
e9 'inancial Statements
A s*steatic stud* o' t)e !a"ance s)eet and proft 4 "oss account gives t)e
'o""o-ing signa"s3
5a6 7nsatis'actor* trend in profts.
5!6 8ise in de!ts.
5c6 ()ortage o' -or1ing 'unds.
5d6 7nsatis'actor* position o' e9uit*.
5e6 :iversion o' s)ort ter 'unds 'or "ong ter uses.
5'6 2ui"ding up o' unproductive assets
6g9 Fnhealthy acco"nting practices
;iven !e"o- are t)e iportant points 'or a !a"ance s)eet o' a potentia" sic1
unit -)ic) can give soe indication o' sic1ness<
Ba$ance S*eet of a #otentia$ Sick SSI nit
Sr8No8 1iabilities &ssets
1. Current 1iabilities Current &ssets
a9 Short term #orrowings wo"ld #e
high and indiscriminate )
irreg"larity in the cash credit for
the last two months
-"rrent assets wo"ld stand
depleted and, whatever e&ist wo"ld
consist ofL
#9 %here wo"ld #e some "npaid
stat"tory lia#ilities s"ch as
wages, #on"s etc.
a9 =ead stoc$ and non)moving
inventory
c9 S"pplies wo"ld remain "npaid
for a long period
#9 Bver d"e de#ts mostly
irrecovera#le
d9 -onsidera#le amo"nt of
contingent lia#ilities wo"ld e&ist
mostly d"e to law s"its
c9 Negligi#le cash and #an$ #alance
4. -erm 1iabilities i)ed &ssets
7ast two monthly loan %hese wo"ld appear inflated and
53B
installments wo"ld remain
"npaid and wo"ld contin"e
non)reali+a#le
8. E'uity !ntangible &ssets
It is grad"ally red"cing %hose incl"ding losses and
capitali+ed e&penses wo"ld #e
prominent
III1 Re*a0i$itation of Sick SSI nits
In general, a sic$ SSI "nit is defined in terms of its capacity to generate internal f"nds. ,
sic$ "nit fails to generate internal s"rpl"s on a contin"ing #asis and depends on its
s"rvival on fre("ent inf"sion of e&ternal f"nds. Hence, need for reha#ilitation or n"rsing
is very m"ch felt. =etails of reha#ilitation or n"rsing are disc"ssed as "nderL
?8 .bBectives of Nursing %rogramme:
%o ena#le the "nit to operate at a profita#le level.
%o ad0"st the irreg"larity in the acco"nt, if any, according to a phased programme.
%h"s, the n"rsing programme involves two aspects i.e., 6i9 preparation of feasi#ility
report #efore implementing the n"rsing programme and 6ii9 caref"l monitoring of the
performance of the "nit d"ring the n"rsing period.
;8 eatures of Nursing %rogramme:
%he programme sho"ld #e caref"lly drawn and all do"#ts m"st #e clarified #efore
chal$ing o"t the same. It m"st #e s"pported #y the #an$ and the #orrowers.
,s the "nit is already heavily de#t #"rdened, the programme sho"ld #e #ased on
well)calc"lated #rea$ even point. Fnder n"rsing, the "nit sho"ld operate at a m"ch
higher level than #efore and in this regard, the following ("estions m"st #e
answeredL
Is it possi#le to operate at a higher level "nder present mar$et
conditionsR
3ill present plant and machinery allow man"fact"ring o"tp"t at
higher level of activityR
-an present organi+ation cope with increased level of activityR
%o #e a#le to operate at higher level, additional finance will #e necessary and
especially in cases where the net worth of the "nit has #ecome almost negative.
In s"ch cases, the end "se of f"nds m"st #e caref"lly monitored.
53C
%he repayment programme m"st #e caref"lly wor$ed o"t, eno"gh f"nds m"st #e
availa#le to the "nit to operate at the desired level with a view to ens"ring
contin"ed internal generation of s"rpl"s.
%he n"rsing programme sho"ld #e decided #y the concerned a"thorities within a
reasona#le time. %he longer the decision)ma$ing period, the greater wo"ld #e
magnit"de of the pro#lem.
A8 $ecision on Nursing
Jeeping in view all the possi#le o"tcomes, ris$ involved and the irreg"larity in the
acco"nt, #an$ decision sho"ld aim at promoting the #"siness activity and not the
#orrower as an individ"al. %he decision sho"ld #e #ased on li$elihood of possi#le
recovery. 'inally, #an$ can s"pport the #orrower provided he has e("al interest in
coming o"t of the sic$ness. In other words, #an$s decision to n"rse a "nit co"ld #e
0"stified if it canL
Denerate ade("ate activity and employment
-ontrol the #"siness activity effectively
-ommit additional f"nds, if necessary
Elicit co)operation from wor$ers, s"ppliers of materials, etc.
C8 %reparation of Nursing %rogramme
*&+ &ssessment of easibility of the %roBect :
%he programme sho"ld #e finali+ed after a detailed st"dy of the sic$ "nit and
"nderstanding the pro#lems of the "nit. In this conte&t, the following points sho"ld #e
$ept in mind*
6i9 [Is the pro0ect feasi#le i.e. to operate a#ove the #rea$)even pointR
6ii9 ,re the prevailing mar$et prices rem"nerativeR Is it necessary to change
the pricing policyR
6iii9 ,re raw materials availa#le to prod"ce goods at the desired level of
activityR
6iv9 ,re there any constraints s"ch as power, transport #ottlenec$s, pa"city of
space, s$illed wor$ers etcR
6v9 ,re of the e&isting machineries a#le to cope with the increased level of
activityR
53?
6vi9 Is the #orrower prepared to accept the financial discipline #eing imposed
#y the #an$R
If all the a#ove ("estions are positively answered, the pro0ect is feasi#le and sho"ld #e
considered for n"rsing programme.
6B9 &ssessment of &dditional unds: ,dditional f"nds are re("ired for the followingL
6i9 Stat"tory lia#ilities payments to creditors to #e paid,
6ii9 2ayments to other creditors
6iii9 Minim"m f"nds re("ired to p"rchase machineries to raise the
prod"ctive capacity to the desired level
6iv9 Minim"m wor$ing capital re("irements till cash cycle gets into
motion.
6v9 Bperating deficits in the short r"n arising as per cash flow
estimates and any other shortage therein to #e provided for.
Sources of unds include:
6i9 ,dditional capital contri#"tion from the #orrower and deposits from the friends
and relatives
6ii9 =isposal of e&cess stoc$ or fi&ed assets not re("ired,
6iii9 Speedy recovery of o"tstanding #ills. #oo$)de#ts ,
6iv9 Internal generation of f"nds
6v9 ,dditional wor$ing capital limits
6vi9 ,dditional term loan for ac("isition of fi&ed assets
6-+ %reparation of Cash lo0 Estimates* Ban$ will have to prepare a cash flow
statement showing cash flow estimates d"ring the reha#ilitation period. %he
estimates sho"ld #e prepared on the #asis of the realistic considerations. %he
n"rsing programme m"st also have a provision to sanction ad)hoc limit in case the
process of credit sanction ta$es a long time and in the meanwhile, the "nit may need
a small amo"nt for certain immediate payments.
6=9 &rrangements made 0ith other creditorsL Before finali+ing the n"rsing
programme, #an$ may see$ co)operation from the creditors for s"pply of raw
materials. It m"st #e ens"red that s"pply of raw materials will contin"e on reg"lar
#asis and at economical price. Ban$ m"st ens"re that the creditors will contin"e to
grant normal credit to the #orrowers.
53A
6E+ /arketing &rrangements L 3hile finali+ing the n"rsing programme, #an$ have to
st"dy the mar$eting pro#lems and offer s"ggestions. S"ch s"ggestions wo"ld
incl"de*
, prod"ct that has lost its name in the mar$et with the trader #"t not with the
"ltimate "sers is easy to re)esta#lish #y restoring confidence of the former.
If e&isting sales)agents are not interested in contin"ing or not needed #eca"se of
high cost, there co"ld #e two options* either to appoint other s"ita#le selling
agents or to create a wide networ$ of selling agents who co"ld #e "sed to reali+e
the overd"e de#ts "nder grad"al collection arrangements thro"gh steady
s"pplies of the prod"ct to s"ch parties.
6'9 &rrangement for Recovery of .verdue $ebts and $isposal of un0anted
&ssets: In some cases, it is possi#le that certain assets which are "nwanted, sho"ld
#e disposed off. 3e have to identify s"ch assets in cons"ltation with the #orrower.
3e m"st ens"re that the #orrower will ma$e all efforts to recover overd"es from
c"stomers. Before deciding on whether to n"rse the "nit or not, we sho"ld $now
what co"ld #e the reali+a#le amo"nt from the disposal of "nwanted assets.
6D9 ree,ing of E)isting Bank Borro0ingsL %his system is s"ggested for smooth
#an$ing operations. -ash credit #alance against dead stoc$, incl"ding non)moving
inventory and over d"e de#ts, sho"ld #e separated and fro+en. Interest thereon
sho"ld also #e $ept separate and fro+en. 'or the p"rpose of deciding on the new
financial arrangements, the c"rrent assets, which are in "se, sho"ld only #e
considered. %he distinction #etween fro+en and operating acco"nts gives
operational control thro"gh sec"rity of transactions at the lenderAs end.
6H9 &rrangements made 0ith .ther inancial !nstitutions and E'uity Holders
for additional fundsO In case of the #orrowers having facilities with more than one
credit instit"tion, the n"rsing programme co"ld #e finali+ed with the consent of the
consorti"m #an$ers. %he possi#ility of iss"ing additional e("ity shares sho"ld also
#e e&amined. Fnder the n"rsing programme, the sta$e of other lenders sho"ld #e
finali+ed.
6I9 &rrangements for /anagement %erformance L It is often tho"ght of replacing
the old management with new management to overcome the fail"re of the former.
'or ens"ring the performance, the action can #e as drastic as removing the entire
top management. %his is s"ggested in case of mis)management, mis)"se of f"nds,
wrong inheritance and other similar sit"ation. 7enders have a right to participate in
534
management and decision ma$ing. %he critical positions are finance, p"rchases,
sales and prod"ction. S"ccess of these e&ec"tives sho"ld #e meas"red on the
#asis of growth of the #orrowersA #"siness and safeg"arding of lendersA interest.
:8 6uidelines on /onitoring
Having decided to n"rse that "nit, the #an$ has to "nderta$e the follow)"p activities
mentioned in the s"cceeding paragraphs.
1. $eveloping !nformation System L 'or the p"rpose of n"rsing, it is necessary that
information is collected periodically. S"ch information to #e collected depends on the
individ"al case. Statements and ret"rns normally collected from #orrowers wo"ld
incl"deL
Stoc$ Statements
3ee$ly.Monthly.M"arterly #"dgets and act"al fig"res for
prod"ction, sales, p"rchases, overhead e&pendit"re etc.
Monthly cash flow statements
Bperating Statement
Balance Sheet
%he follow "p action starts with the collection of necessary information from the
#orrower. Before n"rsing the "nit, we m"st indicate information re("ired so that the
#orrower can develop his own information system.
48 Revie0 of %erformanceL 3e have to review the performance of the #orrower
reg"larly, say monthly. S"ch review performance sho"ld aim at e&amining whether there
has #een improvement in the wor$ing of the "nit. 3e have to ens"re that*
%here is not m"ch variance #etween the pro0ected and act"al fig"res of
prod"ction and sales
%he f"nds are "sed as agreed "pon. If the cash #"dget system is
introd"ced, we sho"ld see that the cash is managed as e&pected.
8. /onitoring &reas of EeaknessL Review of the acco"nt reveals the areas of
wea$ness. , detailed st"dy of s"ch areas wo"ld s"ggest the line of action. 'or
instance, if mar$eting was o#served as a ma0or area of wea$ness, the steps sho"ld #e
ta$en to improve, s"ch as arrangements with salesmen.dealers, prod"ct design, pricing
strategy etc.
In several cases, wea$ness may #e in the organi+ation itself. %he organi+ation can
#e strengthened #y an appointment of the professional personnel. %he #an$ may also
535
nominate one of its e&ec"tives as a director to o#serve policy decisions that are #eing
ta$en.
In regard to financial wea$ness, following alternatives are availa#leL
%o provide additional credit facilities
%o convert e&cess short term credit into term loan
%o modify short term credit facilities
%o red"ce interest rate and other charges
%o rephase the term loan instalment so that a longer repayment period is
granted
%o ad0"st a certain portion of the sale proceeds towards the irreg"larity in
the acco"nt
%o grant repayment holiday for a definite period
%here co"ld #e some small "nits, which have #ecome sic$ on acco"nt of e&ternal factors
li$e lac$ of power s"pply, water, raw materials, etc. S"ch "nits may #e referred to the
State level -o)ordination -ommittee, which has #een set "p at the state level with
representatives of #an$s, term lending instit"tions, state government etc.
REBH&B!1!-&-!.N . S!C3 SS! >N!-S ( $os and $onPts
Ban$s are e&pected to handle the sic$ SSI "nits as per the g"idelines of the RBI. %heir
wor$ starts from the day when a sic$ "nit is identified and concl"des when the acco"nt is
either fo"nd potentially not via#le or is n"rsed to #ring #ac$ to health. It is attempted to
offer certain tips in the form of =os and =onAts L
1. Early identification of the sic$ "nit is necessary for the effective c"re of sic$ness.
B"t it is o#served that #ranches commit a lot of delay in identifying sic$ "nit and
also in reporting to the regional office, the reason #eing a fear)element in their mind
i.e reporting of more and more sic$ "nits to the controlling office which might
"ndermine their performance. In this regard, to ens"re the early identification of the
sic$ "nit #y #an$ #ranches, s"ita#le arrangements need to #e made. Bne of s"ch
arrangement may #e to ed"cate and motivate field staff for timely identification of
sic$ "nits. 'or this p"rpose, each #an$ may have to prepare a #oo$let containing a
few s"ccess stories narrating how early identification helps in reha#ilitating a sic$
"nit .
4. 'or identification of a sic$ "nit, a"dited #alance sheet is a m"st to ascertain the level
of acc"m"lated losses and networth. If a"dited #alance sheet is not availa#le d"e to
533
certain gen"ine diffic"lties, the #ranch manager may accept a provisional #alance
sheet d"ly signed #y the entreprene"r. Even this is not possi#le, the manager may
visit the SSI "nit and prepare a report. Bn the #asis of cond"ct of acco"nts and the
factory inspection report, the manager may form an opinion that the "nit had
#ecome sic$ and proceed to assess ca"ses of sic$ness and via#ility.
8. ,fter identification of the sic$ "nit , a via#ility report has to #e prepared #y the
#orrower himself or with the help of some o"tside cons"ltant. In most of the cases,
o"tside cons"ltantZs help is so"ght for. B"t in the conte&t of cons"ltantZs report,
#an$Zs e&perience is not satisfactory. M"ite often, it is e&perienced that the reports
of the cons"ltants may not reveal ma0or wea$nesses of the pro0ect, and
ass"mptions made in their report for estimating sales, #an$ finance, etc., are fo"nd
to #e "nrealistic. Hence #an$s have to ma$e many changes in the pro0ect report
which almost leads to preparing the same afresh. So, it is necessary to ma$e
arrangements for ens"ring a cons"ltation with o"tside cons"ltants in the matters of
form"lation and implementation of the pro0ect report at vario"s stages.
;. 'or the preparation of reha#ilitation scheme and implementation of the same,
coordinated efforts of #an$s and financial instit"tions are called for. =espite several
g"idelines from the RBI on consorti"m advances, m"ch is desired to p"t these
g"idelines into practice. -onse("ently, the process of reha#ilitation of sic$ness
s"ffers. %o strengthen the consorti"m arrangements, it is s"ggested that there
sho"ld #e a fair "nderstanding among the mem#ers of consorti"m to ens"re that L
6i9 ,ppraisal sho"ld #e at one stage instead of carrying o"t the same at each
instit"tional level.
6ii9 =oc"mentation sho"ld #e completed at one stage.
6iii9 %here sho"ld #e free e&change of information regarding o"tstanding
#alances, position of sec"rities etc.
6iv9 %here sho"ld #e reg"lar review meetings with the #orrowers.
6v9 %here sho"ld #e common terms and conditions.
Besides strengthening consorti"m arrangements, it is also necessary to adopt a time
#o"nd programme for preparation and implementation of the reha#ilitation pac$age for a
sic$ "nit. Efforts sho"ld #e made to complete these tas$s in a period of si& months to
safeg"ard the interest of sic$ "nits.
:. 'or effective preparation and implementation of the reha#ilitation pac$age,
attit"dinal changes are desired #oth in #an$s and sic$ companies, so that f"ll tr"st is
533
esta#lished. -onse("ently, the companies are ena#led to disclose their pro#lems
with the #ranch managers more openly and ("ic$ly.
>. 'or effective co)ordination, ZSic$ Fnits -ellZ set "p at the head office and +onal
offices of the #an$, need to #e strengthened to offer the re("ired s"pport and
g"idance to the #ranches.
?. 'or monitoring, the information from sic$ "nits is necessary. =espite good efforts
on the part of the #an$, the re("ired information is not coming forth. In this conte&t,
it is s"ggested that reliefs and concessions offered to them "nder reha#ilitation
pac$age may #e withdrawn, when information is not s"#mitted. B"t the same may
#e restored once the information is made availa#le to the #an$s.
!. It is reported in several st"dies that SSI "nits fall sic$ mostly on acco"nt of
managerial deficiencies. Mismanagement or mis"se of f"nds is common. Ban$s
may ta$e a stern action in cases when there is a deli#erate attempt to ma$e the "nit
sic$ #y siphoning of f"nds. %o deal with s"ch cases, the e&isting loan agreements of
#an$s may #e ree&amined. It is s"ggested to insert a separate cla"se for penal
action against those responsi#le for siphoning #an$s f"nds. Bne more s"ggestion
may #e made here. In case of total fail"re of "nits , promoters of s"ch companies
sho"ld #e #lac$ listed from o#taining fresh ind"strial licences as well as #an$
finance treating them as willf"l defa"lters.
. It is not necessary to n"rse every sic$ "nit. Branch managers sho"ld #e choosy in
this regard. 3illf"l defa"lters and cases where "nit is not considered potentially
via#le d"e to demand recession and no scope for diversification, need not #e
considered for n"rsing. %here sho"ld #e proper compliance of the RBI.#an$
g"idelines as regards reliefs and concessions. Ban$ managers sho"ld not
recommend #eyond the stip"lated norms.
15. It sho"ld not lead to a sit"ation that a sic$ "nit remains "nder n"rsing for a long time.
%he "nit can #e n"rsed for a ma&im"m period of seven years and concessions in
interest rate, etc., sho"ld #e given "pto five years. In rare cases, a second dose of
n"rsing can also #e considered which sho"ld #e for a short period of one year. It
sho"ld #e the policy of the #an$ to withdraw concessions and recall advances even
d"ring the period of reha#ilitation if f"nds are siphoned off. In any case close
monitoring of performance of sic$ "nits is a m"st.
)555)
53@
%ha"ter-1
SCCESS STORIES ON RE7ABI5ITATION OF SICA
SSI NITS 5ESSONS
!N-R.$>C-!.N
Ind"strial sic$ness can #e defined as a phenomenon where#y a large n"m#er of "nits
are "na#le to meet their d"es to #an$s and financial instit"tions or service their de#ts
d"e to deteriorating financial position for a variety of internal and e&ternal ca"ses.
%oday, ind"strial sic$ness is not pec"liar to any co"ntry or any ind"stry. In advanced
co"ntries, treatment given to c"re ind"strial sic$ness is different from that of developing
co"ntries. In advanced co"ntries, with #etter sec"rity systems and a#"ndant capital, the
approach to sic$ness is to restore a "nit to normalcy thro"gh restr"ct"ring devices within
a short time or else, close it down. S"ch easy and straight forward options are not
availa#le for large la#o"r a#"ndant economies li$e India which can ill afford large scale
"nemployment either of la#o"r or of val"a#le prod"ctive assets ca"sed #y sic$ness.
'"rther, s"#stantial f"nds of #an$s and financial instit"tions are #loc$ed. Since,
ind"strial sic$ness is increasing at a faster rate, everyone is concerned. In India, aro"nd
15 per cent of #an$ credit is #loc$ed in sic$ "nits. Sic$ness in the small scale ind"stries
is m"ch severe. %here has #een an incremental rise of aro"nd 85 per cent in the
n"m#er of sic$ "nits in this sector. So, #an$s, financial instit"tions, Dovernment and
entreprene"rs are deeply worried of "nprecedented growth in sic$ "nits and loo$ for
remedial meas"res.
53>
%o com#at ind"strial sic$ness, a n"m#er of meas"res have #een "nderta$en in India.
%hese meas"res incl"de "niform definition of a sic$ company, common criterions for
assessing via#ility of the sic$ company, concessions to #e granted in interest rate,
promotersA contri#"tion etc. #y #an$s "nder reha#ilitation pac$age, concessions from
government to a sic$ company 6in respect of electricity, sales ta&, e&cise d"ties,
transportation rates, etc.9, coordinated efforts #y forming consorti"m of #an$s and
financial instit"tions, creation of a separate Board for Ind"strial 'inance and
Reconstr"ction etc. %his list of meas"res can go on.
NEE$ .R -HE S->$4
=espite the a#ove mentioned meas"res, sic$ness in ind"stries is on the rise. %o
ela#orate, the rate of s"ccess in reha#ilitation of sic$ "nits is less than 15 per cent of
total sic$ "nits "nder reha#ilitation scheme. %his low rate of s"ccess has #ecome a
so"rce for demotivation. No one wo"ld li$e to ta$e initiative in reha#ilitation activities.
So, to motivate #oth financial instit"tions and entreprene"rs in reha#ilitation e&ercise, it
is worthwhile to #ring to their notice of those "nits which were sic$ at one time and, d"e
to hard wor$ and the right approach of #an$s and financial instit"tions, the same were
s"ccessf"lly reha#ilitated. By st"dying s"ch "nits, the #an$s and financial instit"tions
wo"ld not only get motivated #"t also gain confidence in the tas$ assigned to them. B"t
s"ch s"ccess stories or live cases are not readily availa#le. '"rther, lessons from s"ch
s"ccess stories are yet to #e drawn for the #enefit of entreprene"rs, #an$s, financial
instit"tions and the Dovernment. Jeeping these felt needs in mind, the a"thor attempted
to collect s"ch rare cases from #an$s and financial instit"tions in India. In all, 1: cases
were gathered. %he analysis of these cases was done to draw lessons on reha#ilitation.
III. &B.>- S>CCESS C&SES
It was decided to collect as many s"ccess stories as possi#le. It was also decided to get
the cases prepared #y #an$s and financial instit"tions. %herefore, #an$s and financial
instit"tions were contacted. Initially, Small Scale Ind"stry =epartment in each of these
instit"tions was re("ested to identify at least one s"ccessf"lly reha#ilitated "nit and
provide details of the concerned #ranch manager . officer responsi#le for handling the
same. 'ifteen instit"tions 61; #an$s pl"s 1 financial instit"tion9 provided the details.
53B
%hereafter, the concerned #ranch managers.officers in each of these 1: instit"tions were
approached to write a s"ccess story of the identified "nit incorporating the followingL
1. Identification data i.e. location, year of esta#lishment, constit"tion, prod"cts,
ind"stry, credit facilities en0oyed, etc.
4. 'actors responsi#le for motivating the entreprene"r to start the "nit.
8. 3hen did the "nit start e&periencing pro#lems R
;. 3hen was it declared as a sic$ "nit R
:. -a"ses of sic$ness
>. =etails of the reha#ilitation pac$age.
?. Implementation of the pac$age
!. Strategies adopted #y the entreprene"r to revive the "nit
. 2rogress shown d"ring the post implementation period
15. Involvement of the entreprene"r, #an$s and others in the s"ccessf"l
reha#ilitation
11. 7atest position of credit facilities
14. ,ny other "sef"l information to disc"ss a#o"t the progress of the "nit after
reha#ilitation
%he "nits incl"ded in the sample are as "nder L
1. , tiny "nit in the SSI sector 619
4. ,ncillary "nit 619
8. Fnit financed "nder %echnocrat scheme 619
;. E&port oriented "nit 619
:. Fnit financed "nder I=BI Reha#ilitation Scheme 619
>. Fnits in which death of a $ey director and ta$eover of management #y his
relative 649
?. Fnits ta$en over #y professionals 689
!. Fnits e&periencing pro0ect over r"n and falling sic$ at the infant stage 649
. Fnit e&periencing strained la#o"r relations 619
15. Fnits affected #y recession in ind"stry 649
11. Fnit was first considered for recovery thro"gh the co"rt #"t s"#se("ently it was
decided to reha#ilitate 619
53C
Bther characteristics of the "nits in the sample are disc"ssed #elow L
,. Eight o"t of 1: "nits came into #eing d"ring 1?5As. ,ll of the "nits are relatively
old #eing in operations for the last ! years or so.
B. Fnits in the sample are located in different parts of the co"ntry. 'o"r of them are
in Maharashtra. Bthers are from %amil Nad" 689, Jarnata$a 649, D"0arat 649,
3est Bengal 649, Jerala 619 and Fttar 2radesh 619.
-. ,ll "nits are engaged in man"fact"ring activities. Most of them i.e. ? o"t of 1:
are in engineering ind"stry. Bther ind"stries in which "nits are engaged incl"de
electronics, te&tile, garment and hosiery, paper, flo"r mill etc.
=. Most of them i.e. 11 o"t of 1: "nits are private limited companies. 'o"r are
proprietorship concerns.
E. ,ll the "nits have so"ght finance from #an$s, state financial instit"tions, and
other government sponsored financial instit"tions e&cept 8 "nits which raised
term finance from term lending instit"tions.
!N$!N6S . -HE S->$4
?8 Estimated period re'uired for declaration as a sick unit from the
date of occurrence of cash losses:
It was attempted to wor$ o"t estimated period ta$en #y the #an$ to declare each
one as a sic$ "nit from the date of occ"rrence of cash losses for the first time. It
was fo"nd that the period varied from one case to another. Most of the cases i.e.
o"t of the total, were declared [sic$A within a period of 0"st a year or two from
the data of occ"rrence of cash losses in the #oo$s, for the first time. In other
cases, the period was aro"nd 8); years. It was also fo"nd in these cases that
occ"rrence of cash losses was contin"o"s and therefore, their e("ity was eroded
#y more than :5 per cent in a short period of 4)8 years.
4. Causes of Sickness
Ma0or ca"ses of sic$ness of "nits incl"de pro0ect over)r"n, demand recession,
la#o"r pro#lems, "nfavo"ra#le government policy, death of a $ey director, non)
availa#ility of raw materials and other inp"ts, managerial deficiencies etc. In two
cases, sic$ness occ"rred mainly on acco"nt of e&ternal forces on which they had
53?
no control. S"ch e&ternal forces incl"de death of a $ey director and li#eral import
policy of the government. In other fo"r "nits, sic$ness was d"e to partly internal
ca"ses 6lac$ of "nderstanding among directors, strained la#o"r relations, non)
availa#ility of raw materials on timely #asis d"e to improper planning, slow
recovery of d"es from c"stomers etc.9 and partly e&ternal ca"ses 6mar$et
recession, "nfavo"ra#le government policy, stiff competition etc.9. In remaining
cases, i.e. "nits, sic$ness was on acco"nt of internal ca"ses and pro0ect over)
r"n was ("ite common. %he pro0ect over)r"n was d"e to improper planning and
ineffective co)ordination and control. In 4 o"t of "nits, sic$ness arose when
wor$ers went on a stri$e d"e to "nhealthy attit"de of the entreprene"r. Bn the
whole, it was fo"nd that 14 "nits fell sic$ d"e to internal ca"ses and managerial
deficiencies in $ey f"nctional areas was predominantly fo"nd.
A8 Nature of Rehabilitation &ssistance
Ban$s . State 'inancial -orporations prepared the reha#ilitation scheme $eeping
in mind norms set for concessions, reliefs etc. #y the RBI. %he nat"re of
assistance was not common. -oncessions and reliefs are in the form of waiving
of penal interest rate, f"nding of "npaid interest on cash credit and term loan and
of "ncovered portion of irreg"larity in the cash credit acco"nt, rephasement of
overd"e installments of term loan, meeting of cash losses till the "nit #rea$s
even, rela&ing terms and conditions s"ch as low or nil margin longer moratori"m,
lower interest rate, assessing wor$ing capital on need #asis and low contri#"tion
from promoters. In most of the cases, certain concessions were common which
incl"ded f"nding of overd"e interest, rephasement of overd"e installments,
creation of 3or$ing -apital %erm 7oan 63-%79 and irreg"larity in the cash credit
to meet cash losses. In one case, interest charged "ntil the commencement of
#"siness was ref"nded #eca"se the "nit #ecame sic$ mainly d"e to application
of interest. In this case, there was a pro0ect over r"n #y two years. In two cases,
promotersA contri#"tion was as low as :< of the total wor$ing capital limits. In
other two cases, the penal interest was waived. ,dditional sanction of wor$ing
capital on @need #asisA was commonly o#served. Similarly, in many cases, fresh
sanction of term loan was accorded #y financial instit"tions for the p"rpose of
modernisation of machineries. In two cases, change of management was
considered as a part of reha#ilitation.
53A
,ll "nits were fo"nd to #e happy with the reha#ilitation pac$age which was well
s"ited to meet their re("irements. %o wor$ o"t the right $ind of pac$age, it is
necessary for a #an$er to have a thoro"gh "nderstanding of the sic$ "nits. %his
"nderstanding sho"ld not only relate to wor$ing of the "nits #"t also of their
financial str"ct"re and pro0ected cash flows. %h"s for revival of sic$ness, it is
desired to wor$ o"t the most appropriate pac$age of reha#ilitation.
C8 Strategies adopted by the units for revival
Fnits in the sample adopted different strategies for revival $eeping in mind the
main ca"ses of sic$ness. %hese strategies are disc"ssed as "nder L
6a9 $iversification : Seven o"t of 1: "nits went in for diversification in
different forms. %hree "nits changed the prod"ct line since demand for the
e&isting prod"ct.s was inade("ate. 'or this $ind of diversification, e&isting
reso"rces 6machineries, materials and wor$force9 were "tili+ed. %he other type
of diversification was of shifting from man"fact"ring activities to 0o#)wor$. %his
need was felt necessary #eca"se, the man"fact"ring as an activity, was fo"nd
"neconomical. %his o#servation was made in two "nits. Bne "nit diversified its
concentration from e&ports mar$et to local mar$et in view of the fact that the
demand for e&ports was declining sharply. In other "nit, there was a shift in
concentration from local mar$et to e&ports mar$et.
6#9 Change of /anagementL -hange of management as well as ownership was
inevita#le on the death of an entreprene"r. In one "nit, "pon the death of the
entreprene"r his wife stepped in. She was fo"nd to #e e("ally competent
and highly committed. Nat"rally, she was a#le to revive the "nit. In another
case, a son of an entreprene"r was ind"cted on the death of the latter. In this
case also, incoming entreprene"r was highly competent and adopted modern
methods of management. %herefore, the "nit was f"lly revived. In three
cases, professionals were introd"ced to revive the "nits. In the conte&t of
change of management it is worth referring to one "nit in which case, a newly
ind"cted management decided not to accept any rem"neration from it "ntil
#an$ loans were f"lly repaid. Bne more "nit is interesting to refer here. Ban$
filed the co"rt case for the recovery since the management was not
5@4
competent. B"t, when the management was changed, #an$ withdrew the
case from the co"rt and reha#ilitated the same. %here was a positive
response to the efforts p"t in #y the new management. %h"s, the "nit was
revived.
6c9 inance : %here are two "nits which #ecame sic$ d"e to shortage of
f"nds. Having reali+ed the need for f"nds, the concerned entreprene"rs
managed to #ring in additional f"nds from friends and relatives. %hese f"nds
were not withdrawn "ntil the "nits were f"lly revived.
6d9 -echnical &spects L In one "nit, re0ection of finished goods was on
the higher side. It was rightly decided #y the entreprene"r to modernise
machineries and, when the same was done, it was revived. In another "nit, there
was pro0ect over)r"n since the re("ired machinery was not made availa#le in
time. %he machinery was imported one. -onse("ently, the "nit #ecame sic$ #"t
the entreprene"r decided to go in for a second hand machinery which was locally
availa#le. 3ith some minor repairs, the machinery started f"nctioning. 3ith this
arrangement, the "nit was revived. In one "nit, cost of prod"ction was on the
higher side. 3ith the introd"ction of improved technology, the cost red"ced.
S"#se("ently, the "nit was revived.
6e9 1abour L In one case, wor$ers went on stri$e for a long time d"e to
"nsatisfactory attit"de of the entreprene"r. Bn the death of the
entreprene"r, his son was ind"cted to the "nit who adopted
altogether a different approach towards wor$ers. He was a#le to
p"rs"e the wor$ers to come for the wor$. He also co"nselled them
ade("ately. -onse("ently, the "nit was revived. In another case,
prod"ctivity of the wor$ers was very low. %he entreprene"r rightly
decided to offer incentives on the #asis of o"tp"t. %his was proved to #e
a ma0or so"rce of inspiration. -onse("ently, the prod"ctivity of wor$ers
improved significantly. %h"s, the revival of the health of the "nit co"ld
ta$e place. It is worth to $now that in the same case, the concerned co"rt
a"thorities granted retrenchment of wor$ers which also proved to #e a
"sef"l remedy for revival. Entreprene"r of the "nit presented his case so
5@5
well #efore the co"rt a"thorities that his re("est was considered here, a
lot of home wor$ relating to economics of retrenchment was done.
6f9 .thers : %here are some more strategies adopted for revival. Bne "nit
decided to p"rchase a generator to overcome the power shortage. %his was a
right decision leading to the revival of the "nit. In another case, shortage of raw
material 6raw steel9 was the main ca"se of sic$ness. %he "nit rightly decided to
#ecome a s"#sidiary of a mini steel plant. %his led to revival of the "nit. %o
improve the ("ality of the prod"ct, one entreprene"r hired the services of a
cons"ltant who s"ggested vario"s ways for improving the ("ality. 3hen the
cons"ltantAs report was implemented, the ("ality of the prod"ct improved. %h"s,
the "nit was revived.
%he a#ove mentioned strategies are few in n"m#er. %here can #e some more
strategies depending "pon the nat"re of sic$ness. 'or selection of the right
strategy, it is necessary to diagnose ca"ses of sic$ness correctly.
:. -ime factor) In the conte&t of revivals of sic$ "nits, time factor is the most
important one. %he revival can ta$e place if decisions are ta$en at the right point
of time. It is necessary to have a time #o"nd programme for different aspects
of reha#ilitation which incl"de detection of sic$ness, cond"cting a via#ility st"dy,
preparation of proposal for reha#ilitation, implementation of the proposal and
monitoring of the pro0ect. It was fo"nd in the "nits , "nder the st"dy, that
entreprene"rs paid s"fficient importance to the time factor. %hey were fo"nd to
#e eager to get their "nits revived soon. %herefore, the proposals were
s"#mitted on timely #asis. Ban$s and financial instit"tions also adopted a time
#o"nd programme which is #roadly indicated for vario"s items of wor$ as "nder L
0 -ond"cting of via#ility st"dy L 1 month
0 2reparation of reha#ilitation scheme L 1 month
0 =is#"rsement L 1 month
%he a#ove mentioned time sched"le was followed in most of the cases. %h"s, it can
#e concl"ded that for revival of sic$ness #oth entreprene"rs and #an$ers have to
adopt a time #o"nd programme to carry o"t different aspects of reha#ilitation.
5@3
>. %rofile of Entrepreneurs)It is interesting to st"dy the #ac$gro"nd of
entreprene"rs. %hey were fo"nd to #e hard wor$ing which was evident right from
the stage of detection of sic$ness till its c"re. %hey were fo"nd to #e highly
committed and therefore, they were prepared to sacrifice even their gains. %hey
didnAt e&pect any ret"rn from the "nit "ntil it was revived. %heir integrity was
"ndo"#tedly of higher order. %his was considered as a #asis for providing
financial assistance to the "nits. It was also fo"nd that there was a fair
"nderstanding among the directors of the "nits and, therefore, decisions were
ta$en promptly. '"rther, the gro"p of directors was well #alanced in terms of
e&pertise. Entreprene"rs were fo"nd to #e open to #an$s and financial
instit"tions. %his helped in esta#lishing a #etter rapport #etween the two. %hey
were fo"nd to #e cooperative to the financial instit"tions in s"pplying the re("ired
information and complying with necessary formalities. %hey were fo"nd to #e
ris$ ta$ers and, therefore, decisions were ta$en promptly. %hey were also fo"nd
to #e aware of modern methods of management and practiced the same. 'inally,
the entreprene"rs had pleasing manners and therefore, they were given #etter
treatment #y all the o"tside parties.
?. Role of Banks and inancial !nstitutions(It is worthwhile to tal$ a#o"t the role
of #an$s and financial instit"tions. In all cases, it was o#served that there was a
good "nderstanding #etween the entreprene"rs and the #an$s. Ban$ersA attit"de
towards entreprene"rs was ("ite satisfactory. Ban$s were fo"nd to #e more li#eral
and helpf"l while chal$ing o"t the reha#ilitation pac$age. %hey were fo"nd to #e
very ("ic$ in decision ma$ing. In one case, the re("ired sanction was given within a
period of 0"st one wee$. '"rther, at the time of preparation of the scheme, they had
total perspective of the "nits. %herefore, they s"ggested to modernise management
#esides replacing old machinery. %hey too$ "p ris$ on many occasions. Fpon the
death of an entreprene"r, his immediate s"ccessor 6wife9 was considered to ta$e
over the "nit. Ban$s gave the re("ired assistance even "nder those circ"mstances.
In one "nit when the co"rt granted the decree, the #an$ rightly considered it for
reha#ilitation ta$ing into acco"nt the #enefits of reha#ilitation. 3ith the change of
management, the "nit started operating nearly at f"ll capacity. It also #ecame a
profit ma$ing company.%hey were consistent in their approach to reha#ilitation all
thro"gh the period of revival. %hey were not only a financier #"t also a co"nselor to
5@3
the "nit. %heir advice on money matters was very m"ch rewarding to the "nits.
%here was a good team of #an$s and financial instit"tions which shared the related
wor$. -oordination #etween #an$s and financial instit"tions was of high order and
therefore, credit decisions were ta$en timely. 'inally, #an$ers were fo"nd to #e alert
d"ring the period of post sanction. %hey maintained a close s"pervision of the
factory and operations in the #an$ acco"nt. -onse("ently, the end)"se of #an$
f"nds was f"lly ens"red.
I. 1ESS.NS R./ S>CCESS S-.R!ES
19 Reha#ilitation of a sic$ "nit sho"ld #e considered as a rare occasion and
therefore, every one concerned with it sho"ld #e serio"s in dealing with the
related matters. %heir serio"sness sho"ld also #e seen right from the stage of
identification of a sic$ "nit till the same is s"ccessf"lly reha#ilitated.
49 Bn occ"rrence of a sic$ness, everyone gets affected. May #e, some are #adly
affected while others may s"ffer marginally. %herefore, all those involved in
reha#ilitation e&ercise have to necessarily ma$e sacrifice. %his applies even to
the promoters, government and wor$ers.
89 In addition to the re("ired sacrifice e&pected from all the concerned parties, it is
e("ally important to adopt a right strategy for revival of sic$ness. Selection of the
strategy primarily sho"ld depend "pon the nat"re of sic$ness. It is also
necessary to consider cost implications, competence of management, moods of
wor$ers etc. so that the strategy so selected for revival is widely welcomed.
;9 'or early revival, all wor$ related to reha#ilitation has to #e time #o"nd. 'or
which, the role and responsi#ility of #an$s, financial instit"tions, entreprene"rs
and the government sho"ld #e properly spelt o"t so that it is possi#le to avoid
delays in preparation and implementation of the scheme.
:9 Reha#ilitation is #asically a team wor$ and therefore, mem#ers of the team
incl"ding entreprene"rs, cons"ltants and the government have to p"t in co)
ordinated efforts to implement the pro0ect. In partic"lar, co)ordination #etween
#an$s and financial instit"tions on one hand and #an$s and government, on the
other, has to #e ens"red.
5@@
>9 Ban$s and financial instit"tions are e&pected not only to s"pply timely and
ade("ate finance "nder reha#ilitation #"t also to offer co"nselling services to the
entreprene"rs at vario"s stages of reha#ilitation. %his need is very m"ch felt in
the case of small si+ed firms.
?9 %o complete the process of reha#ilitation, it normally ta$es : to ? years. It may
happen that the "nit "nder reha#ilitation may s"ffer d"e to nat"ral calamities
incl"ding death of a $ey partner.director. In that case, all other parties have to
adopt a sympathetic approach to the firm and e&tend necessary co)operation.
!9 3herever, defa"lt in repayment of loan is deli#erate one, stern action is e&pected
#y #an$s and financial instit"tions incl"ding filing a s"it immediately. %here
sho"ld not #e any delay in this regard.
C.NC1>S!.N
Mere introd"ction of reha#ilitation scheme or a pac$age of concessions will not
ass"re s"ccessf"l revival of a sic$ "nit "nless attit"de of #an$s, financial
instit"tions, government, healthy companies etc. is positive. Similarly, sic$
companies sho"ld loo$ at reha#ilitation as [one time opport"nityA given to them
d"ring their life)span and, therefore, they sho"ld endeavo"r to regain their lost
strength with a high degree of commitment and professional approach. 3hen
these e&pectations are f"lfilled, the present rate of s"ccess in reha#ilitation can
#e enhanced effectively. %here are already many s"ccess stories in this regard.
So, let everyone march on for reviving each eligi#le sic$ "nit as early as possi#le
to ma$e o"r ind"strial economy more healthy.
-000-
5@>
%ha"ter-15
DRTs and 5ok Ada$ats
Introduction
Ban$s and financial instit"tions are increasingly finding that =e#t Recovery %ri#"nals
6=R%s9 do really help in dealing with non)performing assets. 'or instance, =R% at
Bangalore is ran$ed n"m#er Bne #y the Ministry of 'inance which has disposed off
nearly 8:55 cases val"ed at over Rs. 155 crores since its inception in 1;. ,s of
March 81, 455; =R%s in the co"ntry have admitted :>!! cases wherein the amo"nt
involved is Rs. 15!>:: crores. %he cases disposed off and the amo"nt involved in them
stood at 4888 and Rs. 1!>:> crores respectively. %ho"gh the overall recovery thro"gh
=R%s is yet to #e stepped, there is a considera#le progress in their performance. %his is
mainly d"e to several initiatives ta$en #y the =R%s. Bne s"ch initiative is that =R%s
have started holding @7o$ ,dalatsA or @7o$ NyayalayasA to dispose off small val"e cases.
'or instance, the first 7o$ ,dalat in Maharashtra for compromise settlement of #ad loans
of #an$s and financial instit"tions "nder the aegis of the =R% was held in M"m#ai on
Septem#er 4, 455;. %o facilitate #oth #an$s and #orrowers to gain the f"ll advantage
of the 7o$ ,dalats organised #y =R%s, it is necessary for them to $now more a#o"t this
initiative.
-he .rigin of 1ok &dalats
%he concept of 7o$ ,dalat was introd"ced #y the then -hief C"stice of India, Shri 2 N
Bhagwati in the year 1!4 as a part of legal aid. By now, it has #ecome a "s"al feat"re
of the legal system for effecting mediation and conciliation #etween the parties and to
red"ce #"rden on the -o"rts.=R%s specially for small loans. 7arge n"m#er of 7o$
,dalats are #eing organised in different parts of the co"ntry from time to time and it
5@B
has got recognition and the patronage of practically every segment of the society.
Based on the e&perience of several States, a -entral ,ct $nown as 7egal Services
,"thorities ,ct 1!?, has #een passed providing legal #asis for the 7o$ ,dalats and
7egal ,"thorities to the compromise arrived at #etween the parties thro"gh s"ch 7o$
,dalats. Since these ,dalats are yet to ta$e a legal shape, they are #ased on the social
movement only. Several organisations incl"ding =R%s, #an$s and financial instit"tions
are holding 7o$ ,dalats, which are generally presided over #y two or three senior
persons of stat"s and e&perience incl"ding retired Senior -ivil Servants, =efence
2ersonnel and C"dicial Bfficers.
%rocedures at 1ok &dalats
%hey ta$e "p the cases which are #ro"ght to them #y any organisation for consideration.
2arties are heard and they are e&plained their legal position. %hey are also advised
a#o"t the merits of their cases in accordance with law. %hey are f"rther co"nselled to
reach some settlement. 3herever social press"re of senior #"rea"crats, 0"dicial officers
or social wor$ers can wor$, the same is also tried. If the compromise is arrived at, it is
red"ced to writing and the parties to the litigation are e&pected to sign. %he 7o$ ,dalats
not #eing a legal entity do not normally sign the deed of settlement. ,fter the
compromise is arrived at and signed in presence of 7o$ ,dalats, it is to #e filed in co"rts
and a consent decree is to #e o#tained. Normally, s"ch settlements do contain a cla"se
that, if the compromise is not adhered to #y the parties, the s"it pending in the co"rt will
proceed in accordance with the law and the parties will have a right to get decree from
the co"rt. ,t the time of the session of 7o$ ,dalats, in case some of the parties to the
disp"te are not present, they are directed to #e present in co"rt for e&ec"ting the
compromise as arrived at #efore in the 7o$ ,dalat.
Banks and 1ok &dalats 6eneral 6uidelines
%o arrive at compromise #an$s may have to red"ce the rate of interest as per their
compromise scheme. %o maintain some "niformity in this regard, #an$s in cons"ltation
with Indian Ban$sA ,ssociation originally form"lated certain g"idelines. %hese g"idelines
are L)
1. %he #an$ s"its involving claims "pto Rs. 45 la$hs may #e #ro"ght #efore the 7o$
,dalats.
4. Both s"it filed and non)s"it filed cases can #e referred to, 7o$ ,dalats.
5@C
8. Settlement with regards to waivement of interest or sacrifice of principal may #e
decided as per delegated a"thority of the #an$ official attending the 7o$ ,dalat and
as per recovery management policy of the #an$.
;. %he defendant sho"ld pay half the co"rt fees as cost to the #an$ and party sho"ld
#ear rest of the cost as wo"ld #e proposed #y 7o$ ,dalats.
:. %he f"t"re interest may #e agreed to as wo"ld #e proposed #y the 7o$ ,dalats
having regard to Section 8; of -2-.
>. ,s per merits of each case, considering the total amo"nt and financial condition of
the de#tor, si& monthly or yearly instalments may #e agreed as wo"ld #e proposed
#y the 7o$ ,dalats with a defa"lt cla"se providing for whole amo"nt #ecoming d"e
in case of any two defa"lts.
?. %he sic$ "nits declared may #e given concession in interest as per the e&isting #an$
r"les and reg"lations.
Strength of the 1ok &dalats
7o$ ,dalats have had nota#le s"ccess with more than 15 million cases settled thro"gh
mechanism. %he reasons for these s"ccesses need to #e identified. 'irst, 7o$ ,dalats
have an element of conciliation and mediation which is lac$ing in the co"rts. Second,
7o$ ,dalats have the co"nterpart of pre)trial hearings, and have th"s settled :5555
disp"tes at a prelitigative stage itself. %hird, 7o$ ,dalats r"les are #inding on everyone
and no appeals are possi#le. 'o"rth, lawyers are not re("ired in 7o$ ,dalats and
conse("ently, delays have come down fairly. 'ifth, 7o$ ,dalats can dispense with
c"m#ersome co"rt proced"res since they a"tonomo"s #odies. In this way, there are
many more #enefits of the 7o$ ,dalats.
Recent Changes
Recognising the growing importance of 7o$ ,dalats in compromise settlement especially
in respect of small loans, the -entral Dovernment in ,"g"st 455; has enhanced the
monetary ceiling for referring case for compromise settlement of d"es of #an$s and
financial instit"tions "sing the for"m of 7o$ ,dalats to Rs. 45 la$hs as against Rs. :
la$hs earlier. %he scope of the ,dalat is now e&panded to cover #oth s"it filed and non)
s"it filed cases in the @do"#tf"lA and @lossA categories with an o"tstanding #alance "pto
Rs. 45 la$hs.
1ooking &head
%here are twenty nine =R% and : =R,% across the co"ntry. 3ith the "ni("e advantages
of the 7o$ ,dalats, =R%s have to change their mind)set to dispose off cases of small
5@?
#orrowers #y organising the same more fre("ently and also at district and #loc$ levels.
%his in t"rn helps =R%s to concentrate more on high val"e and complicated cases.
=R%s can #e merely a facilitator to impress "pon #oth #orrowers and #an$s to settle
disp"tes on the spot. '"rther, 7o$ ,dalats are more c"stomers friendly in terms of
proced"res for loan settlement #esides there is no cost involved in having access to
them. Hence, #oth #orrowers and #an$s have to ta$e the f"llest advantage of the for"m
created #y the government. B"t this sho"ld #e the collective effort of =R%s, #an$s and
small #orrowers to strengthen this for"m. More importantly, officers representing the
#an$s sho"ld have s"fficient powers to accept the compromise proposal wor$ed o"t at
the 7o$ ,dalat within the #road compromise policy g"idelines of each individ"al #an$
and a#ide the s"ggestions of the presiding officer. Borrowers in)t"rn will have to
appreciate the #an$ formalities and policy g"idelines and agree to the directions of the
7o$ ,dalats. %owards this end, a need for training and ed"cation to =R%s, #an$s and
#orrowers is clearly felt.
04440
5@A
%ha"ter - 16
Reco8er" +rocedure under
SecuritiBation and Reconstruction of Financia$
Assets and Enforcement of Securit" Interest
Act- %&&%
<SARFAESI=
The act does not provide a magic wand to remove the sic+ness in the industry, it can,
at the best, be loo+ed upon as a transient phase in the culture of financing#$
6ustice * - *aner7ee
!N-R.$>C-!.N
="ring the recent past, many legal reforms have #een introd"ced #y the Dovernment
and the Reserve Ban$ of India for facilitating #an$s and financial instit"tions 6'Is9 to
recover their Non 2erforming ,ssets 6N2,s9. %hese reforms incl"de setting "p of
Board for Ind"strial and 'inancial Reconstr"ction 6BI'R9, =e#t Recovery %ri#"nals
6=R%s9 etc., #esides enacting a new act entitled, YSec"riti+ation and Reconstr"ction of
'inancial ,ssets and Enforcement of Sec"rity Interest ,ct, 4554 6conveniently called as
Sec"riti+ation ,ct.
%he ,ct empower the #an$s and 'Is to recover their d"es in N2, acco"nts witho"t
intervention of the co"rt #y iss"ing notice to the defa"lting #orrowers and g"arantors
calling "pon them to discharge the d"es in f"ll within >5 days. %he act f"rther provides
that in case the #orrower fails to comply with the >5 days demand notice given #y the
#an$ to repay the d"es, the #an$ can)
5>4
6a9 %a$e possession or the management of sec"red assets of the #orrower, and can
transfer the same #y way of lease, assignment or sale for reali+ing the sec"red
assets witho"t intervention of co"rt.=R%,
6#9 ,ppoint any person to manage the sec"red assets which has #een ta$en over the
sec"red creditor 6#an$9, and
6c9 Instr"ct at any time #y notice in writing to any person who has ac("ired any of the
sec"red assets from the #orrower and from whom any money is d"e or #ecome d"e
to #orrower to pay it to the sec"red creditor.
,fter receipt of >5 days notice #y the #an$, the #orrower shall not deal with the assets,
which are charged, to the #an$. However, dealing with the said assets in the ordinary
co"rse of #"siness of the #orrower is permitted.
%he Sec"rity Interest 6enforcement9 R"les 4554 notified #y the government provides the
manner in which the sec"red creditor shall ta$e possession of the sec"rities and
proced"re for disposal of s"ch sec"rities.
Section 1? 649 of the original act provided that the #orrower can file an appeal with the
=R%s against any of the aforementioned actions of 'Is.Ban$s ta$en "nder the act
provided ?:< of the demanded money is deposited #y the #orrower with the =R%. %he
said stip"lation regarding deposit of ?:< demand money was str"c$ down #y the
HonA#le S"preme -o"rt in Mardia -hemical case, and thereafter it was felt necessary
that law #e amended to #ring it in conformity with the orders of the HonA#le S"preme
-o"rt. So the 2resident of India prom"lgated an ordinance named @Enforcement of
Sec"rity Interest and recovery of =e#ts 7aws 6amendment9 Brdinance 455;A which was
later converted into amendment #ill and has since #ecame an act.
%hro"gh this amendment s"#)section 649 of section 1? that was declared invalid #y the
S"preme -o"rt has #een deleted and reference to appeal contained in section 1? is
changed to an application. %he amendments of 455; now
6a9 Empower #an$s to ta$e over the management of the #"siness of the #orrower,
incl"ding the right of transfer #y way of lease, assignment or sale or reali+ing the
sec"red assets,
B!C Ban$s are "nder o#ligation to consider representation of the #orrower and reply
within seven days of s"ch representation and if on e&amining the representation
made #y #orrower.g"arantor, the #an$s is satisfied that there is a need to ma$e any
changes or modification in the demand notice, the #an$ shall modify the notice
accordingly and serve a revised notice or pass s"ch other s"ita#le orders as deemed
5>5
necessary, within seven days from the date of receipt of the representation or
o#0ection.
6c9 B"t mere iss"ance of >5 days notice or reply of the ("eries or re0ection of o#0ection
of the #orrower #y the #an$ will not #e a ca"se of action for filing an application in
the =R%,
6d9 However a right has #een provided to the #orrower for ma$ing an application.petition
in =R% for challenging the action of the #an$ for enforcing the sec"rity interest once
#an$ ta$e over management control or ta$e possession of the assets #"t #efore they
are sold,
6e9 =R%s have #een mandated to decide the case within >5 days. If the case is not
decided #y =R% even within fo"r months, the #orrower or #an$ can approach the
appellate tri#"nal 6,=R% 9,
6f9 %he appellate tri#"nal shall entertain no appeal "nless the #orrower deposit :5< of
the amo"nt of de#t d"e to him as claimed #y the sec"red creditor or determined #y
=R,%. =R,% may red"ce the amo"nt to 4:< of the de#t also.
Since Sarfaesi ,ct has given wide powers to sei+e, maintain and sell sec"red assets of
N2, #orrowers to #an$s, there is "rgent need for "nderstanding proced"res #y
a"thori+ed officers 6who are empowered to sei+e and sell the assets9 so that provision of
the act are effectively "sed for #enefit of the #an$s.
REC.HER4 %R.CE$>RES
It is attempted here to disc"ss proced"res to #e adopted #y #an$s and 'Is for
enforcement of sec"rity interest #y referring to 619 Relevant provisions of the ,ct 4554
and s"#se("ent amendment of 455;, 649 -entral Dovernment R"les and 689 RBI
g"idelines iss"ed as on 14th =ecem#er, 4554. It is also $ept in mind the possi#le
("eries that may #e p"t forth #y #ranch managers or a"thori+ed officials on their actions
as indicated "nder the ,ct. %he prescri#ed system is as "nder)L
1. Each #an$.'I has to set "p a separate cell to co)ordinate the wor$ relating to
recovery "nder the ,ct.
4. Each #an$.'I sho"ld appoint an a"thori+ed officer 6,B9 who sho"ld not #e less than
a -hief Manager. =ifferent #an$s have a"thori+ed different level of officers say
Regional manger or Nonal manager. %he a"thori+ed officers 6,59 are vested with the
following powers)
5>3
6a9 %o iss"e demand notice to #orrower6s9.g"arantor6s9 ".s 18 649 of the act.
6#9 %o ta$es steps for s"#stit"ted service of notice #y affi&ing the same on the
conspic"o"s part of the sec"red assets or . and paper p"#lication 6r"le89.
6c9 %o ta$e possession of assets 6#oth mova#le and immova#le9 and e&ec"te
panchanama for having ta$en possession of mova#le assets.
6d9 %o ta$e inventory of mova#le assets and $eep all mova#les in safe c"stody #y
him or thro"gh agents.
6e9 %o approach the -hief Metropolitan Magistrate or the =istrict Magistrate in writing
to ta$e possession of any sec"red assets and forward s"ch assets to him,
wherever needed in case ,B faces any pro#lem in discharge of his responsi#ility.
Bom#ay high co"rt in a land mar$ 0"dgment has r"led that no notice or hearing
needs to #e given to a #orrower or a third party when assistant is ta$en from the
-hief Metropolitan Magistrate to ta$e possession of sec"red assets "nder
sec"riti+ation act. High co"rt has f"rther r"led that the magistrate has simply to
loo$ into two aspects first whether the sec"red asset falls within his territorial
0"risdiction and second whether the #an$ had given notice to the #orrower "nder
section 18 649 of the act to repay the amo"nt d"e.
6f9 %o ta$e steps for protection, preservation and ins"rance of the sec"red assets
ta$en into c"stody.
6g9 %o ta$e possession or recover d"es from 8
rd
parties, other than #orrower after
iss"ing d"e notices containing direction, prohi#itions, or ta$ing possession of title
deeds.
6h9 %o affi& possession notice on the property ta$en into possession and iss"e p"#lic
notice in news paper for having ta$en over possession of the sec"red assets.
6i9 %o fi& reserve price after o#taining estimated val"e of sec"red assets #y #an$As
approved val"er.
609 %o iss"e 85 days sale notice to the #orrower.g"arantor.
6$9 %o iss"e newspaper advertisement setting o"t the terms of sale thro"gh p"#lic
tender or p"#lic a"ction.
6l9 %o sell the sec"red assets in one or more lots #y o#taining ("otations, inviting
tenders, holding p"#lic a"ctions or #y private treaty to recover ma&im"m price.
6m9 %o receive sale money and iss"e certificate of sale.
6n9 %o p"#lish photographs of #orrowers along with demand notice or notice of ta$ing
possession or notice of sale.
5>3
8. ,"thori+ed officer will have to first identify N2, acco"nts to whom the notice has to #e
sent. N2, acco"nts of Rs. 1 la$h and a#ove and loan overd"e #eing more than 45< of
principal amo"nt, are only covered "nder the act. In case of consorti"m . m"ltiple
finance, consent of creditors representing at least ?:< of val"e of amo"nt o"tstanding is
re("ired #efore iss"ance of notice. Sec"red assets m"st not #e agric"lt"ral land. ,B
sho"ld also confirm.chec$ that doc"ments are not time)#arred and remain within
limitation till sale process is completed.
;. %hereafter a notice "nder section 18 649 of >5 days sho"ld #e served to
#orrowers.g"arantors #y a registered post with ,.=.. Speed post. -o"rier. 'a&. email.
etc. and in case #orrower.g"arantor is fo"nd avoiding service of notice, then notice can
#e served #y affi&ing on the door, or p"#lishing in two local newspapers 6one m"st #e
vernac"lar9.
:. If the f"ll payment is made #y the #orrower d"ring the notice period, no f"rther action
is called for. If he ma$es part payment, the #an$.'I can retain the right to sei+e the
asset to claim the #alance amo"nt. ="ring the notice period, Ban$.'I can entertain a
re("est for compromise from the #orrower. If the #orrower ma$es part payment in s"ch
a way that loan installments remain d"e for a period of less than 8 months or irreg"larity
is less than three months as on the end of the notice period, the #an$.'I cannot ta$e
f"rther action since it is a performing loan asset as on e&piry of the notice period.
>. In case #orrower ma$es a representation.o#0ection.reply for consideration of the #an$,
the ,B sho"ld consider o#0ection.representation with d"e application of mind. ,B is
d"ty #o"nd to respond to the #orrower if he does not accepts his o#0ections with reasons
within one wee$ of receipt of s"ch o#0ections. S"ch comm"nication re0ecting the
o#0ection will not give any ca"se of action to #orrower.g"arantor to file application with
=R%.
?. In case #orrowers.g"arantors fail to ma$e payment in terms of notice within >5 days,
,B may decide to ta$e possession of sec"red assets 6#oth mova#le and immova#le9.
!. 2roced"re of ta$ing possession and disposal of mova#le assets #y the ,B is as
"nder)
6a9 ,B sho"ld ta$e possession in presence of two witnesses.
6#9 He sho"ld prepare a panchnama "nder his signat"re and signed #y two
independent witnesses for ta$ing possession of mova#le assets.
6c9 He sho"ld prepare an inventory of all mova#le assets ta$en into possession
and sho"ld deliver a copy to #orrower or g"arantor as applica#le.
5>@
6d9 He sho"ld $eep the mova#les immediately to a near#y godown for storage
and protection and Inform ins"rance company and arrange for ins"rance if
not already availa#le.
6e9 He sho"ld ta$e ade("ate steps for preservation, protection and safety of the
sei+ed assets.
6f9 He sho"ld get the assets val"ed #y the #an$As approved val"er and fi&
reserve price.
6g9 If the #orrower agrees to #ring in a potential #"yer who is ready to pay
minim"m fi&ed price, assets can #e sold thro"gh private treaty with the
consent of #orrower.
6h9 He sho"ld iss"e 85 days notice for sale mentioning o"tstanding d"es,
description of assets, reserve price, mode of sale and proposed date and
time of sale thro"gh 6i9 p"#lic tender, 6ii9 p"#lic a"ction or 6iii9 private treaty.
If the proposed sale is #y inviting tender from p"#lic, then ,B has to p"#lish a
notice in two leading newspapers /one in vernac"lar lang"age) giving all
details and also mention earnest money to #e deposited. He may also
mention that the sale is s"#0ect to confirmation #y #an$.
6i9 ,B sho"ld do act"al sale on date, time and ven"e given in notice.paper
advertisement. E&cepting sale #y p"#lic a"ction or p"#lic tender, terms of
sale sho"ld #e first settled with the #orrower.g"arantor and the prospective
p"rchaser. ,B may accept sale price from the person offering ma&im"m price
and deliver the goods and iss"e certificate of sale.
609 If the assets are of perisha#le nat"re, ,B sho"ld sale the assets immediately
after ta$ing possession.
6$9 If the sec"red asset is a de#t or a share in a corporate #ody, the ,"thori+ed
Bfficer can directly send a notice to the de#tors to ma$e payment to the
#an$.'I or transfer shares in #an$As name, as the case may #e. ,B can
recover d"es from 8
rd
parties other than #orrower after iss"ing d"e notices
containing direction or prohi#itions. 'or e&ample, if the sec"red assets are
leased or rented, ,B may direct the lessee . tenant to pay the lease rent.
monthly rental to #an$. In case of advance against #oo$)de#ts, ,B may
prohi#it the de#tors to pay to the #orrower and direct them to pay to the #an$.
6l9 ,ssistance of empanelled advocates may #e ta$en where ,B may feel any
diffic"lty.
5>>
. 2roced"re for ta$ing possession and disposal of immova#le sec"red assets #y ,B is
as "nder)
6a9 ,B shall ta$e possession of sec"red assets 6either constr"ctive or act"al9 #y
delivering a possession notice to #orrower.g"arantor or #y affi&ing the
possession notice on the o"ter door of the property.
6#9 2ossession notice sho"ld #e p"#lished in two leading news papers one of
which sho"ld #e in vernac"lar lang"age.
6c9 If act"al possession and c"stody of the sec"red asset is ta$en, then ,B will have
to ta$e pr"dent care of the property #y ta$ing steps for preservation, protection,
sec"rity, safety and ins"rance.
6d9 ,B sho"ld get the property val"ed #y an approved val"er and thereafter fi& the
reserve price.
6e9 ,ssistance of empanelled advocates may #e ta$en where ,B feels any diffic"lty.
6f9 If the #orrower agrees to #ring in a potential #"yer who is ready to pay minim"m
reserve price, assets can #e sold thro"gh private treaty with the consent of
mortgagor 6Borrower.g"arantor9.
6g9 ,B sho"ld send 85 days sale notice to the #orrower.g"arantor advising them
interalia amo"nt of de#t, description of sec"red assets, mode of sale, reserve
price, terms of depositing earnest money 64:<9, enc"m#rances if any on the
sec"red assets, date, time and place of p"#lic a"ction or tender. Notice of sale
sho"ld also #e affi&ed on the property and p"#lished in two leading news paper)
one vernac"lar) having wide circ"lation in the area where property is sit"ated. ,B
m"st also mention that the sale is s"#0ect to confirmation #y #an$. It sho"ld #e
clearly mentioned in sale notice that the proposed sale is on @as is where is @
#asis and the #an$ will not #e lia#le for any charges, d"es, levies, ta&es,
enc"m#rances or adverse possession what so ever, neither the #an$ shall #e
lia#le for the clear and mar$eta#le title of the #orrower on the charged sec"rities
as the sec"red assets.
6h9 ,B sho"ld do wide p"#licity of notice of sale. He.#ranch officials sho"ld contact
potential #"yers so that they receive s"fficient offers in terms of sale notice.
6i9 ,B sho"ld accept the #id of highest #idder only if it is a#ove reserve price and
accompanied #y the earnest money. Balance amo"nt has to #e paid #y the
#idder within 1: days. The secured asset should only be sold above the reserve
price fi!ed by the .8#
5>B
609 3hen f"ll #id amo"nt is paid, the sale will #e confirmed and a sale certificate will
#e iss"ed.
6$9 In case of defa"lt in payment of #alance amo"nt #y the #idder, the property will
#e p"t to sale again and same proced"re of sale will apply. %he earnest money
deposited will #e forfeited and credited to #orrowerAs acco"nt.
6l9 If there is no #idder d"e to reserve price #eing high, the ,B may red"ce the
reserve price #y 15 <to 1:< and p"t the sec"red assets for sale 4
nd
time after
complying with the proced"re noted a#ove.
6m9 If e&cess money is received over and a#ove the #an$erAs claim, the same sho"ld
#e credited to the #orrowerAs acco"nt or ref"nded to him. If there are preferred
creditors 6wor$ersA d"es, stat"tory d"es, etc.9, the payments sho"ld #e paid to
them first #efore the settlement of #an$.'I d"es.
6n9 In case the company is in li("idation, the amo"nt reali+ed from the sale of the
sec"red assets shall #e distri#"ted in accordance with the provision of section
:4 , of the -ompanies ,ct 6wor$menAs d"es paripass" charge9.
6o9 3here the property is s"#0ect to any enc"m#rances, the p"rchaser is e&pected to
deposit e&tra amo"nt to discharge enc"m#rances or meet contingencies.
6p9 %he ,"thori+ed Bfficer may prefer the sale of mova#le assets to immova#le
assets for early recovery of N2,s.
20# S"it for recovery of #alance amo"nt sho"ld #e filed with =e#t Recovery %ri#"nals
6=R%s9. appropriate co"rt as per 0"risdiction for recovery of shortfall, if any, on sale of
the sec"red assets.
22# ,fter initiating action "nder Sarfaesi ,ct and #efore act"al sale of sec"red interest, if
is fo"nd that doc"ments are getting time #arred, #an$. 'I m"st file s"it in =R%.civil
co"rt e&plaining the circ"mstances.
2/# ,B may ta$e over the management of the #"siness of #orrower "nder section 18 6;9
of the act. 3hen the #"siness is ta$en over, the ,B may appoint as many as director
or administrator as re("ired. , notice of ta$ing over management and appointment of
directors.administrators sho"ld #e p"#lished in two leading daily newspapers) one in
vernac"lar) having wide circ"lation in the area. %he directors.persons in control will
vacate the office immediately on p"#lication of the notice and hand over the office to
directors.administrators appointed #y the ,.B. and they will ta$e into their c"stody all
property, effects and actiona#le claim of the #"siness of #orrower. %he management
5>C
shall #e restored as soon as de#ts are reali+ed in f"ll. No proceedings for winding "p
or appointment of receiver shall lie witho"t consent of the ,.B.
29# 3rongf"l sei+"re of assets may ca"se penalties. ,B sho"ld ta$e care.
2:# ,B is "nder o#ligation to ma$e disclos"re of all vital facts to the #"yer of the
property. In a land mar$ 0"dgment of Haryana 'inancial corporation vs Ra0esh D"pta
S"preme -o"rt has held that mere perusal of the provisions of the Transfer of
-roperty act will show that it was incumbent upon the corporation to disclose the
buyer about the non e!istence of an independent passage to the unit, It was also the
duty of the corporation to inform the buyer that the passage mentioned in the
revenue record was not fit for movement of vehicles# The corporation also failed to
show the buyer the entire documentation as re"uired by law#
!nterference by High Court
In land mar$ 0"dgement 6E% 8.!.45159 S"preme -o"rt has as$ed High -o"rts
not to interfere with the de#t recovery proceedings initiated #y #an$s against the
defa"lters as it will have serio"s adverse impact on the right of lenders to recover
their d"es. It f"rther directed that alternative remedies availa#le to the #orrowers
m"st #e e&ercised "nder =R% act and S,R'E,SI ,ct #efore the High -o"rt
e&ercise its discretion to interfere with the proceedings.
&dvocates can not sign securiti,ation notice on behalf of bank
In an important 0"dgment ,ndhra 2radesh High co"rt 6 Sampoorna Batt"
v. I-I-I Ban$9 has held that only a"thori+ed person 6 -hief Manager or a#ove9
can sign the notice and noted that iss"ance of notice #y the #an$As advocate
has no loc"s standi and even s"#se("ent co"ntersigning will not #e a remedy to
rectify the defect. 6BS 11.51.189
S!C& &ct
Section 8: of Sarfaesi act gives its provisions an overriding effect over
anything to the contrary contained in any other law that o#vio"sly incl"des the
Sic$ Ind"strial -ompanies 6 special provisions9 ,ct 1!: 6SI-,9. B"t in No#le
5>?
,("a case Bdisha High co"rt r"led otherwise against which State Ban$ of India
appealed to S"preme -o"rt. 3hat perhaps has ("eered the pitch for the
sec"red creditors is Section 8? of the Sarfaesi ,ct that goes on to say that the
act is in addition to and not in derogation of any other law in force. %his forces
#an$s to stop Sarfaesi proceedings against Sic$ companies. 3ith more and
more corporate moving to -=R, it is time to policy ma$ers to lay down r"les to
ma$e the Sarfaesi override SI-, so that instead of yielding to mirage of -=R
#an$s act"ally ta$e advantage of Sarfeasi and enforce recovery.
Change in or -ake .ver of the /anagement of the Business of the
Borro0er
%he Reserve Ban$ of India notified these g"idelines effective ,pril 41, 4515,
framed "nder Section 6a9 of the Sec"ritisation and Reconstr"ction of 'inancial
,ssets and Enforcement of Sec"rity Interest ,ct, 4554 6S,R',ESI ,ct9 to ena#le the
Sec"ritisation -ompany or Reconstr"ction -ompany 6S-.R-9 to realise their d"es
from the #orrowers, #y effecting change in or ta$eover of the management of the
#"siness of the #orrower and related matters.
.bBect of the 6uidelines
%he o#0ective of these g"idelines is to ens"re fairness, transparency, non)
discrimination and non ar#itrariness in the action of Sec"ritisation -ompanies or
Reconstr"ction -ompanies and to #"ild in a system of chec$s and #alances while
effecting change in or ta$eover of the management of the #"siness of the #orrower
#y the S-.R-s "nder Section 6a9 of the S,R',ESI ,ct. %he S-.R-s shall follow
these g"idelines while e&ercising the powers conferred on them "nder Section 6a9
of the S,R',ESI ,ct, 4554.
%o0ers of SC"RC and Scope
5>A
, S-.R- may resort to change in or ta$eover of the management of the #"siness of
the #orrower for the p"rpose of reali+ation of its d"es from the #orrower s"#0ect to
the provisions of these g"idelines. %he S-.R-s resorting to ta$e over of
management of the #"siness of the #orrower shall do so after complying with the
manner of ta$eover of the management in accordance with the provisions of Section
1: of the S,R',ESI ,ct. Bn reali+ation of its d"es in f"ll, the S-.R- shall restore
the management of the #"siness to the #orrower as provided in Section 1:6;9 of the
S,R',ESI ,ct
Eligibility conditions to e)ercise po0er for change in or takeover of
management
a6 , S-.R- may effect change in or ta$e over the management of the #"siness of
the #orrower, where the amo"nt d"e to it from the #orrower is not less than 4:<
of the total assets owned #y the #orrower* and
!6 3here the #orrower is financed #y more than one sec"red creditor 6incl"ding
S-.R-9, sec"red creditors 6incl"ding S-.R-9 holding not less than ?:< of the
o"tstanding sec"rity receipts agree to s"ch action.
6rounds for effecting change in or takeover of management
S-.R- shall #e entitled to effect change in management or ta$e over the
management of #"siness of the #orrower on any of the following gro"ndsL
a9 the #orrower ma$es a willf"l defa"lt in repayment of the amo"nt d"e "nder the
relevant loan agreement.s*
#9 the S-.R- is satisfied that the management of the #"siness of the #orrower is
acting in a manner adversely affecting the interest of the creditors 6incl"ding
S-.R-9 or is failing to ta$e necessary action to avoid any events which wo"ld
adversely affect the interest of the creditors*
5B4
c6 S-.R- is satisfied that the management of the #"siness of the #orrower is
not competent to r"n the #"siness res"lting in losses. non repayment of d"es
to S-.R- or there is a lac$ of professional management of the #"siness of
the #orrower or the $ey managerial personnel of the #"siness of the #orrower
have not #een appointed for more than one year from the date of s"ch
vacancy which wo"ld adversely affect the financial health of the #"siness of
the #orrower or the interests of the S-.R- as a sec"red creditor*
d6 the #orrower has witho"t the prior approval of the sec"red creditors 6incl"ding
S-.R-9, sold, disposed of, charged, enc"m#ered or alienated 15< or more
6in aggregate9 of its assets sec"red to the S-.R-A4
5B5
6e9 there are reasona#le gro"nds to #elieve that the #orrower wo"ld #e
"na#le to pay its de#ts as per terms of repayment accepted #y the #orrower *
6f9 the #orrower has entered into any arrangement or compromise with
creditors witho"t the consent of the S-.R- which adversely affects the
interest of the S-.R- or the #orrower has committed any act of insolvency*
6g9 the #orrower discontin"es or threatens to discontin"e any of its
#"sinesses constit"ting 15< or more of its t"rnover*
6h9 all or a significant part of the assets of the #orrower re("ired for or
essential for its #"siness or operations are damaged d"e to the actions of the
#orrower,
6i9 the general nat"re or scope of the #"siness, operations, management,
control or ownership of the #"siness of the #orrower are altered to an e&tent,
which in the opinion of the S-.R-, materially affects the a#ility of the
#orrower to repay the loan*
609 the S-.R- is satisfied that serio"s disp"te.s have arisen among the
promoters or directors or partners of the #"siness of the #orrower, which
co"ld materially affect the a#ility of the #orrower to repay the loan,
6$9 'ail"re of the #orrower to ac("ire the assets for which the loan has #een
availed and "tili+ation of the f"nds #orrowed for other than stated p"rposes or
disposal of the financed assets and mis"se or misappropriation of the
proceeds*
6l9 'ra"d"lent transactions #y the #orrower in respect of the assets sec"red to
the creditor.s.
%olicy regarding change in or takeover of management
5B3
Every S- . R- shall frame policy g"idelines regarding change in or ta$eover of the
management of the #"siness of the #orrower, with the approval of its Board of
=irectors and the #orrowers shall #e made aware of s"ch policy of the S-.R-. S"ch
policy shall generally provide for the followingL
6i9 %he change in or ta$eover of the management of the #"siness of the
#orrower sho"ld #e done only after the proposal is e&amined #y an
Independent ,dvisory -ommittee to #e appointed #y the S-.R- consisting of
professionals having technical . finance . legal #ac$gro"nd who after
assessment of the financial position of the #orrower, time frame availa#le for
recovery of the de#t from the #orrower, f"t"re prospects of the #"siness of
the #orrower and other relevant aspects shall recommend to the S-.R- that
it may resort to change in or ta$eover of the management of the #"siness of
the #orrower and that s"ch action wo"ld #e necessary for effective r"nning of
the #"siness leading to recovery of its d"es*
6ii9 %he Board of =irectors incl"ding at least two independent directors of the
S-.R- sho"ld deli#erate on the recommendations of the Independent
,dvisory -ommittee and consider the vario"s options availa#le for the
recovery of d"es #efore deciding whether "nder the e&isting circ"mstances
the change in or ta$eover of the management of the #"siness of the #orrower
is necessary and the decision shall #e specifically incl"ded in the min"tes.
6iii9 %he S-.R- shall carry o"t d"e diligence e&ercise and record the details of
the e&ercise, incl"ding the findings on the circ"mstances which had led to
defa"lt in repayment of the d"es #y the #orrower and why the decision to
change in or ta$eover of the management of the #"siness of the #orrower has
#ecome necessary.
6iv9%he S-.R- shall identify s"ita#le personnel . agencies, who can ta$e over
the management of the #"siness of the #orrower #y form"lating a plan for
operating and managing the #"siness of the #orrower effectively, so that the
d"es of the S-.R- may #e reali+ed from the #orrower within the time frame.
5B3
6v9 S"ch plan will also incl"de proced"re to #e adopted #y the S-.R- at the
time of restoration of the management of the #"siness to the #orrower,
#orrowerAs rights and lia#ilities at the time of change in or ta$eover of
management #y the S-.R- and at the time of restoration of management
#ac$ to the #orrower, rights and lia#ilities of the new management ta$ing over
management of the #"siness of the #orrower at the #ehest of S-.R-. It
sho"ld #e clarified to the new management #y the S-.R- that the scope of
their role is limited to recovery of d"es of the S-.R- #y managing the affairs
of the #"siness of the #orrower in a pr"dent manner.
%rocedure for change in or takeover of management
6a9 %he S-.R- shall give a notice of >5 days to the #orrower indicating its
intention to effect change in or ta$e over the management of the #"siness of
the #orrower and calling for o#0ections, if any.
6#9 %he o#0ections, if any, s"#mitted #y the #orrower shall #e initially
considered #y the I,- and thereafter the o#0ections along with the
recommendations of the I,- shall #e s"#mitted to the Board of =irectors of
the S-.R-. %he Board of =irectors of S-.R- shall pass a reasoned order
within a period of 85 days from the date of e&piry of the notice period,
indicating the decision of the S-.R- regarding the change in or ta$eover of
the management of the #"siness of the #orrower, which shall #e
comm"nicated to the #orrower.
1..3!N6 &HE&$
,s per RBI data, o"t of >1,4>8 notices iss"ed #y 2SBs involving an o"tstanding of Rs. 1,?;;
crores, 2SBs have recovered only Rs.1?!; cores from 4;,54 #orrowers. It is a good
#eginning, #"t we have a long way to go. Now #an$s will have to capitali+e on the #enefits of
the act. Hence, what is important is to identify eligi#le acco"nts immediately. Notice sho"ld
#e served to them immediately. Ban$s.'Is sho"ld give priority for sei+"re of sec"red assets in
those acco"nts where sec"red assets are li$ely to fetch potential #"yers easily or #orrowers
5B@
are fo"nd cooperating. %here sho"ld #e "tmost care in preserving the assets, which are
sei+ed. In partic"lar, a"thori+ed officers sho"ld ta$e reasona#le care to comply with the
provision of the act and RBI g"idelines. It calls for a professional approach from a"thori+ed
officers in sei+"re and sale of sec"red assets. S"ch meas"res will definitely send strong
signals to willf"l defa"lters. %h"s, one can hope that #an$s.'Is will s"cceed in #ringing down
the level of N2,s #y enforcing sec"rity interest. It will also create a congenial repayment
climate in the co"ntry #y diss"ading willf"l defa"lt.
)555)
5B>
%ha"ter-17
'+,0+&'* +ct 2002 - 0+H
!ntroduction
3ith the recent 0"dgment delivered #y the S"preme -o"rt in respect of I-I-I
Ban$ and Mardia -hemicals, #an$s are now #"sy in sei+"re of sec"red assets and sale
"nder the Sec"riti+ation and Reconstr"ction of 'inancial ,ssets and Enforcement of
Sec"rity Interest 6S,R',ESI9 ,ct, 4554. 3hile waiving the condition "nder 1? 649 "nder
the S,R',ESI ,ct to deposit ?:< of the #an$)claim #y the aggrieved #orrower with the
=e#t Recovery %ri#"nal 6=R%9, the ,pe& -o"rt too$ a note of the 7endersA 7ia#ility /
Best 2ractices -ode of the Reserve Ban$ of India #esides ma$ing it o#ligatory on the
part of #an$s to provide clarification to a #orrower to whom notice is served "nder > of
the ,ct. %ho"gh #an$s are now allowed to proceed with their arrangements to sell the
assets sei+ed "nder the ,ct, most of the #orrowers are r"shing to the =R% to see$
0"stice for which no deposit of the #an$erAs claim is called for. -onse("ently, #an$s are
prevented to sell the assets "ntil the =R% decides on the petition filed #y the aggrieved
#orrower. Hence, these #an$s made a re("est to the Dovernment to amend the
S,R',ESI ,ct and the Recovery of ="es to Ban$s and 'inancial Instit"tions ,ct, 18.
3hile performing the tas$s, #an$s wo"ld li$e to see$ clarification on vario"s matters
concerning the sei+"re and sale of assets. In this chapter , it is attempted to provide
clarification on vario"s #an$ proced"res thro"gh fre("ently as$ed ("estions.
Juestions and &ns0ers
M1. -an any officer in #an$s sei+e assetsR
,ns. No, only the a"thori+ed officers appointed "nder section 18 6149 can sei+e
sec"red assets. Each #an$.'I has appointed a"thori+ed officers "nder provision of
this section. In p"#lic sector #an$s, officer in SMD II and a#ove and not #elow the ran$
of -hief Manager can #e appointed as the a"thori+ed officer.
M.4. How do we serve noticeR
,ns. ,s "nder section > of the ,ct, notice of >5 days 6from the date of receipt of
notice9 sho"ld #e served properly, i.e., #y a registered post with ,.=., affi&ing the notice
on the door, or p"#lishing in the local newspapers. Notice to all the parties is necessary
if the n"m#er is more than one. Sim"ltaneo"s action may also #e ta$en against the
5BB
g"arantor. %he notice has to #e delivered at the place where the #orrower. g"arantor,
act"ally and vol"ntarily resides or carries on #"siness or personally wor$s for gain and
where the #orrower is corporate, the demand notice has to #e served at registered office
address.
M.8. Is it necessary to see$ permission from the -o"rt.=R% for serving the notice in
respect of s"it filed.=R% casesR
,ns. In terms of the proviso to amended section 1 of the =R% ,ct, the #an$, may if
so chooses move an application for permission of =R% for withdrawal of the recovery
s"it pending #efore =R% for ena#ling the #an$ for ta$ing action "nder sec"ritisation act .
It sho"ld #e noted that withdrawal of =R% s"it may have implication from limitation point
of view and #efore ta$ing s"ch a decision a #an$er m"st caref"lly e&amine all inns and
o"t. However if the notice "nder section 18 649 of the Sec"ritisation ,ct was iss"ed
#efore 11
th
Novem#er 455; in a #orrowal acco"nt in respect of which the recovery
proceedings are already pending #efore =R%, there is no need for withdrawal of the
recovery s"it.
M.;. Is it necessary that doc"ments to #e valid on the date of serving noticeR
,ns. 1es, not only the date of serving notice #"t also on the date of sale of sei+ed
assets.
M.:. 3hat is e&pected to #e done #y the a"thori+ed officer d"ring the notice periodR
,ns. If the f"ll payment is made #y the #orrower d"ring the notice period, no f"rther
action is called for. If he ma$es part payment, the #an$ can retain the right to sei+e the
asset to claim the #alance amo"nt. If the #orrower ma$es part payment in s"ch a way
that loan installments remain d"e for a period of less than 8 months as on the end of the
notice period, the #an$ cannot ta$e f"rther action since it is now a performing loan asset.
="ring the notice period, #an$ may entertain a re("est for compromise from the
#orrower.
M.>. 3hat are the proced"res to #e followed for sei+"re of the assetsR
,ns. Bn e&piry of >5 days notice period, ,"thorised Bfficer 6,B9 may ta$e following
actions for sei+"re and sale of mova#le and immova#le assets)
6a9 ,B sho"ld ta$e possession of mova#le sec"red assets in presence of two
witnesses. He sho"ld prepare a panchnama "nder his signat"re and signed
#y two independent witnesses for ta$ing possession of mova#le assets. He
sho"ld prepare an inventory of all mova#le assets ta$en into possession
and sho"ld deliver a copy to #orrower or g"arantor as applica#le. He sho"ld
5BC
$eep the mova#les immediately to a near#y godown for storage and
protection and inform ins"rance company and arrange for ins"rance if not
already availa#le.
6#9 ,B shall ta$e possession of immova#le sec"red assets 6either constr"ctive
or act"al9 #y delivering a possession notice to #orrower.g"arantor or #y
affi&ing the possession notice on the o"ter door of the property. 2ossession
notice sho"ld sim"ltaneo"sly #e p"#lished in two leading newspapers one
of which sho"ld #e in vernac"lar lang"age.
6c9 ,B sho"ld ta$e ade("ate steps for preservation, protection and safety of the
sei+ed assets. ,B sho"ld ta$e s"fficient care of the assets sei+ed incl"ding
ins"rance cover, posting a sec"rity g"ard, etc. and sho"ld get the assets
val"ed #y the #an$As approved val"er and fi& reserve price.
6d9 If the #orrower agrees to #ring in a potential #"yer who is ready to pay
minim"m fi&ed price, assets can #e sold thro"gh private treaty with the
consent of #orrower.
6e9 ,B sho"ld iss"e 85 days notice for sale mentioning o"tstanding d"es,
description of assets, reserve price, mode of sale and proposed date and
time of sale thro"gh 6i9 p"#lic tender, 6ii9 p"#lic a"ction or 6iii9 private treaty. If
the proposed sale is #y inviting tender from p"#lic, then ,B has to p"#lish a
notice in two leading newspapers /one in vernac"lar lang"age) giving all
details and also mention earnest money to #e deposited. He may also
mention that the sale is s"#0ect to confirmation #y #an$.
6f9 ,B sho"ld do act"al sale on date, time and ven"e given in notice.paper
advertisement. E&cepting sale #y p"#lic a"ction or p"#lic tender, terms of
sale sho"ld #e first settled with the #orrower.g"arantor and the prospective
p"rchaser. ,B may accept sale price from the person offering ma&im"m price
and deliver the goods and iss"e certificate of sale.
6g9 If the assets are of perisha#le nat"re, ,B sho"ld sale the assets immediately
after ta$ing possession.
6h9 ,ssistance of empanelled advocates may #e ta$en where ,B may feel any
diffic"lty.
M.?. 3hat are the types of possession of assetsR
,ns. %here can #e of two types of possession / physical and to$en. 'or e&ample
)receiving a $ey of a flat is a to$en possession. If the sec"red asset is a de#t or a share
5B?
in a corporate #ody, the ,"thori+ed Bfficer sho"ld send a notice to the #orrower as$ing
him to direct the de#tors to ma$e payment to the #an$ or transfer shares in its name, as
the case may #e. ,B can recover d"es from 8
rd
parties other than #orrower after iss"ing
d"e notices containing direction or prohi#itions. 'or e&ample, if the sec"red assets are
leased or rented, ,B may direct the lessee . tenant to pay the lease rent. monthly rental
to #an$. In case of advance against #oo$)de#ts, ,B may prohi#it the de#tors to pay to
the #orrower and direct them to pay to the #an$.
M.!. 3hether it is mandatory "nder the ,ct to ta$e physical possession of the property
#efore sale is affectedR
,ns. NB. In respect of immovea#le property it is NB% mandatory "nder the act to ta$e
physical possession of the concerned immovea#le property #efore sale is affected.
M.. 3hether 0"dgment of the S"preme co"rt in the %ranscore prohi#its ta$ing sym#olic
possession of immova#le property and spea$s of act"al physical possession ".s 18 6;9
of the act.
,ns. NB, the 0"dgment of the S"preme co"rt in %ranscore did not prohi#it ta$ing
sym#olic possession of immovea#le property and did not spea$ only of physical
possession "nder section 186O9 of the act.
M.15) 3ho sho"ld val"e the assets "nder possession of the #an$R
,ns. Det val"ation of the assets in possession thro"gh an approved val"er of the
#an$.
M.11. -an we allow the #orrower to "se assets after possessionR
,ns. 1es, on possession of assets, the #an$ may appoint a manager to manage s"ch
assets. In that case, this matter sho"ld #e p"#lished in the local newspaper. , copy of
the 2anchanama sho"ld #e affi&ed on the asset.
M.14 -an the asset #e sold immediatelyR
,ns. No, sell the asset only after serving a notice period of 85 days to the #orrower, so
that he gets one more opport"nity.
M.18. 3hat are the types of saleR
,ns. ,B may adopt any of the following methods to sale the sec"red assets)
6a9 B#taining ("otations from parties dealing in sec"red assets or otherwise
interested in #"ying s"ch assets.
6#9 Inviting tender from p"#lic, or
6c9 Holding p"#lic a"ction, or
6d9 By private treaty.
5BA
M.1;. If e&cess money is received thro"gh sale of the assets, to whom this #elongsR
,ns. If e&cess money is received over and a#ove the #an$As claim, the same sho"ld
#e passed on to the #orrower. If there are preferred creditors in respect of wor$ersA
d"es, stat"tory d"es, etc. the sale proceeds sho"ld #e "tili+ed to pay to them first
#efore the settlement of #an$ d"es.
M1:. 3hether claim of stat"tory d"es s"ch as state sales ta&, electricity, royalty
payment etc. have priority over d"es of sec"red creditorsR.
,ns. In -entre Ban$ of India Is. State of Jerala , HonA#le S"preme -o"rt has r"led
that claim of sec"red creditors over #orrowerAs assets have priority over stat"tory d"es
s"ch as sales ta&, lease rent, power d"es etc.
M.1>. 3hat sho"ld #e done after receiving the amo"nt on sale of the assetR
,ns. Iss"e a -ertificate of Sale to the p"rchaser on receipt of f"ll payment as per
terms of sale.
M.1?. 3hat are the proced"res to #e followed for the sale of immova#le assetsR
,ns. %he p"rchaser has to pay a deposit of 4:< of the amo"nt of the sale price on the
date of a"ction ) sale and the #alance sho"ld #e paid within the ne&t 1: days. Bnce
entire sale amo"nt is received, the sale sho"ld #e confirmed and sale certificate sho"ld
#e iss"ed. Bn defa"lt of payment within the specified period, the earlier deposit of 4:<
sho"ld #e forfeited and the same sho"ld #e credited to the #orrowerAs loan acco"nt and
the property may #e considered for re)sale.
M.1!. %o whom the #an$s sho"ld approach for shortfall in recovery tho"gh the sale of
the sec"red assetsR
,ns. =e#t Recovery %ri#"nals 6=R%s9 or competent co"rt 6 as per 0"risdiction9 sho"ld
#e approached for recovery of shortfall, if any, on sale of the sec"red assets.
M.1. If fo"nd diffic"lt to ta$e act"al possession of sec"red the asset, whose help may
#e so"ght for #y ,.B.R
,ns. %o approach the -hief Metropolitan Magistrate or the =istrict Magistrate in writing
to ta$e possession of any sec"red assets and forward s"ch assets to him, wherever
needed in case ,B faces any pro#lem in discharge of his responsi#ility. Bom#ay high
co"rt in a land mar$ 0"dgment has r"led that no notice or hearing needs to #e given to a
#orrower or a third party when assistant is ta$en from the -hief Metropolitan Magistrate
to ta$e possession of sec"red assets "nder sec"riti+ation act. High co"rt has f"rther
r"led that the magistrate has simply to loo$ into two aspects first whether the sec"red
5C4
asset falls within his territorial 0"risdiction and second whether the #an$ had given notice
to the #orrower "nder section 18 649 of the act to repay the amo"nt d"e.
M.45. 3hat is the c"t)off limit of loans to #e considered "nder the S,R',ESI ,ctR
,ns. =e#ts of Rs. 1 la$h and a#ove and overd"es #eing more than 45< of principal
amo"nt are only to #e considered "nder the ,ct.
M.41. 3hich assets sho"ld not #e considered for sei+"reR
,ns. %he following are not eligi#le "nder the ,ctL
Q ,gric"lt"ral land and tools of farmers
Q 2ledged assets
Q Fnsec"red assets. clean loans."ndrawn limits
Q Fnpaid stoc$
M.44 Is it possi#le to sei+e the assets in the a#sence of #orrowerR
,ns. 1es, it is possi#le.
M.48. -an we consider collateral sec"ritiesR
,ns. %he ,ct refers to all the assets, which are sec"red / #oth primary and collateral.
M.4;Is it necessary to sei+e the assets of the #orrower first and then a g"arantorR
,ns. It is not necessary. Sim"ltaneo"s action is also possi#le.
M.4:. In consorti"m advances, who can serve a noticeR
,ns. It is desired if 0oint action is initiated when mem#ers of the consorti"m 0oin the
lead instit"tion and serve a notice.
M.4>. If there are no #idders despite organi+ing p"#lic a"ction repeatedly, what sho"ld
#e doneR
,ns. If there is no option, It is advisa#le to file s"it with =R% to save limitation.
M.4?. -an the #an$ sei+e the assets when the #orrower approaches -orporate =e#t
Restr"ct"ring Body for de#t recastR
,ns. No. %he #an$ can do so only after the restr"ct"ring period.
M.4!. 3hether in a case where second charge holder resorts to enforcement of sec"rity
interest, sho"ld he satisfy the d"es of first charge holder from the sale proceeds of the
sec"red assetsR
,ns. 1es the d"es of the first charge holder have to satisfied. %he 1
st
charge holder
sho"ld also #e cons"lted #efore ta$ing steps for sale.
M.4. 3hile ta$ing possession of stoc$, how a part of them "nder lien to "npaid seller is
to #e identifiedR
5C5
,ns. %he ,B is e&pected to $now from verification of p"rchase register of the #orrower,
which is paid "p, and which is not paid stoc$. Fnpaid stoc$ cannot #e ta$en over.
M.85. 3hat are the prospects of recovery "nder the ,ct in f"t"reR
,ns. -hances of recovery are e&pected to #e #right if the S,R',ESI ,ct and =R%
,ct are amended to prevent the aggrieved defa"lter in approaching =R% to fight on
trivial iss"es and th"s #argaining more time to settle #an$ d"es.
M.81) -an the #an$ p"#lish photographs of #orrowers.g"arantors along with possession
or sale noticeR
,ns. In case of J". ,rchana -ha"han v. State Ban$ of India, Ca#alp"r w.p. no. 881.
455> dated ?.8.455>, it has #een held that p"#lication of photographs of the #orrowers
can not #e said to #e impermissi#le mode. ,ction cannot #e said to #e ar#itrary or lillegal
in any matter. It can not #e said to #e defamatory p"#lication made.
M.84) 3hether High -o"rt can direct one time settlementR.
,ns)It is held #y HoAn#le High -o"rt of -hennai in a land)mar$ 0"dgment dated
5?.5?.5: that co"rt "nder article 44> of constit"tion can not resched"le the loan. It held
that co"rt m"st e&ercise restraint in passing s"ch an order.
M88. / 3hether tenancy created #y the #orrower after creation of mortgage in favo"r of
the #an$s wo"ld #e validR
,nswer)Madras High co"rt vide 0"dgment dated 48
rd
'e#r"ary 455? in the matter of
Shree 7a$shmi 2rod"cts Is. SBI, -oim#atore has held that tenancy created after
mortgage in contravention of section >: , of %ransfer of property act wo"ld not #e
#inding "pon the #an$ and provision of S,R'E,SI ,ct 4554 will prevail over the local
law in case of conflict and s"ch tenancy right shall stand determined once action ".s
186;9 has #een ta$en #y the #an$.
M8;. 3hether #an$ can ta$e steps ".d 1; of the act after completion of sale of
immova#le propertyR
,ns. 1es, #an$ can ta$e steps "nder section 1; of the act after completion of sale of
immovea#le property.
M8:. 3hether pre deposit condition of 4:< for hearing the matter #efore =R,% can #e
rela&ed for sic$ companyR
,nswerL %he =elhi High -o"rt dismissed the petition filed #y Swadeshi -ement 7td
against the order of =,% to deposit 4:< in advance to hear the appeal filed #y the
company and declared that sic$ company are not entitled to s"ch #enefits when ,sset
-are Enterprise invo$ed the S,R'E,SI act the company.
5C3
5ooking A*ead
%his chapter on fre("ently as$ed ("estions ma$es a modest attempt to offer
clarifications on #an$ proced"re prescri#ed "nder S,R'ES,I ,ct 4554 for sei+"re and
sell of sec"red assets so that a"thori+ed officers can e&ercise their powers in fair,
reasona#le and fearless manner. In case of do"#t, a"thori+ed officer m"st ta$e legal
advice to avoid complications.
04440
5C3
%ha"ter- 18
Asset Reconstruction Com+anies
*ntrod#ct$on
%he downt"rn in the economy in 455!)5 has ca"sed large scale loan defa"lts that
res"lted in h"ge non performing assets which added more than Rs. 11555 crores as
fresh N2, d"ring 455!)5. %he N2,s of commercial #an$s increased from Rs.::,!55
crores as on March 455! to Rs. >>,55 crores as on March 81, 455 . 6%BI 1:.5?.4559
%his N2, level is despite massive de#t waiver of Rs. >:555 croes in agric"lt"re d"ring
455!)5. Hence, it is necessary to red"ce the level of N2, on a war)footing thro"gh
vario"s meas"res. In this regard, certain innovative meas"res were tho"ght of.
-reation of ,sset Reconstr"ction -ompany 6,R-9, also $nown as ,ssets Management
-ompanies 6,M-9 is one s"ch meas"re. ,R-s set "p "nder Sec"ritisation and
Reconstr"ction of 'inancial ,ssets and Enforcement of Sec"rity Interest 6S,R'ES,I9
,ct have #een empowered to ta$e over N2, from #an$s, engage in innovative corporate
finance s"ch as merger, sale of #rands or plants, in0ect new capital, convert distressed
companies into new companies and even ta$e o"t an I2B. ,R- will have to wor$ within
RBI g"idelines and s"#0ect to registration.license from RBI. ,ccordingly all ,R-s
sho"ld have minim"m owned f"nds of Rs. 155 crores and to maintain minim"m capital
ade("acy of 1:< at all times. DBI is also considering allowing the ,R-s to have ;<
foreign direct investment.
Many more developments are li$ely to ta$e place in the matters of recovery of N2,s
thro"gh ,R-s. Hence, an attempt is made, in this chapter , to disc"ss #oth concept"al
and operational aspects of ,R-s, #esides e&amining the relevant iss"es. 7et "s start
with the recommendations of the Narasimham -ommittee Report.
-he Second Narasimham Committee on &RC
In India, the -ommittee on Ban$ing Sector Reform 61!9 appointed #y the Reserve
Ban$ of India, s"ggested for the first time to set)"p an ,R- for ta$e)over of N2,s of
wea$ #an$s. ,ccording to the -ommittee, for red"cing the N2,s of wea$ #an$s, there
5C@
can #e two approaches. In the first approach, all hard)core N2,s 6do"#tf"l and loss9
sho"ld #e identified #y each #an$. Sec"rities #ac$ing these N2,s sho"ld #e assessed
to arrive at reali+a#le. mar$eta#le val"e. S"ch N2,s sho"ld then #e transferred to the
,R- which wo"ld iss"e N2, Swap Bonds, as consideration for the assets 6N2,s9 ta$en)
over. %he amo"nt of #onds sho"ld #e e("al to the s"m of reali+a#le val"e of the assets
transferred. If the vol"me of N2,s is very large, each wea$ #an$ may set)"p itAs own
,R- as a s"#sidiary. Br, a gro"p of wea$ #an$s with moderate si+e of N2,s, may
promote an ,R- 0ointly. S"ch ,R- may #e set)"p either in the p"#lic sector or in the
private sector. In case, #an$s decide to set)"p an ,R-, it is essential that they spare
their staff re("ired for ta$e)over of assets and their s"#se("ent sale. %his arrangement
ens"res that the instit"tional memory on N2,s is made availa#le to the ,R-. In
addition, there is some rationali+ation of staff in the #an$s, whose assets are so"ght to
#e transferred to the ,R-. 'or speedy and effective recovery, the ,R-s sho"ld #e
permitted to file s"its in =e#t Recovery %ri#"nals 6=R%s9. In case it is attempted to
create an ,R- in the private sector, the -ommittee envisages certain pro#lems. 'or
instance, there may not #e many ta$ers for the assets representing N2,s in the #an$s
#eca"se, most of them may not #e #ac$ed #y fi&ed assets li$e land and #"ilding or, their
mar$et val"e may #e negligi#le.
In the second approach, the red"ction of N2,s is s"ggested witho"t creating an ,R-.
Here, N2,s will #e red"ced #y ma$ing provisions.write)offs. %his can #e done if the %ier
I capital is very large. Btherwise, %ier II capital can #e raised #y iss"ing #onds so as to
meet the shortfall in the -apital ,de("acy Ratio arising o"t of h"ge provisions and write)
offs to #e made. If #an$s are li$ely to e&perience diffic"lties in getting s"#scription to
these #onds, the government may g"arantee the same. '"rther, these #onds may #e
considered as @approved sec"ritiesA #y DI-, 7I- or 2rovident '"nds and @S7R
investmentA #y #an$s. ,n alternative meas"re to widen the capital #ase is to see$
#"dgetary s"pport #y #an$s, which seems to #e diffic"lt at this stage. %h"s, with the
increased capital it is possi#le to red"ce net N2, amo"nt and itAs percentage to the total
advances. %he -ommittee, in the end, advises that #an$s and 'Is sho"ld sit together to
wor$ o"t the approaches as o"tlined a#ove.
%rocess of &sset Reconstruction
%o get a fair "nderstanding of the processes of the asset reconstr"ction, let "s ta$e an
e&ample. 'orward Ban$ has hard)core N2,s of Rs. 4555 crores as on 81)58)54. %his
5C>
#an$ wo"ld li$e to sell these N2,s to the ,R-. ,ccordingly, it ma$es an assessment of
the reali+a#le or mar$et val"e thro"gh an independent val"er, which is arrived at a
certain amo"nt, say, Rs. 1;55 crores. %he #an$ approaches the ,R- for the sale of
N2,s. %he ,R- p"rchases these N2,s at Rs. 1>55 crores, i.e. reali+a#le val"e. It
iss"es N2, Swap Bonds worth Rs. 1>55 crores to the 'orward Ban$. %he #ond wo"ld
carry a fi&ed interest rate of say, ?.: per cent e("al to the rate on recapitali+ation
#onds. %he 'orward Ban$ will then provide for the entire loss of Rs. ;55 crores 6Rs.
4555 / 1>55 crores9 in the profit and loss acco"nt. Br, this can #e amorti+ed if the
profits are not ade("ate. '"rther, itAs networth will decline #y Rs. ;55 crores since loans
and advances will #e red"ced #y Rs. 4555 d"e to write)off 6Rs. ;55 crores9 with addition
to investment portfolio 6Rs. 1>55 crores9. %he #an$ will contin"e to receive interest on
#onds each year "ntil the date of mat"rity. %hen, these #onds will #e redeemed on
mat"rity #y the ,R-. ,lternatively, there can #e periodical redemption of #onds. ,fter
the p"rchase of N2,s, the ,R- will recover the ma&im"m amo"nt from N2,s over a
period of time. If the amo"nt so received is more than the p"rchase)val"e, the #"siness
t"rns o"t to #e profita#le one. %his is ("ite possi#le since the ,R-s are s"pposed to #e
professional e&perts in recovery from the N2,s. %h"s, the a#ove arrangement is fo"nd
to #e #eneficial to #oth #an$s and ,R-.
1essons from !nternational E)periences
In the international scenario, a #an$ resol"tion or #an$ reha#ilitation agency ta$es
control of pro#lems of #an$s, and therefore, operates "nder a m"ch #roader mandate
than an asset management company. Denerally, a #an$ resol"tion agency foc"ses on
winding "p insolvent #an$s, incl"ding asset management. %he approach was introd"ced
in the FS, with the Resol"tion %r"st -orporation 6R%-9 which was formed in 1! to
li("idate insolvent savings #an$s as well as with the 'ederal =eposit Ins"rance
-orporation 6'=I-9. In the resol"tion made, these agencies were also incharge of
disposing of all assets, incl"ding non)performing assets. In Capan, the =eposit
Ins"rance -orporation 6=I-9 offers ade("ate s"pport for tro"#led #an$s and #an$
li("idation. 7oan wor$)o"ts are carried o"t #y the resol"tion and collection #an$ 6a =I-
s"#sidiary9. In Dhana, a Non)2erforming ,ssets Recovery %r"st 6N2,R%9 was set)"p in
1! to deal with the recovery and disposal of #ad de#ts and other collaterals. N2,R%
was a"thori+ed to s"e for recovery and collect proceeds from de#ts. Bn the Dhana
model, %an+ania and Fganda also set)"p N2,R% in 1!! and 1: respectively. In
5CB
Me&ico, the =eposit Ins"rance -ompany, thro"gh its loan wor$)o"t s"#sidiary, was p"t
incharge of assets management. -hina, in view of high N2,s, has set)"p ,R-s / even
selling of assets to foreigners at steep disco"nts. In Malaysia, @=ahantraA, a restr"ct"ring
agency, has done well in disposing of three)fo"rths of assets which it ac("ired. %h"s,
enco"raged #y the e&periences of these co"ntries, India sho"ld go ahead in setting "p
many more ,R-s. B"t there are several iss"es relating to the organi+ational aspects.
.rgani,ational &spects of &RCs
Sometime in 4555, the 'inance Minister for the first time proposed to set)"p an ,R-
mainly for the wea$ #an$s. S"#se("ently, it was tho"ght that the scope of the ,R-s
sho"ld #e enlarged to cover all p"#lic sector #an$s. In the long r"n, even #an$s in the
cooperative sector and NB'-s may also #e targeted. In any case, the co"ntry re("ires
several ,R-s and not 0"st one, to represent each of the ma0or geographical areas.
%hese shall #e set)"p in the private sector so that more fle&i#ility in their organi+ations
can #e ens"red. ,lternatively, #an$s can 0ointly set)"p a s"#sidiary to act as an ,R-.
3hatever may #e the form of organi+ation, ade("ate capital has to #e provided to the
,R-. B"t s"ch s"pport is not li$ely to come from the Dovernment. %he other iss"e
refers to the stamp d"ties to #e paid on p"rchase of loan assets #y ,R-s. %his wo"ld
#e a ma0or #"rden. B"t, if proposed to set)"p an ,R- as a cooperative "nit or a tr"st,
there is a way o"t. ,lternatively, ,R-s may #e e&empted from the payment of stamp
d"ties recogni+ing the dire need to red"ce N2,s of #an$s. Regarding the staff, we
sho"ld not go in for merely dep"tationists from #an$s and financial instit"tions since they
have already demonstrated their ina#ility to recover the N2,s. Hence, it is essential that
,R-s sho"ld ind"ct a pool of professionals on f"ll time #asis. It can also #e de#ated
whether the investment made in ,R-s co"ld #e given the S7R stat"s. It is also
important that ,R-s have a definite period of ten"re, after which they sho"ld #e
li("idated. Fs"ally, one may insist a life period of say :)? years. '"rther, to achieve the
#asic o#0ectives, cost control occ"pies an important place. 7astly, the prices at which
assets are transferred sho"ld #e #ased on mar$et prices. %he ,R-s sho"ld not #e
compelled to ta$e)over assets at prices other than what itAs management feels. In
partic"lar, they sho"ld have more a"tonomy and wide powers to manage N2,s. In this
regard, the recent enactment on Sec"riti+ation and Reconstr"ction of 'inancial ,ssets
has spelt o"t the role and f"nctions of ,R-s.
5CC
Securiti,ation and Reconstruction of inancial &ssets and Enforcement of
Security !nterest &ct# ;@@;
%his ,ct empowers #an$s and financial instit"tions to ta$e)over the assets from
defa"lters #y serving a notice of si&ty days, witho"t any intervention from the co"rt. Bn
ta$e)over, these assets shall #e managed, leased o"t, or sold to li("idate loans. B"t this
is not an easy 0o#. Hence, services of ,R-s have to #e hired. %he important provisions
of Sarfaesi ,ct in reference to ,R- are as "nder)
1. Fnfettered right to the lenders acting in ma0ority 6\?:< #y val"e9 to enforce sec"rity
rights witho"t intervention of co"rt.
4. No single investor to have ma0ority control over ,R-s.
8. ,dditional right of ,R- which is not availa#le to lender i.e. sale or lease of
#"sinesses #y s"perceding #oard powers.
;. Ena#les foreign investor participation.
:. Meas"res for reconstr"ction)
6a9 -hange in or ta$eover of management of #"siness of the #orrower
6#9 Sale or lease of part or whole #"siness of the #orrower
6c9 Resched"ling of payment of de#t
6d9 Enforcement of sec"rity interest
6e9 Settlement of d"es paya#le #y the #orrower
6f9 %a$ing possession of the sec"red assets
>. Enforcement of sec"rity interest
6a9 -an #e enforced witho"t intervention of co"rt.
6#9 Borrower to discharge lia#ility within >5 days notice.
6c9 Sec"red creditors have right to ta$e possession, ta$e management control of
sec"red assets incl"ding right to transfer.
6d9 In consorti"m right can #e e&ercised if more than ?:< #orrowers agree to
proceeds "nder the act.
5C?
It will #e o#served that "nder Sarfaesi, ,R-s are vested with the rights of a
@deemed lenderA in respect of ta$e)over of assets and s"#se("ent sale or management
of assets. %ho"gh the ,R-s are given wide powers, still do"#ts are raised a#o"t their
effectiveness. Since -entral Registry is not set)"p, it is diffic"lt to sell assets tho"gh
ta$en over from loan defa"lters. B"t one thing is certain that the need for promotion of
,R-s in India is very m"ch felt. %ho"gh their role and responsi#ility have #een spelt,
what is re("ired is to create a cond"cive environment and wor$)o"t arrangements for
setting "p more s"ch ,R-s.
Setting up of &RCs
Several players have applied to RBI for registration in order to commence
#"siness. 'irst ,R- $nown as ,R-I7 has #een registered as private sector entity with
:1< e("ity in the hands of private sector #an$s. It is registered with RBI "nder section 8
of the S,R'ES,I act 4554 as Sec"ritisation and Reconstr"ction -ompany, which
commenced #"siness from ,"g"st 4, 4558. %he company is an associate mem#er of
IB,. In two and half year operation, ,R-I7 has ac("ired #ad loans from 84 #an$s of
over Rs.44,555 crores at an average ac("isition cost of 48< of total d"es 6B"siness
Standard 14
th
May 455>9 . I-I-I #an$ is the #iggest seller of 18; #ad loan of Rs. !;:5
crores followed #y SBI, which sold 1!1 #ad loans of Rs. 4,;>! crores. So far only > o"t
of total 1 nationali+ed #an$s have sold their #ad loans to ,R- 6Economic %imes
1;.5;.455:9. ,R-I7 has also vent"red in ac("iring retail ho"sing loans of Rs. 1555
crores of National Ho"sing Ban$ and I-I-I #an$. 6'E 4:.!.455!9 %heoretically ,R-I7
has red"ced the N2, of #an$ing ind"stry #y 18<. F%I has promoted the second ,R-
$nown as ,SRE-. %he company received RBI license in Bcto#er 455;. It has ac("ired
N2,s from 11 #an$s.'Is having gross val"e of Rs.115.:5 crores consisting of 1>;
acco"nts. B"t of this ,SRE- recovered Rs.?5.>? crores thro"gh resol"tion. Bther
,R-s are 6a9 India SME asset Reconstr"ction -ompany 7imited 6IS,R-9 promoted #y
SI=BI, 6#9 ,ssets -are Enterprise 6,-E9 7td. 2romoted #y I'-I, and 6c9 Reliance ,sset
Reconstr"ction -ompany promoted #y Reliance ,=, gro"p. ,R-s are hardly a
s"ccesses story since it has #een a#le to #"y only a fraction of N2,s and #an$s are
complaining that they are not offering right price to them. %his pro#lem is e&pected to
#e solved with setting "p of few more ,R-s #eca"se it will increase competition.
5CA
Conclusion
Recent Inspection of RBI of ,R-I7 has s"ggested serio"s deficiencies in asset
reconstr"ction #"siness in general and ,R-I7 in partic"lar. 'irst there is iss"e of poor
corporate governance that ena#led the ma0or shareholders to coll"de in off loading their
#ad loans to ,R-. Second iss"e is of technical nat"re a#o"t #"siness model of ,R-s
a#o"t ac("iring #ad loans and then reali+ing them. %ypically N27s are ac("ired #y ,R-s
"nder a tr"st str"ct"re and sec"rity receipts representing interest in "nderlying sec"rities
iss"ed to ("alified Instit"tional #"yers with ,R-s acting as tr"stees. %he proceeds th"s
reali+ed is "sed to pay sellers of N27s. Since sellers are also #an$ or financial
instit"tions, the model is a$in to a co+y deal #etween #an$ and ,R-s, reminiscent of
incest"o"s relationship #etween financial players that was hall mar$ of 455! financial
crisis. In other words #an$ get N27 off the #oo$ #y selling to a tr"st which in t"rn is
f"nded #y them. So instead of impaired loans they now hold sec"rities representing the
same impaired assets. %hird is that ,R-s are no #etter e("ipped to handle the N27s
than the #an$s them selves. %he sec"riti+ation ,ct 4554 was e&pected to ma$e drastic
changes in recovery landscape #"t it has not happened. Hence the s"ccess of
the ,R-s will depend "pon the serio"sness of the government in implementing the ,ct.
'"rther, =e#t Recovery %ri#"nals 6=R%s9 will have to #e made strong to offer necessary
help to ,R-s in recovery of d"es. 7astly, #an$s and financial instit"tions have to reali+e
that, for recovery from hard)core N2,s, the need for the services of ,R-s clearly e&ists.
,ll the more important is to create awareness on the role and responsi#ility of #an$
officers "nder the ,ct, the f"nctioning of ,R-s, etc. for which the need for strengthening
o"r efforts in training and ed"cation is clearly felt.
5?4
%ha"ter- 19
Due Di$igence in Credit Management
!ntroduction
Bf late, d"e diligence in credit management is reemphasi+ed in #an$s d"e to increasing
irreg"larities and fra"ds. %his is evident from the RBI circ"lar of ,"g"st 4;, 455;
wherein deficiencies commonly o#served in credit management, are e&plained. In this
#ac$drop, there is a felt need to strengthen the system of d"e diligence in credit
management in #an$s. %owards this end, it is attempted to develop a chec$list for the
#enefit of credit officers in #an$s. %he chec$list is #ased on the st"dy of RBI g"idelines,
7oan 2olicy prepared in #an$s, 7enders 7ia#ilities / Best 2ractices -ode in #an$s and
Basic 2rinciples of Ban$ 7ending. %ho"gh this seems to #e comprehensive chec$list,
there is scope to e&pand the same #ased on e&periences of #an$s.
Check(list
I. %re(sanction ormalities
'"lfill the J1- norms for opening a savings . c"rrent acco"nt #y a potential
#orrower. B#tain photograph, I% 2,N, sales ta&.e&cise registration n"m#er, shop
and esta#lishment registration n"m#er, etc. of the person a"thori+ed to operate
the acco"nt.
Dive a loan application forms only if fo"nd eligi#le "nder the concerned #an$
scheme. Help the #orrower to complete the loan application form.
Receive the loan application form d"ly filled)in which sho"ld #e s"#mitted along
withL )
5?5
o 2ro0ect proposal, past and pro0ected financial statements 6a"dited
#alance sheet, and profit E loss acco"nt9 and cash flow statement* &ero&
copies of the relevant certificates* #io)data of the promoter, etc. %he
pro0ect proposal sho"ld contain the re("ired details.
o Iss"e a receipt for the loan application form #eing received and enter in
the 7oan ,pplications Received Register.
,s part of credit appraisal, scr"tini+e doc"ments incl"ding partnership deed,
certificate of incorporation, articles of association, resol"tion of the #oard to raise
#orrowings, tr"st deed, certificate of registration, etc. 6as the case may #e9 and
verify the registered office.#"siness office address.
B#tain the mar$et report of the #orrower and reference letter from referees.
-ollect the details of e&isting #orrowing arrangements with the other #an$s, if
any.
-hec$ list of willf"l defa"lters from RBI.-IBI7 we# site.
=o compliance of g"idelines relating to ta$e)over of the loan acco"nt from the
other #an$.s. B#tain credit report and no lien.no charge letter.
Borrower sho"ld #e as$ed to give a certificate stating details of c"rrent acco"nt
opened with other #an$6s9. Btherwise o#tain "nderta$ing that they are not
$eeping c"rrent acco"nt with any other #an$.
,ssess the financial stat"s of associated companies, if any, and call for their
a"dited financial statements.
Scr"tinise details of the g"arantors which incl"de their relationship with the
#orrower, net worth, #"siness activities, sec"rities to #e offered, etc.
2repare a process note for loan sanction which sho"ld incl"deL
Bac$gro"nd of the promoters
2osition of the present #"siness activities
2roposed #"siness activities
2ro0ect cost and so"rces of f"nds / details
Interview the applicant and record the conversation in #rief.
-hec$ that proposal is within the e&pos"re norms as applica#le to the
individ"al.gro"p.ind"stry.
If the proposal is "nder sensitive sector e&amine e&pos"re norms and g"idelines
"nder #an$As credit policy and RBI restrictions if any.
5?3
o ratin& of t(e borro'er under ban89s ris8 &radin& system6
,pprove the pro0ected fig"res as stated in the proposal, which sho"ld #e #ased
on convincing ass"mptions, and verify certificates of a"ditors and architects.
E&amine the mar$et conditions to approve #"siness estimates.
,ssessment of feasi#ility of the pro0ect / technical, commercial, financial and
managerial aspects. Interpretation of the financial statements and cash flow
statements thro"gh $ey ratios / =LE, -R, =S-R, BE2, IRR, etc. E&amine the
financial standing of the pro0ect and profita#ility of the #orrower.
=o social costL #enefit analysis.
-ond"ct pre)sanction inspection to verify information as f"rnished in the loan
application form and assess the antecedents of the promoters.g"arantors. ,lso
verify the details of the sec"rities to #e offered* proof of the residence, lease
deed, sales deed, rent agreement, etc.
Sanction credit facilities $eeping in mind the lending powers delegated. If
proposed limit fall "nder a"thority of higher office, recommend the proposal to
them. Iss"e a letter of sanction to the #orrower stating the terms and conditions
and o#tain his written consent.
If decided not to sanction, state reasons thereof. B#serve the time limit set for
loan sanction.
2repare a set of doc"ments for e&ec"tion.
=is#"rse the loan amo"nt only after f"lfillment of all terms and conditions. In
partic"lar, promotersA contri#"tion sho"ld #e deposited first #efore dis#"rsement
of the amo"nt. %he term loan amo"nt sho"ld #e dis#"rsed as per the progress of
the pro0ect. End "se of firms sho"ld #e satisfied.
-ond"ct inspection of the factory.#"siness premises within a month from the loan
dis#"rsement to ens"re the end "se of #orrowed f"nds.
!!8 %ost(sanction ormalities
,s part of post sanction formalities, 6,9 -ond"ct of Stoc$ Inspection, 6B9 'ollow)"p the
transactions in 7oan 7edger, 6-9 =isc"ss with the Borrower, 6=9 St"dy the Mar$et
Reports, 6E9 ,naly+e the 'inancial Statements and cash flow statement, 6'9 Review and
Renew the 3or$ing -apital 7imits, 6D9 Reha#ilitate Sic$ Fnits, 6H9 Recover from Non)
performing ,dvances. ="e diligence in respect of these post)sanction formalities is
s"ggested as "nder L
5?3
8 Stock !nspection
By comparing the stoc$ statement of a #orrower with his stoc$ register to confirm that
the stoc$ position as declared #y him is in accordance with the #oo$s of acco"nts. If
there is a ma0or variation, it is a #ad signal.
In case of large #orrowers verification of stoc$ incl"desL
6a9 stoc$ $ept at the factory premises*
6#9 finished stoc$ at the sales depots of the company*
6c9 raw materials sent to o"tsiders for conversion or processing* and
6d9 stoc$ in transit
Besides physical verification of stoc$, it is essential to see L
6a9 p"rchase price of raw materials as indicated in the invoices*
6#9 position of stoc$ in process and finished stoc$ as on the given date d"ly
certified #y the prod"ction manager* and
6c9 pricing policy of the company and methods of val"ation of stoc$ adopted.
'ollowing tips may #e of great "se)
-ond"ct inspection periodically. Ban$s are having policy of inspection on
monthly. ("arterly intervals depending "pon health 6ris$ grading9 of the
#orrowing "nits.
=o s"fficient homewor$ #efore inspection. ,fter inspection, calc"late the
drawing power and note down in the loan ledger. Note down adverse
o#servations in Inspection Register.
=o ,B- analysis. =o 155< verification of high val"e less n"m#er of stoc$s and
85< verification of low val"e high n"m#er of stoc$s.
%he physical verification of stoc$ ens"res the end "se of loans. If the stoc$s are
not ade("ate, it indicates that the f"nds are not f"lly "tili+ed for the agreed
p"rpose.
,ny ma0or variation in stoc$ val"e as per the stoc$ statement on one hand and
#oo$s of acco"nts on the other gives an indication of misappropriation of stoc$ or
diversion of f"nds.
If the stoc$ not #elonging to the company is stored in the factory godown, it
indicates that the company is ind"lging in malpractices.
If the stoc$ statements are deli#erately not s"#mitted for a long time, it shows
that a ma0or portion of the stoc$ does not e&ist.
5?@
If the company has maintained e&cess stoc$, it also indicates that the company is
ind"lging in trading also.
If the company has ta$en a d"al finance from two different #an$s on the same
stoc$, it indicates dishonesty of the #orrowers.
It is diffic"lt to ens"re the ("ality of stoc$. B"t, if there is no movement of certain
finished goods, it shows that the stoc$ is o"tdated, slow moving, o#solete or
"nsalea#le.
It is advisa#le to get the stoc$s chec$ed. val"ed #y stoc$ a"ditors or internal
technical officers of Ial"ation -ell. Drad"ally, dependence on e&ternal val"ers
sho"ld #e red"ced.
="ring inspection, the presence of #an$ #oard, #oo$)$eeping and maintenance
of registers, ins"rance cover, etc. sho"ld #e loo$ed into.
7oo$ into the level of operations, orders in hand, t"rnover of staff, la#o"r
sit"ation, payment of rent and stat"tory d"es, #rea$)down.sh"tdown, poll"tion
control, etc.
-arry o"t age wise classification of receiva#les. B#tain the list of ma0or
c"stomers and e&amine the credit offered to them which sho"ld #e in line with
mar$et practices. In("ire the reasons for #ills ret"rned "npaid.
68 Stock &udit
Bank very often entrust stock F book debt audit to firm of Chartered
accountants8 ollo0ing areas are generally entrusted to audit firms to be
looked into:(
o 2hysical verification of inventory.
o St"dy on inventory control practices, proper "p $eep and re("isite
record.#oo$s.
o Basis of val"ation) whether in line with standard practices and stip"lations of
the #an$.
o System st"dy to segregate non)moving or o#solete inventory.
o ,ge wise analysis of #oo$ de#its.
o E&amine gen"ineness of the trade transaction passing thro"gh #oo$
de#ts.receiva#le.
o -omments on maintenance of plant and machinery.
o Stat"s of registration of RB- charge.
5?>
o Ins"rance stat"s of stoc$.plant and machinery.
o ,ny other information fo"nd relevant.
B. ollo0(up of -ransactions in 1edger Book
2oor t"rnover in an acco"nt indicates that, either the sales are #eing ro"ted
thro"gh other #an$s or have, in fact, #een dropped. In either case, the #an$
sho"ld ma$e an en("iry. 2oor t"rnover indicates poor health.
-he("es for large and ro"nd amo"nt, post)dated che("es and che("es
fre("ently iss"ed in favo"r of those parties not related to #"siness, may need to
#e e&amined caref"lly. , dialog"e with the #orrower sho"ld #e initiated to find
o"t the reasons for the same and ta$e remedial steps.
're("ency of ret"rning of che("es sho"ld #e e&amined. If it is high, it indicates
li("idity pro#lem of the #orrower or otherwise he is engaged in overtrading.
%he Bills ,cco"nt reveals ma0or transactions of the #"siness. 're("ent ret"rn of
#ills may mean that the #orrowersA goods are #eing re0ected #y p"rchasers or the
p"rchasers are sending payments directly to the #orrower. 3hen the #ills are
received #ac$, the #orrower is promptly advised that they have #een ret"rned #y
the collecting #ranch for the reason, [payment not forthcomingA and that he
sho"ld reg"lari+e his acco"nt.
If there has #een irreg"larity in the acco"nt for a longer period, it indicates that
o"tflows are in e&cess of inflows of cash.
If there are no operations in the acco"nt d"ring a part of the year, it indicates that
the "nit has stopped wor$ing d"ring that period. %his is a signal for analysing the
reasons for the inactive operations in the acco"nt.
%he #ehavio"r of the acco"nt d"ring the year wo"ld help #an$ in getting the
signal. %he act"al drawings sho"ld #e related to the #"siness re("irements. It is
e&pected that the "nit normally re("ires more f"nds d"ring the #"sy season. It is
also e&pected that the "nit has to maintain a minim"m level of stoc$ d"ring the
off)season and, therefore, it re("ires minim"m f"nds. ,ny variation in these
e&pectations wo"ld throw a signal.
If there is a heavy withdrawal of cash witho"t convincing reasons, this is a signal
of mis"se of f"nds.
C8 $iscussion 0ith the Borro0er on adverse features
%he following are the signals of incipient sic$ness of the "nit L
Ma0or #rea$down in plant and machinery
5?B
7a#o"r stri$e
're("ent changes in management
S"dden death.illness of a partner.director
=isp"tes among the partners.directors
Repeated reconstit"tion of the firm.#oard
're("ent re("ests from the #orrower for enhancement of credit limits or granting
e&cess drawing
$8 Study the /arket Reports
%he following are the adverse developments relating to a #orrowal acco"nt as
mar$et reports or news in the newspaperL
Recession in the ind"stry
Fnfavo"ra#le position of the inp"ts
Fnsatisfactory report a#o"t the party
Sharp fall in prices 6o"tp"t9
Fnfavo"ra#le changes in government policy as regards e&cise, imports and
e&ports, price fi&ation #y the government, etc.
Ro"ting transactions thro"gh other #an$.s or legal action #y other #an$ in sister
concern or gro"p acco"nt .
E8 &nalyse the inancial Statements
Several wea$nesses in financial health of the "nit can #e "nderstood from
analysis of financial statement li$e L)
Fnsatisfactory trend in profits
Sales #elow pro0ected level
Rise in #oo$ de#ts
Shortage of wor$ing f"nds
Fnsatisfactory position of e("ity or withdrawl of f"nds #y partners or proprietor
=iversion of short term f"nds for long term "se
B"ilding "p of "nprod"ctive assets
Fnhealthy acco"nting practices
8 Revie0 and Rene0 the Eorking Capital 1imits
,s$ the #orrower to s"#mit the renewal proposal #efore the credit limits e&pire.
Review the performance d"ring the c"rrent year in terms of S3B% analysis.
5?C
Scr"tinise the proposal to enhance the credit limits in terms of ass"mptions in the
estimating pro0ected sales, inventory levels, credit re("irement, cond"ct of the
acco"nts, stoc$ inspection and ind"stry prospects.
-omply with the g"idelines of the Ban$ in respect of e&pos"re limits, sensitive
sectors
Review or renew the facility in terms of lending powers or otherwise refer to the
sanctioning a"thority.
=ecide on the credit proposal timely, partic"larly #efore the e&piry of the limits.
Non review of acco"nts for more than 5 days will ma$e the acco"nt N2, as per
pr"dential norms.
-onsider to sanction ad)hoc limit if enhancement is going to ta$e time to meet
pressing payments of wages, #on"s, p"rchase of raw material, electricity, ta&es,
etc.
68 Rehabilitation a Sick >nit
It is essential to ta$e)"p the following steps to reha#ilitate a sic$ "nit L
Identify a sic$ "nit as per the official definition.
,s$ the #orrower to s"#mit the proposal to reha#ilitate the "nit.
St"dy the ca"ses of sic$ness, internal and e&ternal
2repare the reha#ilitation scheme $eeping in mind the g"idelines of the
RBI.Ban$.
Sanction the scheme #y f"nding irreg"larity, "ncharged interest and sanction of
need #ased limit.
Implement the reha#ilitation scheme) necessary contri#"tion from #orrower to #e
ens"re.
Monitor the progress d"ring the post implementation of the scheme.
Review the progress in reha#ilitation of the "nit in terms of the loan repayment
with interest.
Initiate legal action if the reha#ilitation efforts fail.
6'or detailed proced"re of reha#ilitation of sic$ "nit refer to -hapter)189
H8 Recovery from Non(%erforming &dvances *N%&s+
Several steps relating to recovery from N2,s shall incl"de the following L
Ban$ sho"ld form"late a Recovery 2olicy.
5??
Ban$ sho"ld set the targets for recovery from N2,s and also for prevention of
potential N2,s. , separate Recovery =epartment . -ell sho"ld #e set "p in the
#an$ to co)ordinate recovery efforts.
Send a reminder to the defa"lters on timely #asis, pay a visit to their #"siness
premise.residence.
Entertain a compromise proposal as per the #road policy g"idelines of the #an$.
Recall the advance.
'ile s"it against the #orrowers in the -ivil) co"rt.=R%.-ertificate case .
Serve a notice of >5 days "nder the S,R',ESI ,ct and ta$e action of sale and
sei+"re of assets or ta$e over of management.
Initiate action "nder %ransfer of 2roperty ,ct #y entr"sting the wor$ to the private
a"ctioneers.
Brganise @recovery campA and reward those recovering the highest amo"nt.
Initiate any other steps to strengthen recovery efforts and "pgrade the ("ality of
potential N2,s.
6'or detailed recovery meas"re refer to chapter )119
Conc$usion
In this chapter , it is attempted to p"t in one place vario"s items of d"e diligence in credit
management. B"t this may not #e considered as an e&ha"stive list. Hence, credit
officers may ta$e into acco"nt additional item of d"e diligence #ased on their e&perience
and common sense. %his e&ercise of developing the chec$)list is felt necessary to
co"nter operational ris$ in large scale credit e&pansion partic"larly in ,gric"lt"re, SSI
and Retail loans. ="e diligence will also help the #an$ers in chec$ing slippage of N2, or
controlling potential N2,. %owards this end, it is appropriate to reiterate that non)
compliance of principles of lending and #an$ g"idelines wo"ld deteriorate the ("ality of
loan portfolio and allowing the credit ris$ to go "p. Hence, d"e diligence in credit
management m"st receive d"e care.
-000-
5?A
%ha"ter-20
Negotiation Ski$$s and Strategies for Banking
Business
6etting a best deal
In a negotiation sit"ation two parties negotiate for a #est possi#le o"t come say
price. %he process starts with the negotiation preparation, common negotiation mista$es,
whether to ma$e a first offer or not, respond to offers from the other party, str"ct"ring
yo"r initial offers, finding o"t how far yo" can p"sh the other party, strategies for haggling
effectively and to how to ma&imi+e not only yo"r o"tcome #"t also the val"e of o"tcome
of other parties. It is well $nown that negotiators who foc"s only on claiming val"e reach
worse o"tcomes than do those who cooperate with the other side to improve deal for
#oth parties. %here are also occasion when negations are not the answer to the
pro#lem. , #an$er sho"ld learn to disting"ish #etween the times when he sho"ld #e
playing the negotiation game and times when he sho"ld #e changing the game.
Customer driven market
-redit is now mar$et driven. Borrowers are not only negotiating interest rates,
service charges, free) remittance facility #"t also terms and conditions of loan
aggressively. %hey are demanding fle&i#le repayment terms, floating interest options,
collateral free loans, s"#)27R interest rates, top "p or ad)hoc finance, less paper wor$
5A4
and formalities, fast sanction and dis#"rsement. In deposit front, there is demand of new
prod"cts and services, which not only #rings convenience #"t also #etter ret"rns and
cost. Ban$s are now selling third party prod"cts li$e ins"rance and m"t"al f"nds, which
not only re("ires proactive selling #"t also good negotiation s$ill and mar$eting
strategies. Even in finali+ing the terms of loan sanction, reha#ilitation and compromise
negotiation s$ills are essentials, which provide competitive edge to #ranch managers. In
HR and IR matters, negotiation s$ills play an important role. It is, therefore, essential for
every #an$ officer to ac("ire and develop negotiating s$ills, which wo"ld help him or her
to do #an$ing #"siness efficiently and effectively.
Negotiation tips(
Negotiation is a#o"t achieving a m"t"ally accepta#le o"tcome to a sit"ation in which
the parties involved initially have differing aims. =o not negotiate "nless this is either
necessary, or some advantage may #e o#tained #y doing so. %hree stages are
involved in negotiationL preparation, the negotiation itself, and implementation.
Before em#ar$ing on negotiation, there is a need to assess the partiesA relative
strengths.wea$ness and possi#le o"tcome, improvement in #ottom line etc.
Esta#lish what the other partyAs case is and what they are see$ing to achieve. If
possi#le, one o#0ective sho"ld #e to help the other party to feel satisfied with the
o"tcome.
Ial"e time, sched"les and deadlines. , good negotiator will not #eat aro"nd the #"sh
or adopt delay tactics or waste time tal$ing a#o"t m"ndane matters. It is professional
to get down to #"siness and address $ey iss"es.
E&change fact"al data in advance of negotiations. %his may infl"ence the o"tcome
or prevent delay and conf"sion d"ring negotiation.
-onsider the possi#le e&istence of a hidden agenda / "nderlying iss"es, which may
infl"ence the cond"ct and o"tcome of the negotiations.
Negotiations are infl"enced #y their style and pace, #y the composition of the
negotiating team, and #y the arrangements for seating and refreshments.
%he s"#0ect, scope and p"rpose of the meeting sho"ld #e made clear #efore
negotiations commence.
Be foc"sed on the pro#lem or iss"e. 7ogical arg"ments are the $ey to smooth
negotiations.
%he first spea$er infl"ences the progress of negotiation significantly.
5A5
It is important to #e firm yet polite when ma$ing a stand or presenting a point.
Be patient and let the process of negotiations ta$es its co"rse.
3hen considering concessions, introd"ce the condition first and do not give details
of the concessions "ntil the other party shows some willingness to negotiate on the
condition. -learly specify advantages and disadvantages.
2"t ego aside and concentrate on the matter at hand. It is finding an amia#le sol"tion
thatAs important not self worth or position.
,void the psychological traps and have the magnanimity to admit when yo" are
wrong. Be open minded d"ring negotiations.
Never threaten or manip"late the opposite party) it is completely "nethical and "nfair.
Normally, avoid emotional commitment, #"t display of emotion may occasionally #e
#eneficial provided that they are sincere and "sed conscio"sly.
, contin"o"s session sho"ld rarely e&ceed two ho"rs, a formal presentation for 1: to
45 min"tes, and an informal introd"ction for two to three min"tes.
Effective negotiators are good listeners* they as$ ("estions more than they ma$e
statements.
,im for sol"tions that are interest #ased and not what individ"al desires or aims are.
It is #est to consider any sit"ation as a whole rather than from a personal view point.
=o not accept wea$ sol"tions or temporary sol"tion. %ry to negotiate a pla"si#le
settlement.
%here is a positive advantage in ma$ing it easy for the other side to move, rather
than challenging them on a win.lose #asis.
-ompromise sho"ld #e seen as constr"ctive, not wea$ness. It is a win)win game.
%he closer a negotiation is to reaching agreement, the more sensitively the
disc"ssion needs to #e handled.
Some record of the o"tcome of negotiations, however informal, is desira#le in order
to ens"re a common "nderstanding of what has #een agreed.
Before finali+ing an agreement, chec$ that all aspects have #een agreed partic"larly
dates for implementation, review or completion* and definitions of terms.
,n agreement is not s"ccessf"l "ntil it has #een effectively implemented.
2eriodic and 0ointly agreed s"mmaries of progress can sec"re a phased agreement
and prevent reversion to earlier arg"ment.
5A3
H"mor, can #e "sed to red"ce tension and help create a #ond #etween the parties.
%he main options of handling #rea$down are to ta$e "nilateral action to enforce an
o"tcome, or to see$ third party intervention. %he most powerf"l and ris$y form a third
party resol"tion is ar#itration / where #oth parties #ind themselves in advance to
accept the ar#itratorAs sol"tion / or legal action thro"gh the co"rts or tri#"nals.
'ace)to)face disc"ssions are not the only form of negotiationL effective "se can also
#e made of correspondence and the telephone. Iideo conferencing is now an
effective way of negotiation in cost effective manner.
%elephone disc"ssions may #e "sed to settle minor or simple negotiating points
e&tremely ("ic$ly.
,ltho"gh some people are #etter nat"ral negotiators than others, negotiating s$ills
can #e ac("ired or improved #y practice, coaching and training.
%ha"ter-21
5oan Defau$t and #ro;ta0i$it" of Banks
Introduction
Ierma -ommittee on Restr"ct"ring of 3ea$ 2"#lic Sector Ban$s, appointed #y
the Reserve Ban$ of India, as part of assignment, identified wea$ #an$s, strong #an$s
and potential wea$ #an$s #ased on the st"dy of seven efficiency parameters. %hese
parameters incl"de capital ade("acy ratio, coverage ratio, ret"rn on assets, net)interest
margin, operating profits to average wor$ing f"nds, cost to income, and staff cost to net
interest income pl"s other income. ,ccordingly, three #an$s were identified as wea$
#an$s when none of the seven efficiency parameters were met. ,s against this, two
#an$s were considered as strong #an$s when all parameters were complied. B"t in
respect of si& #an$s most of the parameters i.e. five or si& of the total parameters i.e.,
seven, were not f"lfilled. Hence, they were considered as potential wea$ #an$s. %his
paper attempts to e&tend the st"dy cond"cted #y the Ierma -ommittee more specifically
to ascertain whether eno"gh signals of wea$ness were indicated m"ch #efore the event.
't#d9 P4an
%he present st"dy considers 1!) as the year of event when the Ierma
-ommittee identified wea$ #an$s, strong #an$s and potential wea$ #an$s. Since the
5A3
data relating to #an$s are not availa#le on "niform #asis for the earlier years, there is a
slight change in the set of parameters as considered #y the Ierma -ommittee.
,ccordingly, this st"dy considers nine efficiency parameters, which are comp"ted, #ased
on the data collected from the Reserve Ban$ of India p"#lication i.e., Report on %rend
and 2rogress of Ban$ing in India. %he parameters incl"des L
-apital ,de("acy Ratio
Net Non 2erforming ,ssets.Net ,dvances
Net 2rofit . %otal ,ssets
Dross 2rofit . 3or$ing '"nds
Net Interest Income 6Spread9.%otal ,ssets
Interest Income . %otal ,ssets
Interest E&pended . %otal ,ssets
Intermediation -ost . %otal ,ssets
2rovisions and -ontingencies . %otal ,ssets
%he a#ove parameters foc"s on two ma0or concerns of #an$s i.e. loan defa"lt and
profita#ility where as the Ierma -ommittee covered all aspects of financial health. %he
st"dy aims at pointing o"t signals of loan defa"lt and deterioration in profita#ility prior to
the year of event.
Initially, it was attempted to find o"t whether the a#ove parameters were interdependent
for which regression analysis was carried o"t. ,s seen from %a#le 1, the correlation
coefficient is positive in respect of fo"r pairs i.e. Net profit.%otal assets and -apital
,de("acy Ratio* Net profit.%otal assets and Dross profit.%otal assets* Net profit.%otal
assets and Interest spread.%otal assets* and Net profit.%otal assets and Interest
income.%otal assets. ,nd in regard to other fo"r pairs i.e. Non)performing assets.%otal
advances and -apital ,de("acy Ratio* Non)performing assets.%otal assets and Net
profit.%otal assets* Net profit.%otal assets and Intermediation -ost.%otal assets* Net
profit.%otal assets and 2rovisions and -ontingencies.%otal assets, it is negative
marginally. %he remaining pair i.e., Net profit.%otal assets and Interest E&panded.%otal
assets is the least correlated one d"e to the fact that interest o#ligations directly depend
on deposits and #orrowings and not on profit. Barring this pair, all pairs are fairly
correlated. Hence, it wo"ld #e an interesting e&ercise to st"dy the #ehavio"r of the
a#ove)mentioned ratios for three gro"ps of #an$s 6wea$, strong and potential wea$9
#efore the year of event i.e. 1. 'or this p"rpose, a mean val"e of each ratio 6%a#le 19
5A@
was comp"ted. %he following o#servations are made from the st"dy of these mean
val"es.
.bservations:
%he level of non)performing assets discriminated #etween two gro"ps. 'or instance,
the average ratio of non)performing assets.total advances of wea$ #an$s, strong
and potential wea$ #an$s for the year 1!) was 1:.?8, >.8> and .4: percent
respectively. %ho"gh wea$ #an$s and potential wea$ #an$s attempted to red"ce
the ratio over the years, the level of N2,s was considera#ly high. ,s against this,
strong #an$s $ept N2,s at low level.
Ret"rn on total assets is also a discriminator #etween the two gro"ps. 'or wea$
#an$s, the average ratio of net profit.total assets was negative for the entire period,
tho"gh it was attempted to red"ce it from 8.?8< 6negative9 in 1:)> to 1.4;<
6negative9 in 1!). ,s against this, strong #an$s maintained an average ann"al
ret"rn of 1.1 percent on total assets. 2otential wea$ #an$s witnessed a positive
ratio tho"gh it was very low. In 1!), #an$s in all the three gro"ps have not
performed well and, therefore, the ratio #ehaved typically.
,ny change in the ret"rn on total assets depends "pon corresponding change in net
profit on one hand and si+e of total assets on the other. ,nd, net profit is the s"m of
gross profit less provisions and contingencies. Since the ret"rn on total asset
discriminates one gro"p from another, interest spread and provisions and
contingencies sho"ld also #e related to total assets. %he average gross profit.total
assets ratio varied from one gro"p to another very widely. In 1!), the average
ratio was 5.15 6negative9, 4.45 and 5.: percent respectively for wea$ #an$s, strong
#an$s and potential wea$ #an$s. Bver the years, wea$ #an$s attempted to red"ce
gross loss s"#stantially. ,s against this, strong #an$s e&perienced slight red"ction
in the gross profit ratio #"t itAs level still remained as high as 4.45 percent in 1!)
. %he potential wea$ #an$s also s"cceeded in improving the position #"t their
ratio was very low as compared to ind"stry average fig"res. B"t in 1!), the
average ratio of potential wea$ #an$s e&ceeded the sample average ratio. %h"s, all
gro"ps tried to show a higher gross ret"rn on total assets. B"t, what really matters
is the level of the ratio.
%he si+e of interest spread also decides net profit. 3ea$ #an$s in the sample
maintained 0"st half the spread of strong #an$s as seen from the average ratio of
interest spread.total assets which was 1.> per cent in 1!) for wea$ #an$s as
5A>
against 8.81 per cent for strong #an$s. 'or potential wea$ #an$s, it was moderate
#eing at 4.:> per cent which was lower than ind"stry average i.e. 4.!1 per cent. In
1!), all #an$s witnessed a decline in interest spread as compared to 1?)!
fig"res. It is interesting to note that wea$ #an$s improved the position of spread
over the years whereas strong #an$s and potential wea$ #an$s, witnessed some
deterioration in it. B"t for wea$ #an$s, low interest spread is a matter of concern.
Interest spread is the net of interest income less interest e&pended so, wea$ #an$s
tried to attac$ #oth items i.e. interest income and interest e&pended. B"t in respect
of strong #an$s and potential wea$ #an$s, while there was some s"ccess in
a"gmenting interest income, it was fo"nd diffic"lt to chec$ interest e&pended.
Relatively spea$ing, all gro"ps e&perienced high interest e&pended as compared to
ind"stry average fig"res thro"gho"t the period i.e. 1:). Here again, what
matters is the level of interest income of wea$ #an$s.
,ll the three gro"ps were a#le to chec$ intermediation cost i.e., operating e&penses.
%here was a marginal difference in the average ratio of intermediation cost. total
assets in 1!) which was 4.? per cent and 4.?8 percent for wea$ #an$s and
strong #an$s respectively. It was 4.1 per cent for strong #an$s. Both wea$ #an$s
and potential wea$ #an$s have to learn from strong #an$s in restricting the
intermediation cost. 'or the year 1!), the average ratio of strong #an$s was
m"ch lower than #oth sample average and ind"stry average.
Non)performing assets have to #e provided for. %ho"gh the data on provisions made
for N2,s are not availa#le, some idea may #e o#tained from provisions and
contingencies as stated in the income statement. ,ccordingly, the average ratio of
provisions and contingencies.total assets witnessed a declining trend in respect of all
three gro"ps d"ring the period i.e. 1:). %his is #eca"se of red"ction in the
gross N2, percentage which was 14.?? for all three gro"ps in 1:)> and then
declined to 15.> in 1!). %here was a steep fall in the ratio of wea$ #an$s and
potential wea$ #an$s in 1!) over 1:)> fig"res. %his s"ggests that these
#an$s were a#le to ma$e a good recovery from N2,s d"ring the period.
%he average -apital ,de("acy Ratio in 1!) also discriminates wea$ #an$s from
strong #an$s very distinctly when the same was 8.;8 per cent and 14.4! percent
respectively. 'or potential wea$ #an$s, this was 15.:? per cent as against ind"stry
average ratio of 15.!4 percent. 3ea$ #an$s were far #ehind the minim"m
prescri#ed norms of ! percent. Bver the years, while wea$ #an$s contin"ed to
5AB
o#serve a low ratio, strong #an$s not only maintained high capital ade("acy ratio #"t
also improved its level.
Conclusion
'rom the a#ove o#servations, a few iss"es arise. 3ea$, strong and potential wea$
#an$s were ade("ately discriminated #y loan defa"lt on one hand and profita#ility on the
other. %ho"gh #an$s in all three categories red"ced the N2, percentage and improved
the position of profita#ility, what matters is their levels. In other words, wea$ and
potential wea$ #an$s were saddled with high N2,s and low profita#ility. Even today, the
pro#lem persists. Hence, corrective strategies have to #e tho"ght of.
-able( ? :Correlation Coefficient *r+ of %arameters
Sr8 No8 %arameter r
1. Non)performing assets.%otal assets and Net profit.%otal
assets
) 5.!;
2. Non)performing assets.%otal assets and -apital
,de("acy Ratio
) 5.!>
3. Net profit.%otal asset and -apital ,de("acy Ratio 5.!
. Net profit.%otal assets and Dross profit.%otal assets 5.!8
5. Net profit.%otal assets and Interest Spread.%otal ,ssets 5.!:
6. Net profit.%otal ,ssets Interest Income.%otal ,ssets 5.!>
7. Net profit.%otal ,ssets E Interest E&pended.%otal
,ssets
) 5.5
8. Net profit.%otal ,ssets Intermediation -ost.%otal ,ssets ) 5.>1
9. Net profit.%otal ,ssets and 2rovisions and
-ontingencies.%otal ,ssets
) 5.??
-000-
5AC
M+,D&:*).
':,+:&.?
T %=':(M&,'
T P,(/=%:'
T %>+))&7'
T ;='*)&''
+77*+)%&'
%ha"ter-22
Retai$ Banking Ne2 #aradigm
The purpose of business is to attract and retain a customer$#
-eter %ruc+er
?8 %ost reform development /arketing Strategy
7i#erali+ation and de)reg"lation process started in 11)4 has made a sea change
in the Indian #an$ing system. 'rom totally reg"lated environment, #an$s moved into
a mar$et driven competitive environment. %he traditional #an$ing approach to
depend "pon wal$ in c"stomer has given way to
s"per mar$et where all financial need of the
c"stomers are satisfied "nder one roof. If we loo$ to
the evol"tion of mar$eting, we find that different
strategies have evolved over a period of time for
prod"ction, distri#"tion and promotion of prod"cts. It
started with mass mar$eting model ) where mass prod"ction of goods was done with
the hope that low cost and price wo"ld a"tomatically create a #ig mar$et. 7ater on,
prod"cers shifted to prod"ct variety model that was #ased on ass"mption that m"ch
variety across the shelf will event"ally win a c"stomer. ,nd last one is target
mar$eting where the prod"cer.financial service provider identifies variety of mar$et
segments, selects one or more of them and than resorts to relationship mar$eting #y
strategically positioning its prod"cts to the target c"stomers. %he same pattern is
evolving in #an$ mar$eting in India.
;8 Retail Banking( Customer focus
5A?
4.1. Berry recommended five strategies for practicing mar$eting) 6a9 =eveloping a
core service aro"nd which to #"ild a c"stomer relationship, 6#9 -"stomi+ing the
relationship to the individ"al c"stomer, 6c9 ,"gmenting the core service with
e&tra #enefits, 6d9 2ricing services to enco"rage c"stomer loyalty and 6e9
Mar$eting to employees so that they will perform well for c"stomers.
4.4. %he traditional mar$eting mindset is @command and controlA mindset that relies
on selling to passive c"stomers who demand and perceptions can infl"ence and
manip"lated. However in the information age, mar$eting people has to evolve
strategy of @connect and colla#orateA with c"stomers to create, deliver and share
val"e #y esta#lishing long term relationship.
4.8. 'irst law of good c"stomer relationship is @ta$e good care of yo"r c"stomersA.
Dood office am#ience and interiors not only ma$e c"stomer rela& and "p#eat
#"t also have them feel welcome, ta$en care and important.
4.;. Since all #an$s offer more or less the similar prod"cts and replication of the
prod"ct is very easy, it is the c"stomer service that ma$es the difference. %he
c"stomers these days are #ecoming more and more demanding on price,
prod"ct and convenience. %hey are well informed and see$ financial advice
#efore they #"y a prod"ct. %hey have no loyalty with any instit"tion and ready to
switch over to any #an$ as and when they get a #etter deal. Ban$sA are gearing
themselves to #ecome c"stomer centric where all foc"s is on #"ilding
s"staina#le long)term c"stomer relationship.
4.:. 3ith little to disting"ish #etween different players, #an$s are searching for newer
ways to reach o"t to the c"stomers. , few #an$s have now la"nched home
delivery service that provide home delivery of cash and demand drafts and
home pic$ "p of cash and che("es etc. %hese are meas"res to retain c"stomers
and enhance their loyalty.
4.>. Relationship Ban$ing plays a cr"cial role in strategy #"ilding. %he emphasis
here is on viewing the c"stomer)relationship as long term m"t"ally #eneficial
rather than confining to a partic"lar loan or deposit transaction. Ban$ now tries
to meet total financial re("irements of the c"stomer to get repeat #"siness. In
order to promote lifetime relationship, #an$ does offer relationship concession
6red"ction in interest9, relationship disco"nt 6concession in service charges9, free
co"nseling and investment advice which c"stomer can val"e in terms of their
loyalty.
5AA
4.?. In competitive environment, c"stomer can choose what they consider #est. In
choosing their #an$s c"stomers are infl"enced #y the image of the #an$ and the
perceived ("ality of service. %he #an$ that provides #etter service or perceived
to #e #etter than others gets c"stomers. Dood c"stomer service in itself wor$s
li$e a @#randA for the #an$. It spea$s of the service standard.
4.!. , perception of good service relates to co"rtesy, promptness, employee
attit"des, physical facilities, c"stomersA recognition, speed, clarity and
comm"nicative s$ills and host of s"ch feat"res. It gets manifested in the care,
concern, commitment and sensitivity shown #y the #an$ staff. , delighted
c"stomer helps the #an$ in ac("iring new c"stomers. S"ch a c"stomer is an
"npaid salesperson of the #an$.
4.. Relationship #an$ing re("ires sales force with complete $nowledge of prod"ct
with pleasing attit"des and gen"ine concern of c"stomerAs pro#lem. However to
offer correct prod"ct to the c"stomers, #an$ staff need to have complete
$nowledge of the prod"cts and s$ill in mar$eting the prod"cts. He m"st
"nderstand c"stomerAs need so that the he can offer to him #est prod"ct
availa#le and not the one, which he is having. He sho"ld $now how to greet
c"stomers, meet their needs and handle their do"#ts and complaints. ,s
$nowledge and s$ill development re("ires lot of orientation and attit"dinal
changes, #an$s are training.retraining their h"man reso"rces to #"ild "p these
competencies and capa#ilities.
4.15. %he research has shown that cost of ac("iring a new c"stomer is si&
times more than that the cost of retaining a c"stomer 6Dr"en, 1?9 and hardly
1;< c"stomers leave an organi+ation for competitive reasons whereas >!<
leave for indifferent approach. %herefore all attention is now on retaining
c"stomers #y pampering them thro"gh #etter price 6#etter interest rate,
concession in service charges etc.9, more convenience 6instant sanction, easy
doc"mentation, foc"sed service, c"stomer friendly staff etc.9 #etter ("ality
6prod"ct variety9 and e&tras li$e free#ies or add on 6+ero processing charge,
free car ins"rance, free home ins"rance etc.9 In fact for retaining c"stomers, a
#an$ has to constantly reinvent itself. -aptivating 6instead of capt"ring9
c"stomer is new mantra of retail #an$ing.
4.11. -"stomers are also #ecoming less tolerant of mista$es. %he retention
strategy involves enco"raging and entertaining complaints proactively to create
344
c"stomer friendly image. Ban$s are providing call center or toll)free help line to
ena#le the c"stomer to ma$e ("eries and register grievances.
4.14. , new dimension in c"stomer service is ethical practices. Responsi#le
ethical #ehavior is now seen as an essential part of c"stomer relationship.
Ban$s are p"#lishing #est practices code in s"pport of their commitment to
ethical #"siness practices.
4.18. =e)selection of c"stomer is also an important iss"e, which is often
ignored in conte&t of social #an$ing. ,ccording to Mar$et 7ine ,ssociates, the
top 45< of typical #an$ c"stomers prod"ce as m"ch as 1:5< of over all profit,
while the #ottom 45< of c"stomers drain a#o"t :5< from #an$As #ottom line
and the reven"es from the rest 0"st eno"gh for meeting their e&penses. =e)
selection involves deli#erately losing few c"stomers, which are considered
"nimportant.loss ma$ing. 'or e&ample #an$s are changing foc"s from n"m#er
of savings #an$ acco"nts to val"e of acco"nts and in the process weeding o"t
those acco"nts where c"stomer persistently fail to maintain minim"m #alance.
4.1;. =e)selection sho"ld #e differentiated from @-"stomer on trialA / c"stomer
doing trial of a prod"ct or service or a #an$. Strategic mar$eting involves
converting s"ch c"stomers into a higher spending, more fre("ent referring
advocate. See 'IIE r"pee magic / H77 sells n"m#er of prod"cts at Rs. : li$e
2epsodent, 2ondAs tal$, 2ondAs cold cream, Rin, %aa+a, 'air E 7ovely, -linic
2l"s and 7"&. %he strategy is to ind"ce first "ser c"stomer #y offering a prod"ct
as cheap as Rs : to penetrate the mar$et and then converting these #"yers into
permanent c"stomers #y offering val"e for their money. , #an$ has recently
introd"ced Rs. : Saving Ban$ @no)frillA acco"nt to capt"re c"stomers #y an
entry)level prod"ct.
4.1:. Income that a c"stomer generates to the #an$ directly or thro"gh referral and
recommendation model refers to G7ife time val"e of a c"stomerH. S"ch
c"stomers are specifically targeted for #"siness development. -RM plays a
cr"cial role in f"lly harnessing the val"e of e&isting as well as potential
c"stomers. -RM is a new face of mar$eting.
4.1>. %he #asic concept of -RM is that it aids #"sinesses #y "se of technology and
h"man reso"rces to gain insight into the #ehavior of c"stomer. Many -RM
software sol"tions are now availa#le to create -"stomer Information System
6-IS9, =ata wareho"sing, =ata mining and Sales 'orce ,"tomation 6S',9. -RM
345
can help the #an$ in 6a9 ac("iring newer more profita#le c"stomers, 6#9 selling
more prod"cts to the e&iting more profita#le c"stomers and 6c9 red"cing
c"stomer ch"rn #y retaining more profita#le c"stomers.
4.1?. Speed and time are critical factors in c"stomer service. Internet #an$ing,
mo#ile #an$ing, ,%M, tele)#an$ing etc. are all offered to ta$e care of speed and
time. %echnology today is a $ey facilitator to any time, anywhere and anyhow
#an$ing. I% is #"ilding competitive advantage for #an$s.
4.1!. =emographic and psycho)graphic changes of people are ca"sing demand shift
in a very #ig way and these are $ey drivers of demand side of retail prod"cts.
Mapping c"stomer needs is important for prod"ct development so that act"al
re("irement of the c"stomer is $nown and can #e satisfied. %he process starts
with the mapping the c"stomerAs #ehavior #y analy+ing vario"s activities that he
performs while selecting, p"rchasing, "sing and disposing a prod"ct and then to
locate gaps from where he derives val"e. In a classic case of car loan, a
c"stomer as$ed the #an$ why the #an$ wanted him to retain a car for seven
year #y offering him seven)year prod"ct. In fact, a short)term loan say, one to
two year wo"ld have served his p"rpose.
A8 Retail Banking %roduct focus
8.1. %he term prod"ct in #an$ means a set of services designed to varied needs,
motives, styles, val"es etc., of #an$ c"stomers. It is wants)satisfying commodity
created and delivered for c"stomerAs satisfaction. 7i$e any other physical
prod"ct, the str"ct"re of the #an$ prod"cts consists of different components li$e
core component, a"gmented component, ancillary service component etc. It
may #e deposit)#ased prod"ct or a credit #ased prod"ct. 'or e&ample, no frill
home loan is a core prod"ct, other facility li$e personal ins"rance, life ins"rance,
ho"se hold ins"rance, fle&i)repayment plan etc., is a"gmented component and
pre credit. post credit co"nseling, ta& planning and advise in selection of
property etc. is ancillary service component. %he prod"ct development is $ey to
s"ccessf"lly face competition.
8.4. %he mar$eting of financial prod"cts is totally different to mar$eting of physical
prod"cts 61o" can not sell a home loan, they way yo" sell soaps9 d"e to nat"re
of financial prod"cts i.e. intangi#ility of prod"ct and its insepara#ility from
provider. Intangi#ility means #"yers can not compare service the way they can
compare the goods #y loo$ing to its appearance, feel, weight, smell, si+e,
343
shape, price, pac$aging and #rand. %hey can o#serve the difference only #y
meas"ring e&pected vis a vis the perceived #enefits. %o ena#le c"stomers to
meas"re #enefits, #an$ has to create prod"ct visi#ility thro"gh aggressive
advertising, mo"th p"#licity and #y creating professional am#ience. %o
overcome pro#lem of insepara#ility, the #an$ has to pro0ect it self as ro#"st,
relia#le and "ser)friendly service system.
8.8. %o create a distinction in the mar$et, the #an$ has to design services strategies
to #"ild credi#ility and professional relationship among c"stomers. 'or e&ample
many #an$s have started offering home delivery and home pic$ "p service of
cash, drafts.che("es and other #an$ing prod"cts li$e "tility #ill payment which
for past many years was the e&cl"sive domain of retail shops li$e provision
stores. %his is helping the #an$s to increase penetration, c"t retailing cost and
improve c"stomer #ase. , #an$ with tie)"p of a telecom company has
leveraged technology #y offering eSettlement prod"ct so that c"stomer can
settle the #ills min"s cash from comfort of his home. However #an$s has to ta$e
care of credi#ility of third party #y ens"ring that o"tso"rcing agent maintain
service standard.
8.;. Since #an$s operate in #"yers mar$et, c"stomer satisfaction is $ey to s"ccess
of new prod"cts. Basically the c"stomerAs needs are repetitive, m"ltiplicative and
dynamic in nat"re. %he prod"ct development strategy aims at e&ploring and
satisfying these needs in a contin"o"s manner. ,lfred 2. Sloan once said @ we
m"st design not 0"st cars we wo"ld li$e to #"ild #"t, more important, the car that
o"r c"stomers wo"ld want to #"y.A
8.:. Each prod"ct has its life cycle. 2rod"ct innovation is a necessity so that #efore
life cycle of the prod"ct is over, there is new prod"ct to ta$e its place. %he #an$
sho"ld, therefore, aim at creating new prod"cts or modify e&isting prod"cts
after mapping c"stomerAs need. -reation. modification of prod"cts can #e done
either thro"gh val"e creation 6innovate or die9 or val"e addition 6new feat"res9 or
val"e afforda#ility 6cheap or no frill prod"cts9. Bpening of Savings Ban$ acco"nt
with only RS.:.) is a classic e&ample of val"e afforda#ility.
8.>. 3hile development of new prod"ct is important, it is e("ally important to wean
o"t o#solete.low demand.loss ma$ing or low profit prod"cts. 7i$e any thing else,
each prod"ct has its life cycle. %ypical life cycle is) introd"ction, growth,
mat"rity and decline. B"t very often most #an$s do not e&amine their prod"cts
343
to chec$ if they are selling too many prod"cts, identify wea$ ones and $ill
"nprofita#le ones. Merge, mil$, sell, or $ill are fo"r options for prod"ct
management.
8.?. Merging prod"cts than dropping them is an option, which is e&ercised when a
#an$ finds that a prod"ct targeted for deletion is having c"stomers that might
grow in f"t"re. So prod"cts are merged and new feat"res are promoted to
initiate migration of c"stomers to new #rand.
8.!. Mil$ing strategy is adopted for those prod"cts where it is fo"nd that the prod"ct
is pop"lar with a small segment. So a #an$ drops all sales promotion
e&penses and allows the prod"ct to die its nat"ral death and meantime availa#le
sales potential is e&ploited #y providing #are minim"m s"pport.
8.. Fnprofita#le #rands.prod"cts are either sold or $illed to save money for
mar$eting profita#le prod"cts. 7arge #an$s often dispose off prod"cts that no
longer meet their financial targets altho"gh these may #e profita#le to smaller
#an$s. %he legal safe g"ards in respect of sale of prod"cts are ta$en to ens"re
that the #rands.prod"cts do not ret"rn as rivals.
8.15. 'ailed prod"cts are also dropped or $illed. 'ailed prod"ct is one that does not
meet the e&pected need and wants of the c"stomers. In Indian conte&t, Dold
=eposit scheme is a classic case, which failed d"e to Indian psychic that people
do not want to dismantle their ornaments. Stoc$ invest scheme is other prod"ct
which lost its "tility d"e to red"ction in allotment time of primary iss"e and has
therefore #een withdrawn #y RBI.
8.11. %he race for #ecoming a @one)stop financial s"permar$etA is hotting "p li$e
never #efore and even smaller #an$s are now tal$ing a#o"t #ecoming the
destination for all $inds of financial prod"cts. 3hile developing own prod"cts is
an e&pensive proposition and is a time cons"ming process, third party prod"ct is
sold aggressively #y ta$ing #enefit of esta#lished and recogni+ed #rand in
segments where the #an$ itself possesses no e&perience. It is also important
that while selling third party prod"cts, #an$ers m"st convey "nconditionally to
the c"stomers that they are only selling some thing for which responsi#ility to
service and performance lies with the third party. Selling of third party prod"cts
also help the #an$ to cross sell its own prod"cts.
8.14. %he #an$ has to deal with diverse nat"re of c"stomers) r"ral and "r#an, rich
and poor, high net worth to middle class, retail and instit"tional. In order to
34@
assess the need properly, c"stomer segmentation is done so that instead of
one)prod"ct fits all approach, individ"al sol"tion #y way of tailor made prod"cts
are offered. Identification of mar$et segment is also cr"cial from prod"ct pricing,
promotion and distri#"tion point of view.
8.18. 3ith all pervasive "se of technology vario"s e)prod"cts are now in the mar$et
that leverage innovations and convenience for c"stomers. Internet is a $ey
driver of technological change and has #ro"ght ma0or transformation in delivery
process. B"t, at the same time, it has opened serio"s sec"rity concern. 2rod"ct
development needs to address all these related iss"es in a holistic and
integrated manner so that c"stomer accepts the prod"ct with o"t any hesitation.
8.1;. In order to promote the prod"ct in a highly competitive mar$et, it is most
appropriate to "se creative mar$eting tool to sim"late imp"lsive #"ying #y
potential c"stomers. Bpening of savings #an$ acco"nt with +ero #alance is one
s"ch innovation made #y #an$s to garner acco"nts of salaried people in #"l$.
Bther ways of prod"ct promotion are offering free#ies, add on etc. -ross selling,
F2 selling, ,s$)selling, Soft)selling, free#ies, adds on, and piggy)ride are other
strategies to p"sh sales. 3hile implementing sales promotion plans mar$eters
sho"ld decide amo"nt and nat"re of incentive.concession, which is eligi#le, how
to advertise, when it sho"ld start and how long it sho"ld last.
8.1:. =irect mar$eting 6selling 1L19 is a very powerf"l tool and can #e very
s"ccessf"lly "tili+ed for selling prod"cts li$e credit cards, m"t"al f"nds, life
ins"rance etc. %here are n"m#er of stories of s"ccessf"l ins"rance agents giving
their presentation #efore family mem#ers and telling a#o"t families which are
a#le to face crisis d"e to ins"rance. %I and other media advertising, which
increases prod"ct visi#ility, f"rther s"pplement direct selling. However,
c"stomer privacy these days is getting "tmost important and even RBI has
ca"tioned #an$s not to "se personal information for soliciting c"stomer either
directly or thro"gh alliance partners. direct selling agents witho"t e&press
condition or disclos"re to the c"stomers. So #an$, while resorting to direct
mar$eting, m"st design their strategy in s"ch a way that no irritation is ca"sed to
c"stomer #y their "nsolicited telephone call or SMS or email.
8.1>. In order to create prod"ct affinity among c"stomers #rand #"ilding is done as a
strategy so that c"stomer can identify the prod"ct #y way of log or p"nch lines or
prod"ct name. 'or #rand mar$eters the need to develop a#le, sta#le and
34>
d"ra#le #rands is e&tremely critical for creating prod"ct affinity. In India name of
most of the financial prod"cts is lin$ed to the name of the #an$. %his techni("e
is advantageo"s for prod"ct identification as well as prod"ct differentiation.
8.1?. 2rod"ct pricing is another important element of mar$eting strategy. Based on
trade off #etween price and ("ality, JB%7ER predicted nine mar$eting mi&
strategies on pricing ) premi"m strategy, overcharging strategy, rip)off strategy,
penetration strategy, average strategy, #ora& strategy, s"per)val"e strategy,
good val"e strategy and cheap val"e strategy. %he #an$ may adopt any one or
more strategies as considered appropriate depending "pon #an$As policy of
profit ma&imi+ation, mar$et)share leadership, prod"ct ("ality leadership or
s"rvival strategy.
8.1!. %ransparency is new #"++word of mar$eting strategy. Ban$s that charge
hidden cost #y fine print may lose competitive advantage as s"ch a strategy
may create c"stomer conf"sion.
C8Retail Banking(/ultiple delivery channels
;..1 Bne c"stomer m"ltiple channel is now order of the day. 'rom traditional physical
#ranches.e&tension co"nters to ,%M.internet.%ele)#an$ing.mo#ile #an$ing
.smart cards. to"ch screen.$ios$.call centers vario"s delivery channels are now
availa#le for the c"stomers to choose from. %hese channels now offer
4;T?T8>: #an$ing on any time anywhere and anyhow #asis and have added a
new chapter in convenience #an$ing. %he determination of proper channel for
selling a prod"ct is very cr"cial from prod"ct management angle. %he decision
depends "pon mar$eting strength of the #an$ vis a vis the availa#ility of
channel.
;..4 3hile offering a range of delivery channels, it is necessary that #an$s integrate
physical channel with electronic channel effectively and offer a seamless
service. %he c"stomer m"st #e a#le to deal with a coordinated informed
organi+ation, whether he access it thro"gh a #ranch, a call center, the internet or
any other channel.
;..8 %here is now a deli#erate paradigm shift to wean away c"stomers from #ranch
to other channels not only to s"#stantially lower cost #"t also to #ecome high
reven"e generating profit centers that, apart from increasing visi#ility, can now
cross)sell and "p)sell prod"cts.
34B
;..; Ban$ing with these new channels is a "ni("e shopping e&perience to the
c"stomers, which shifts foc"s from eye contact to e)contact. %hese channels
provide time and place advantage to the c"stomers. '"rther #an$ has to #"ild
integrated delivery channels with #oth vertical and hori+ontal integration. In
order to do so #an$ has to install an ena#ling and compati#le m"lti)channel
platform which wo"ld s"pport and seamlessly integrate #oth the e&isting and
f"t"re delivery channels.
;..: ,%M is most s"ccessf"l delivery channel followed #y telephone #an$ing and
Internet #an$ing. ,s ,%M is #ecoming more and more "ser friendly, #an$s have
started dispensing third party prod"cts li$e railway tic$et, movie tic$ets, refilling
mo#ile etc. ,s per cond"cted #y ,- Nielson BRD)M,RD for N-R nearly 5<
,%M "sers prefer to receive information on new prod"ct and services thro"gh
,%M.
;..> Internet Ban$ing provides n"mero"s facilities to retail c"stomers li$e "tility #ill
payment, online shopping, tic$eting, share trading, down loading statement of
acco"nt, $nowing #alance, $nowing stat"s of che("e iss"ed, electronic f"nd
transfer, transfer to 22' acco"nt, re("est for draft.che("e #oo$ etc. 'or trade
and commerce Internet #an$ing provide facilities s"ch as on)line opening of
letter of credit, on)line #ill loading, acco"nt sweeping, acco"nt pooling, f"nd
management etc. It also ena#les the #an$ to provide m"lti)#ranch #an$ing with
m"lti)city che("e)#oo$ facility. Internet is now FS2 of retail loan.
<8 Retail Banking( Goint Hentures"Business &lliances
:..1 ,n F.S. mar$et st"dy of ,nderson -ons"lting fo"nd that :!< of the financial
sectorAs most dynamic companies / the @val"e capt"resA that generates #oth
high growth and high share)holders ret"rn) are #"ilt aro"nd #"siness alliances.
:..4 %o captivate c"stomers 0oint vent"res.alliances with prod"ct developers,
man"fact"rers, mar$eters, o"tso"rcing partners, #"ilders, promoters,
ed"cational instit"tions, hospitals, ins"rance companies etc. who together
em#ody the e&tended enterprise has #ecome the order of the day. %he
o#0ective is to develop a m"t"ally s"pportive, val"e)creating chain* #ringing
together complementary competencies of alliance partners to create more val"e
together than one can deliver separately.
34C
:..8 N,B,R=.-ommercial #an$s have entered into colla#oration agreement with
corporate li$e %,%,S, I%-, and Hind"stan 7ever etc., for contract farming th"s
opening new vistas for r"ral credit financing.
:..; Bancaass"rance model is totally #ased on #"siness alliance #etween #an$ and
ins"rance companies, as Ban$ing Reg"lation ,ct does not permit the #an$ to
enter into ins"rance #"siness directly. %o #oost fee #ased income, #an$s are
entering into #"siness alliances with ins"rance companies) #oth life and general
and are e&ploiting #"siness opport"nities #y selling ins"rance prod"cts to their
e&isting c"stomers. SBI 7ife has reported that total premi"m collection of Rs. 4?
crores from #ancaass"rance #"siness o"t of total premi"m collection of Rs. :1
crores in M1 of 455;)5:.
:..: M"t"al f"nd is other area where synergies of #an$ and m"t"al f"nd companies
are e&ploited thro"gh #"siness alliance. H='- m"t"al f"nds has reported that
they have tie "p with I-I-I Ban$, H='- Ban$, -anara Ban$, -iti#an$ and
Standard -hartered Ban$ to sell its m"t"al f"nds prod"ct and as m"ch as 4?<
of the mo#ili+ation is now coming thro"gh this channel.
:..> Man"fact"rers, dealers and financiers are stitching their wits together in
mar$eting thro"gh colla#oration and alliances. -olla#oration agreements with
tractor.car man"fact"rers and a"tomo#ile dealers are ch"rned daily which
creates m"t"ally s"pportive #"siness mode. 3hile for man"fact"res.dealers it
provides opport"nity to #oost sales, for the #an$ it is an opport"nity to finance.
Even in second hand car mar$et, dealers are colla#orating with #an$s to finance
#"yers.
D8 Retail Banking( & Ne0 %aradigm
Retail #an$ing is for @fittest, fasted and smartestA. It has #ecome totally c"stomer
centric. %he man who cares his c"stomers will event"ally win. Si+e, location or
past history does not matter any more. 3hat matters) how ("ic$ly a #an$ can
adapt itself to the changing world at Internet speed that itself is fast changing.
%he emerging retail #an$ing paradigm is )
%here is visi#le shift of foc"s from prod"ct to c"stomer. Best mar$eting secret
is to love yo"r c"stomers, to cherish them, to appreciate them, to listen them
and #e honest with them.
Ban$s need to #e passionate a#o"t n"rt"ring c"stomer relationship. 7ong)
term s"ccess comes from deeper and more honest c"stomer relationships.
34?
Ban$s need to constantly anticipate and adapt as per c"stomerAs changing
need and demand. 2rod"ct innovation and renovation is $ey to s"ccess.
Ban$s need to ta$e speedy actions and decisions as new generation
c"stomer val"e time.
Ban$s need to integrate physical channel with electronic channel effectively
so that new generation c"stomers feel comforta#le.
Ban$ need to forge strategic partnership with dealers .man"fact"rers.
#"ilders.promoters etc to harness synergies of alliance partners.
Ban$ need to do reg"lar strategic mar$eting a"dit of their #"siness to ma$e
s"re that they contin"e to #e c"stomer oriented.
)5)5)5)
34A
,eta$4 7oan-'tat$st$cs
:y%e Mar$(
5AAB
Mar$(
344@
<ousin& B343 >5A?5
-onsumer 5@CB ?3C@
S(ares bonds
et$6
5A33 3434
!eal estate 55C3 >>CC
Fi,ed de%osits 53444 3B3@B
Personal loan 53>>A 3>5B>
:otal 3>@>@ 53A3B3
)mount in !s6 $rores6
!.I re%ort on trend and %ro&ress of
ban8in&
%ha"ter-23
Retai$ 5oan O++ortunities and C*a$$enges
The mar+et is bigger than we have ever dreamt#$
6ac+ Welch
?8 Retail Banking( post reform development
,fter introd"ction of financial sector reforms in 14, #an$s are facing n"mero"s
challenges li$e increasing competition from private and foreign #an$s, low prod"ctivity,
high operational costs, press"re on spreads and foc"s on N2, management d"e to
tightening of pr"dential norms. B"t they are awash with li("idity. -orporate clients are
now demanding loan at S"#)27R d"e to new aven"es availa#le to raise #orrowing
overseas at m"ch cheaper rates. %his has forced the #an$s to loo$ for new aven"es for
growth and s"rvival #y repositioning themselves in new #"siness segments of economy
where opport"nities are more and ris$ is less. Retail c"stomers who represent h"ge
"ntapped mar$et for credit has s"ddenly #ecome a new #"siness mantra for #an$s.
;8 Retail loan( ne0 business opportunities
3elcome to new India, where living off de#t is
well)accepted norm of life. If recent statistics *see
bo)+ on cons"mer finance are any indication, last few
years have #een trend setting. %he conservative,
ca"tio"s, thrifty and de#t)averse middle class of past
seems to have given way to a new middle class
6pop"lation a#o"t 84 million9 that is free from all
inhi#itions regarding conspic"o"s cons"mption. It has
no stigma of #orrowing for cons"mer spending. Indian
-orporate has #een dreaming for a long time to tap this h"ge mar$et of middle class
that is h"ngry for cons"mer d"ra#les #"t short of cash. %he cheap retail loan has made
their dream come tr"e.
A8 Retail loan( market si,e
354
,=,+7 .+M&
G;< 6or 84,:8!9 of all
sched"led commercial #an$
#ranches are r"ral, 81 per cent
6or 18 crores9 of the total
deposit acco"nts and ;8 per
cent 64.4 crores9 of total credit
acco"nts are in r"ral #ranches.
Bver >.;4 crore Jisan credit
cards have #een iss"ed #y
#an$s.Y
%he retail assets crossed Rs. 1;,555 crores in 455; from Rs. ;4,555 crores in
1 according to ind"stry estimates. Home loan mar$et constit"ted ;?< 6Rs.>5,
555.559 in 455;)5: followed #y car loan 44.8< and personal loan !.1< 6 Economic
times 5?.5:.455:9. 2resent penetration level of retail loans is only >.:< of o"r D=2,
compared with 15.4< in %hailand, ;.8< in Malaysia and >!.;< in So"th Jorea. 6%he
,sian Ban$er9 %h"s "ntapped potential of retail loan in o"r co"ntry is very high. %he
over all demand for car loans and two wheelers has seen a 4:)85< growth since
Can"ary 5;. -ons"mer d"ra#le loans have grown consistently more than 45)4:< since
4555 while two wheeler loans have grown 85<. -ar finance too has grown 85<. Seeing
#ig opport"nity #an$s have #ecome very aggressive in retail loan with the res"lt mar$et
vol"me is #"ilding "p #y leaps and #o"nds. %he feisty private sector #an$s li$e H='-
#an$ and I--I #an$ have already occ"pied m"ch of the retail space. 2"#lic Sector
#an$s are carving o"t space for themselves thro"gh 6a9 3ider reach 6#ranch networ$9,
6#9 7arge c"stomer #ase, 6c9 Strong #rand presence, 6d9 7arge prod"ct portfolio, 6e9
M"ltiple delivery channels and 6f9 7everaging technology 6to handle large vol"mes9.
C8 Retail loan( 6oing Rural
IndiaAs smaller cities and towns are #eginning to assert themselves in the credit
mar$et place as among the top 155 cities, the
share of non)metros in total #an$ credit increased
to 4!< in 4558)5; from 1:< in 4551)54 6See #o&9.
'"rther per capita income in r"ral India is Rs. ;!1
where as in "r#an India it is Rs.1, ;5? #"t in r"ral
place no #ody pays for drin$ing water, primary
health care or home rent. So disposa#le income in
r"ral India is really high. ,s per N-E,R s"rvey
over a third of o"r middle class 6ann"al ho"sehold income of Rs. 4 la$hs to Rs. 15 la$hs9
live in r"ral areas and another si&th reside in small towns of pop"lation less than : la$h.
'"rther as per s"rvey the n"m#er of middle and high)income ho"sehold in r"ral India is
e&pected to grow from !5 million to 111 million #y 455?. In "r#an India the n"m#er of
middle and high)income ho"seholds is e&pected to grow from ;> million to : million.
-ons"mer growth is ta$ing place at fast pace in 1?118 villages with pop"lation of more
than :555. Bf these ! villages are in ? states, namely ,ndhra 2radesh, Bihar,
Jerala, Maharashtra, %amilnad", Fttar 2radesh and 3est Bengal. ,ll this data indicates
the amo"nt of #"ying power of great r"ral India. It also indicates e&istence of enormo"s
355
#"siness opport"nities partic"larly for retail loans. 3ith more than ;5555 r"ral and semi
"r#an #ranches having powerf"l #onding with the c"stomers and their implicit faith,
#an$s are "ni("ely positioned to e&ploit this opport"nity. Some of the ma0or challenges
of the r"ral mar$eting are /6a9 scattered nat"re of pop"lation, 6#9 diversity, 6n"mero"s
lang"ages and dialects, caste, c"lt"re and religion9 6c9 poor connectivity leading to high
distri#"tion cost and 6d9 comm"nication pro#lem 6low literacy and limited reach of mass
media9. Doing r"ral is new mar$et mantra for p"#lic sector #an$s.
5. Retail loan ( as driver of economic gro0th
%he sp"rt of retail credit in sectors li$e cons"mer finance, a"tomo#iles, two)
wheelers, financial services, home loans, ed"cation and credit card indirectly helps the
economy #y p"shing "p the sales of the prod"cts and services involved. Dovernment
has increasingly p"shing lending to this segment #eca"se it has m"ltiplier effect on the
growth of the economy.
D8 Retail loan( Ne0 /arketing %aradigm
%he #asic nat"re of financial prod"cts of intangi#ility and insepara#ility from the
#an$ creates many a h"rdle for the #an$ service mar$eters. Intangi#ility ma$es it diffic"lt
for the provider to comm"nicate to c"stomers in very precise terms. It also poses
pro#lems for the c"stomers as they find it diffic"lt to differentiate and eval"ate the
services of vario"s providers. In order to create a distinction in the mar$et, the players
have toL)
6a9 $esigning services strategies / It is aimed to #"ild credi#ility and professional
relationship among c"stomers. -redi#ility is #"ilt over a period of time #y ways of
f"lfilling the promises thro"gh competitive performance.
6#9 -angibilisation of services) the c"stomer do no see or to"ch anything to decide
#efore #"ying financial prod"cts. In order to create tr"st of c"stomers, the #an$
has to tangi#ilise its service prod"ct #y providing proof of performance thro"gh
advocacy 6mo"th p"#licity9 or advertisement and thro"gh pleasant and
professional am#ience at the service co"nters.
6c9 $eveloping delivery system) it has to esta#lish a ro#"st, efficient, relia#le and
"ser)friendly delivery channels.
6d9 !nformation technology is changing the way the services are designed,
managed and delivered. ,dvances in I% have ena#led #an$s to offer variety of
new services. In doing so, many traditional services are #ecoming o#solete. 'or
e&ample, electronic f"nd transfer is ma$ing demand draft o#solete and ,%M card
353
has made travelerAs che("es o"t of date. It also adds to competitive advantage
to #an$s.
%he c"stomer is the foc"s of this new mar$eting paradigm, which wor$s on
premises of )
aC 1oyalty(It is less e&pensive to $eep an e&isting c"stomer than to ac("ire a new
one.
!C Scope It is easier and more profita#le for a company to sell to a satisfied
c"stomer.
cC Efficiency( B"siness sho"ld #ear in mind that some c"stomers are more
profita#le than others.
98 Retail loans Shifting focus
%he foc"s of retail #an$ing has constantly #een evolving* in early 5s it was
prod"ct foc"s, in late 5s it was sales foc"s, in 4555 it was price foc"sed and today it is
c"stomer foc"sed. %o have competitive advantage, a #an$s are )
6a9 Shifting foc"s from prod"ct to c"stomer,
6#9 Jeeping developing prod"cts as per need and demand of the c"stomers,
6c9 =eveloping efficient appraisal and ris$ assessment s$ill among managers for
speedy decision and sanction,
6d9 E&ploiting c"stomer #ase and availa#le delivery channels #y aggressively
p"shing the prod"cts,
6e9 'orging strategic partnership.alliance with #"siness partners s"ch as #"ilders,
a"to dealers etc. to e&tract ma&im"m competitive advantage and
6f9 -ontin"o"sly wor$ing for innovation and creativity for prod"ct development.
M8 Retail 1oan Ne0 Business %rocess
3al$ in #"siness is the thing of the past. %he new #"siness process of retail
loans is to captivate c"stomers #y offering #est of #reed prod"cts thro"gh m"ltiple
delivery channel and 0oint vent"re.#"siness alliances. %he New B"siness 2rocess
comprises ofL )
BaC Best of breed products( %he prod"ct development is $ey to s"ccessf"lly face
competition. It is a contin"o"s process. %he o#0ective sho"ld #e to remain one
step ahead of competitors. 3ith all pervasive "se of technology vario"s e2rod"ct
are now in the mar$et that leverage technology for convenience of c"stomers.
B!C /ultiple delivery channels) Bne c"stomer m"ltiple channel is now order of the
day. 'rom traditional physical #ranches.e&tension co"nters to ,%M.internet.tele)
353
#an$ing.mo#ile #an$ing .smart cards. to"ch screen.$ios$.call centers vario"s
delivery channels are now availa#le for the c"stomers to choose from. %hese
channels now offer 4;T?T8>: #an$ing on any time anywhere and anyhow #asis.
%here is now a deli#erate paradigm shift to wean away c"stomers from #ranch to
other channels not only to s"#stantially lower cost #"t also to #ecome high
reven"e generating profit centers that, apart from increasing visi#ility, can now
cross)sell and "p)sell prod"cts.
BcC Goint Henture"&lliances( %o captivate c"stomers 0oint vent"re.alliances with
prod"ct developers, man"fact"rers, mar$eters, o"tso"rcing partners, #"ilders,
promoters, ed"cational instit"tions, hospitals, ins"rance companies etc. who
together em#ody the e&tended enterprise has #ecome the order of the day. %he
o#0ective is to develop a m"t"ally s"pportive, val"e)creating mode* #ringing
together complementary competencies of alliance partners to create more val"e
together than one can deliver separately.
L8 Retail 1oan( $esigning Strategies
=esigning strategies is most important part of retail mar$eting. , strategy is a
road map to sell prod"cts. Strategies differentiate a #an$ with its competitors. It helps to
#"ild competitive advantage. %he strategies can #e classified into vario"s categories li$e
operational strategies that incl"des #oth str"ct"ral and infrastr"ct"re decision, mar$eting
strategies incl"des pricing, placement and delivery decisions, h"man reso"rce strategy
incl"des the s$ill levels of the sales people hired and the type of training they re("ire, I%
strategy incl"des I% infrastr"ct"re to deliver the service as per e&pected standards and
service strategies li$e si& sigma, ("ality circle, +ero defect program etc.
?@8 %lanning for the future ( Emerging issues# strategies and challenges
1. 26eneration Ne)t5 segment 68:5 million yo"ng Indian #etween age gro"p of 1:)8;
years see life and life)style very differently9) %his is going to #e the target in
immediate f"t"re. It is c"rrently "r#an phenomenon #"t it wo"ld not #e too long when
it will emerge in r"ral India also. %hey are tech)savvy and prefer electronic channel.
%hey see$ financial information from variety of so"rces and are very fic$le shoppers.
Ban$s will have to leverage technology and develop e#ased prod"cts to tap this
segment.
4. 2Rural segment5 is one from where fresh demand of retail loan is #eing generated.
2SBs are in real advantage as they have good networ$ of r"ral and semi)#ranches
where competition is less and opport"nities are more.
35@
8. 2Never use5 categoryH)c"stomer who has never availed.#o"ght financial prod"cts
are #eing targeted thro"gh vario"s promotional offers. %his category holds h"ge
"ntapped potential. 7oan mela.#a+aar.road shows are creative prod"ct promotional
tools to create imp"lsive #"ying in new c"stomers. 2roperty melas and e&hi#itions
c"t short the process of c"stomer ac("isition on two co"nts* the properties are pre)
vetted hence need no scr"tiny and the c"stomer 0"st wal$s in. S"ch melas attracts
tremendo"s foot )fall / potential c"stomers) dr"ms "p h"ge #"siness vol"me at low
cost. Ban$s sho"ld learn art to organi+e loan #a+aar.mela.road shows so as to
e&ploit local potential and esta#lish a #etter prod"ct visi#ility.
;. 2Brand building5 for wider reach and prod"ct affinity is a strategic tool. Brand in
#road term incl"des all means of identifying a prod"ct #y way of log, or p"nch lines
or prod"ct name. Brands comm"nicate a val"e proposition to the c"stomer and
conse("ently strategy sho"ld #e to strengthen the #rand with appropriate investment
Retail manager sho"ld #e trained to pro0ect #rand val"e 6competitive advantage in
pricing, less paper wor$, speedy sanction etc.9 to the c"stomers. %hey sho"ld avail of
each and every opport"nity to e&plain prod"cts feat"res to develop c"stomer #rand
affinity. Remem#er that one satisfied c"stomer #rings eleven new c"stomers.
:. %roduct innovation and renovation( Replication of prod"ct is very easy. Retail loan
managers will have to #e mar$et sensitive and they will have to sei+e each and every
opport"nity to redesign a prod"ct as per mar$et need or to introd"ce new one with
minim"m of time. 'or this reg"lar interaction of mar$eting team and corporate
planner is essential so that #ased on feed #ac$ innovation and renovation is done
on reg"lar #asis. Remem#er that first mover will always have advantage over
followers. 'ree#ies and add)ons li$e +ero processing fees, free ins"rance with car or
ho"sing loan, no prepayment penalty,
concession in interest and charges to loyal
c"stomers etc. are other innovative ways to
captivate c"stomers.
>. Cross selling and up selling is a very
s"ccessf"l way of improving vol"mes. ,s a
strategy e&isting c"stomers sho"ld #e offered
prod"cts where profit margins are more e.g.
offering car loan, f"rnishing loan etc. to e&isting
ho"sing loan c"stomers. '"rther #ased on contri#"tion of the c"stomers to #an$,
35>
S-. -redit
Outstandin&
Mar$(
5AAC
1
Mar$(
3443
1
:otal
-redit
3?@6@ B>B64
Personal loan 5A634 @B6>4
% (f tota4 6.75% 7.00%
1 )mount in t(ousand $rores
of ru%ees0 %M*& data
:(P 0*F& .(7/ 7&)/&,'
B *n croresC
56 Mut(oot Finan$e !s6 C3@3
36 Indian Overseas .an8 !s6 >7334
36 Indian .an8 !s63A34
@6 Mana%%uram !s637>B4
>6 Sout( Indian .an8 !s6 33B4
(IMa-S industry re%ort 03454 u%date)
differential)pricing strategies s"ch as disco"nt in interest, as relation ship waiver has
to #e evolved.
?. %ersonal loan segment of retail loan has seen ma&im"m growth. %otal personal loan
o"tstanding of S-Bs increased from Rs. 1455 crores in 1? to Rs.;>:55 crores in
4554 *see bo)+8 %he mar$et is grad"ally sat"rating and fresh dis#"rsements are
largely #y way of roll over or on repayment of previo"s loan. Ban$s will have to target
#"siness from other segments of retail loan.
!. Car finance industry record sales of ;8< lmillion units in 4 ;@??:( =isco"nts
finance schemes, low interest rate, festive season offer and new la"nches li$e teaser
rates offer have wor$ed wonders to Indian a"to ind"stry d"ring 4515)11 which
cloc$ed car sales to cloc$ record high of 4: million "nits. However d"ring 4511)14
the car sales is li$ely to sta#ili+e at 14)1:< growth d"e to higher #orrowing cost and
s"rging prices. 'rom #an$er perspective, a car loan c"stomer is m"ch #etter ris$
than an "nsec"red personal loan or a credit card. However lac$ of clarity in
repossession of vehicle from defa"lters d"e to S"preme -o"rt 0"dgment and
conse("ential delin("ency of loan has ca"sed many #an$s to go slow in financing
this segment.
. 6old 1oanL , grad"al shift from pawn)#ro$ers to organi+ed lenders #y people who
raise money against gold or
ornaments is e&pected to do"#le
the holding of three speciali+ed
companies in the #"siness to 455
tonnes or over a third held #y
Reserve Ban$ of India #y the end
March, 4511. Indian ho"seholds
estimated to have 1!555 tons of
gold and o"t of this hardly 1555 tons is pledged. Hence gold loan potential is h"ge.
%here are NB'- li$e M"thoot and Manapp"ram Dold in gold loan #"siness in
addition to #an$s. 7%I ratio 6e&cl"ding ma$ing charges9 is aro"nd ?:< . Normally
NB'- sells.a"ction gold after 1: months and recogni+e a loan as N2, after 14
months. 7oo$ing great opport"nity, #an$s are targeting the mar$et very
aggressively. Bne nationali+ed #an$, recently decided to set "p e&cl"sive o"tlet for
gold loans so as to compete with the NB'-s head on. Ban$ is also planning to p"t
35B
of assaying machine so that dependence on 0ewellers is red"ced and loan is
sanctioned witho"t delay.
15. -0o 0heeler financing: ) Bver the last decade the two)wheeler ind"stry was the
highest val"e creators recording ann"al share holder ret"rn of over ;5<. Bne of the
drivers of the growth was strong sales growth at over 1:< for last five years which
provided immense #"siness opport"nity of financing. 'rom #an$As perspective
serving this c"stomer segment is an operationally intensive e&ercise covering
locations m"ch #eyond city limits and #eing dependent on correspondents #an$ing
relationship. %he c"stomers typically #elong to lower and middle class which tend to
#orrow irrespective of repaying capacity and very often overleveraged #y #orrowing
and spending. ,s per reports 6BS 1!.54.455!9, two wheeler lending has declined
more than 1:< d"ring 455?)5! over previo"s year. Recent norms on appointment of
recovery agents, lac$ of clarity in repossession of vehicles and growing delin("ency
in two wheeler loans have forced #an$s to go slow in this segment.
11. Housing loan has large potential( Ho"se today is #etter afforda#le thro"gh loan.
%a& #rea$s have sp"rred credit demand. ,s per feed#ac$ of ,ssocham 6B7
:.11.455?9 the age gro"p for property registration for personal "se has #een 85)8!
years in most cases from :5):! earlier. DBI move to give 1< interest s"#vention
on home loan "p to Rs. 4: la$hs and cover them "nder priority sector has made
the #an$s to p"sh harder this segment. %he S,R',ESI ,ct has increased level of
comfort as #an$ can now go for foreclos"re of loan witho"t intervention of co"rt.
Diven the fact that the total shortage of dwelling "nits at the #eginning of the
Eleventh 2lan period 455?) is estimated to #e nearly 4.: crore, the opport"nity of
ho"sing finance sector is h"ge. R"ral and Semi)Fr#an sector is almost "ntapped.
Ho"sing loan growth slowed to 14.1< d"ring 4511)14 from 1>< in 4515)11 d"e to
high property prices and high interest rates. 3ith e&pectations of fall in interest rates,
#an$s are now #"llish in home loan mar$et. %o meet competition foc"s will have to
shift on c"stomerAs convenience and tailor made prod"cts to garner larger share of
ho"sing loan pie. Bne innovation of -iti#an$As Home -redit, Standard -harteredAs
Home Saver and HSB- Smart Home in which home loan is lin$ed with a over)draft
acco"nt with the res"lt interest o#ligation get red"ced to the e&tent of credit #alance
in B= ad0"sted against principal loan o"tstanding in the home loan. Second home
loan see$er is other segment where demand is emerging. -redit assessment in this
will #e entirely different process, as #an$ will have to factor in possi#le rental income
35C
while considering repayment capacity. %hird segment is "p gradation to #igger
ho"se, which is emerging mar$et d"e to rise in income of professionals.
14. -easer rates home loansL %easer rates or terraced loan scheme la"nched #y SBI
and later followed #y many #an$s helped them to capt"re at a #igger si+e of the
mar$et and also e&pand the mar$et si+e. It may #e noted that as per scheme interest
is fi&ed slightly lower to mar$et rate initially for two.three years on fi&ed #asis and
s"#se("ently lin$ed to mar$et determined rates.
18. S0itching of loan particularly in housing sector has significant inertia. RBI
directives to #an$s not to charge pre)payment charges has given opport"nity to
home loan #orrowers to switch to other lenders if they find that they are a#le to get
loan at a #etter prices. 2SBs sho"ld get ready to tap this opport"nity.
1;. Eomen segment( 7oan schemes li$e loan for p"rchase of gold ornaments have
#een specially targeted for women segment. India cons"mes gold worth !55 tonnes
ann"ally and gold 0ewelry mar$et is estimated to #e a#o"t Rs.;:,555 -rores
6B"siness standard 4th Septem#er 5;9. , few so"th #ased #an$s have already
leveraged the potential of this segment. Bther 2SBs sho"ld develop and position this
prod"ct to target segment to e&ploit #"siness opport"nity.
1:. Educational 1oan) 7oan to st"dents for p"rs"ing higher ed"cation is fast emerging
retail loan segment. Ed"cation loan portfolio stood Rs. 4?> crores as on C"ne, 85,
4515 covering 1.?1 la$hs st"dents. 6B S Septem#er 18,45159 ,s per a st"dy
6B"siness 7ine ?.8.45119 hardly :< st"dents p"rs"ing higher ed"cation in India
ta$es ed"cation loan against a#o"t >5< in FS ta$ing reco"rse to s"ch loans.
However grad"ally ed"cation loan segments have started increasing many fold
mainly d"e to easy availa#ility, collateral free, ta& #rea$ on loan repayment and
inclination to self)finance the st"dy. 'or #an$s loan provide the opport"nity to catch
c"stomer when they are yo"ng and that too for the lifetime. Some #an$s have
started offering loan for financing fee of coaching classes as considera#le cost is
inc"rred #y st"dents in preparing for entrance e&aminations.
1>. -ravel 1oan or Holiday loan ) Ban$s have now cashing on peopleAs "rge sp"rge on
foreign holidays #y offering @travel loanA. %ill now, it was prerogative of few foreign
#an$s, #"t lately p"#lic sector #an$s have also started granting s"ch loan. Ban$s are
tying "p with travel companies to tap potential travellers. Ban$s charge lower
interest on travel loan as these loans are typically sanctioned to high net worth
people with lesser pro#a#ility of defa"lts.
35?
1?. !%. 1oan) with capital mar$et at its pea$ and n"m#er of I2Bs on line, #an$s have
started aggressively selling I2B loan to retail c"stomers. It is "pcoming segment and
has immense potential.
1!. Bancassurance offer opport"nities of cross selling of retail loan prod"cts #y
#"ndling with ins"rance prod"cts. Banc ass"rance has started ta$ing strong roots in
o"r co"ntry and there are e&pectations that average collection thro"gh #an$ing
channel will rise to :5< in ne&t five years. %his prod"ct offers vast cross selling
opport"nity to #an$s #y #"ndling with their own financial prod"cts #esides #"ilding
fee)#ased income.
1. Goint venture"business alliances have #ecome order of the day. %hey provide
m"t"ally s"pportive, val"e creating mode #y #ringing together complementary
competencies of alliance partners to create more val"e together. 3hile private sector
#an$s have s"ccessf"lly em#raced this model, 2SBs are also grad"ally loo$ing to
this #"siness mode not only for #"siness development #"t also for d"e diligence and
recovery.
45. $ue diligence of retail loans: ) Instances of resorting to m"ltiple financing #y
"nscr"p"lo"s #orrowers are very common. Instances of ho"sing loan on the #asis of
fa$e doc"ments and impersonation have also #een reported. %o safe g"ards from
fra"ds, sanctioning.dis#"rsing officials are re("ired to metic"lo"sly follow J1-
policies of c"stomer acceptance and identification and other systems of internal
control. It is interesting to learn that a 2SB has recently "nveiled its plan to "se credit
verification agencies to improve d"e diligence of retail loans.
41. =%eople 0ith right soft skill7 is the re("irement of retail #an$ing. %hey sho"ld have
not only complete $nowledge of the prod"cts #"t m"st have pleasing attit"de and
gen"ine concern of c"stomersA pro#lem. Reg"lar training of retail people is essential
to ma$e them s"ccessf"l sales person.
44. Consumer lending blues( ,fter aggressive growth in the past few yearsA #an$s
have now started feeling the pinch as N2, in retail loan is on rise. Ban$s have also
started receiving reprimand from Reserve Ban$ and co"rt for "se of strong arm
tactics of recovery agents. %he pro#lem is symptomatic of a deeper systemic rot that
afflicts retail lending in India. 2oor instit"tional mechanism for recovery of d"es as it
ta$es a long time to recover de#ts thro"gh 0"dicial process. It is in this conte&t to
emphasi+e that field staff sho"ld #e ed"cated to e&ercise high degree of diligence
35A
#y not only rigidly following J1- polices in identification of #orrowers and screening
loan applications #"t also monitoring recovery.
48. %$C management(Ban$s to ta$e reco"rse of Section 18! of Negotia#le Instr"ment
,ct are ta$ing 2=- in all retail loans. 'rom timely presentation of che("es to timely
and prompt legal action, it is necessary that awareness in legal aspects #e created
among mangers so that provisions of the act are f"lly harnessed for #enefit of the
#an$. 2hysical handling of h"ge vol"me of che("es is compelling #an$s to consider
alternate li$e E-S 6electronic clearing system9 or credit to receive monthly
installments as this arrangement is cost and time effective.
4;. air practices code( 3ith RBI insisting on #an$s to p"t in place anti)tying
meas"res, there is growing demand that lender do not resort to "nfair trade
practices. It is, therefore, essential that interest rate, method of compo"nding, penal
interest, prepayment penalty, re#ate for prompt payment, right of #orrowers li$e copy
of loan doc"ments, statement of acco"nt, right of privacy i.e. not sharing his personal
profile to #"siness associate.other agencies sho"ld #e e&plained to prospective
c"stomer and #an$ sho"ld p"t in place a grievance redressal mechanism to sort o"t
pro#lem.
4:. Credit counseling( In retail credit cases of m"ltiple credits is very common. Bther
pro#lem is revolving credit of credit cards from m"ltiple iss"ers. Bnce a #orrower is
in distress, it is very diffic"lt for him to come o"t "nless proper g"idance is given to
him. -redit co"nseling centers ed"cate s"ch people on financial ed"cation, credit
co"nseling and de#t management. Borrowers in distress may call to these centers
to ta$e g"idance to resched"le de#ts, wor$ o"t repayment plan or scaling down of
334
de#t or one time settlement.
4>. Sale of impaired assets ) ,R-s deal only with p"rchase of high val"e assets. %he
retail loan portfolio, which consists of ho"sing and car loan, necessitates setting "p
of ,R-s to deal with impaired assets of retail loans.
S>//!N6 >%(
In the years to come, c"stomers will #e more demanding, competition will #e more
intense and dealings need to #e more transparent. 3hile the delivery is not going to #e a
ma0or challenge, s"rely the ("ality maintenance will #e. It is a great challenge for the
#an$s. Managing service ("ality warrants a perfect "nderstanding of c"stomer need,
designing prod"cts which c"stomer appreciates, developing and monitoring the process
that delivers the service or prod"ct, training sales people and meas"ring c"stomer
satisfaction. %his is possi#le only when day)to)day e&periences are critically analy+ed
and prod"cts and policies are aligned to mar$et demand.
335
:a6$ng a 7oan< ,emem!er
Many people ta$e loans when they donAt need them. ,void that.
,pply for loans, donAt ta$e loans that #an$s call "p and offer.
-larify the loan amo"nt #eca"se yo" might land "p #eing
charged interest on a higher amo"nt.
-larify how the #an$ will go a#o"t recovery. Jnow yo"r rights.
In diffic"lty, call the #an$ to renegotiate the repayment terms.
%ha"ter @2
Retail Banking ( S - % /arketing
*an+s have to move from the old fashioned, one si;e fits all products to customer
segmentation and customi;ation#$
?8 Retail /arketing Captivating the customer through innovations
3al$ in #"siness is the thing of the past. %he c"stomers are now more demanding on
price 6#etter interest rates9, prod"ct 6("ality9, place 6home delivery, internet #an$ing
etc.9, pac$aging 6#rand affinity9, people 6c"stomer service9, partnering 6#"siness
alliance.0oint vent"re9 and promotion 6disco"nt, free#ies etc.9. %hey are well informed,
see$ financial advice and collect prod"ct information from variety of so"rces li$e financial
planners, %I, press, ready to #ear ris$, sensitive to price as well as ("ality of prod"ct
and e&plores.negotiate #est possi#le deals. %hey have no loyalty with any instit"tion
and as and when they get #etter offer 6price or ("ality9, they are ready to switch over to
any #an$8 Intense competition among #an$s has complicated the matter f"rther as each
one tries to have larger share of the pie #y one or the other means. ="e to intense
competition, the old retail #"siness model of @capt"ring c"stomer thro"gh aggressing
sellingA has changed to new #"siness model of @captivating the c"stomer thro"gh
innovationA. %he $ey element to achieve this strategy is c"stomer segmentation as one)
prod"ct fits all approach is no longer feasi#le.
;8 Service /arketing( $ifference
%he mar$eting of financial prod"cts is totally different to mar$eting of physical
prod"cts 61o" can not sell the financial prod"cts they way yo" sell soaps9 d"e to nat"re
of financial prod"cts i.e. intangi#ility of prod"ct, perisha#le nat"re of service and its
insepara#ility from its provider. Intangi#ility means #"yers can not compare service the
way they can compare the goods #y loo$ing to its appearance, feel, weight, smell, si+e,
shape, price, pac$aging and #rand. %his also means that they cannot eval"ate it
o#0ectively. B"t they can o#serve the difference #y meas"ring e&pected vis a vis the
perceived service. In order to ena#le c"stomers to meas"re #enefits, #an$ has to create
333
prod"ct)val"e visi#ility thro"gh aggressive advertising, mo"th p"#licity and #y creating
professional am#ience. Services are also perisha#le and conse("ently can not #e
prod"ced in advance and $ept as inventory li$e man"fact"red goods. Services are
diffic"lt to patent and s"#0ect to copy #y the competitors easily. %o overcome the
pro#lem of insepara#ility and to deliver service effectively, #an$s have to pro0ect it self as
ro#"st, relia#le and "ser)friendly service delivery system.
88 /arketing Strategy( Evolution
If we loo$ to the evol"tion of mar$eting, we find that different strategies have evolved
over a period of time for prod"ction, distri#"tion and promotion of prod"cts. It started
with mass mar$eting model ) where mass prod"ction of goods is done with the hope that
low cost and price wo"ld a"tomatically create a #ig mar$et. Henry 'ord "sed to 0o$e,
@yo" can have any colo"r car as long as it was #lac$A. 7ater on prod"cers shifted to
prod"ct variety model which was #ased on ass"mption that many variety across the
shelf will event"ally win a c"stomer. ,nd last one is target mar$eting where the
prod"cer.service provider identifies variety of mar$et segments, selects one or more of
them and than resorts to relationship mar$eting #y strategically positioning its prod"cts
to target c"stomers.
;.1 /arket Segmentation
Mar$et segmentation is the division of the mar$et into distinct gro"ps of #"yers who
might re("ire different prod"cts or mar$et mi&es d"e to their different need and wants.
Bnce segmentation is done, #an$ can foc"s on partic"lar segment of c"stomers with
common needs and wants. %he #asis of mar$et segmentation can #e )
aC 6eographical segmentation s"ch as states, region, co"ntries etc. where
prod"cer can pay attention to geographical differences. 'or e&ample there may
#e greater need of woolen garments for northern India rather than west or east.
!C $emographic segmentation is dividing the mar$et #ased on demographic
varia#le s"ch as age, se&, occ"pation, family si+e, life cycle etc. 'or e&ample
ready)made garment mar$et can #e divided into $ids, ladies and ad"lt.
cC %sychographic segmentation is dividing the mar$et #y life)style or socio)
economic stat"s or personality characteristic. 'or e&ample, #an$s c"stomer can
#e divided into HN3I 6high net worth individ"als9, Senior -iti+ens 6-"stomers of
>5 years and a#ove9 etc.
333
dC Behaviour segmentation is dividing the mar$et #ased on c"stomerAs
$nowledge of prod"ct, "sage, attit"des and responses. 'or e&ample, soap
mar$et is segmented on perceived val"e of #ea"ty, hygiene and health.
a9 -ransactional segmentation is process of relating a c"stomer to a service,
which he is most li$ely to "se. 'or e&ample, yo"ng c"stomers 6age 45 to ;5
years9 may "se more ,%M, -"stomer in age gro"p 8:) ;: years may avail
more ho"sing loan and so on. In credit card #"siness, it is possi#le to red"ce
cost and improve payment #y segmenting c"stomer #ased on transactional
segmentation. , good ris$ might receive a polite reminder, a ha#it"al #"t
dependa#le late payer might have his reminder delayed and poor ris$ might
get a strongly worded reminder with a threat of canceling card.
;.4 !ndian Banking F segmentation(
%he #an$ has to serve #oth r"ral and "r#an c"stomers, small and large
entreprene"r, high earning and low earning c"stomers, retail and instit"tional etc.
Hence segmentation is possi#le in many ways. However #ased on #ehavior and
attit"de of c"stomer to prod"ct and delivery channel preference, c"stomer
segmentation can #e done in "nder)noted five categoriesL )
6a9 -ime pressed life(style customers) Catch them youngQ !s business
practice8 %hese c"stomers s"ffer from time #"t willing to #"y prod"cts to
meet life)style need, ready to spend more #"t not willing to visit #an$ to $now
prod"cts. Ban$ need to have well trained staff to mar$et prod"cts to this
segment.
6#9 /iddle(class customers) %hey adore traditional #an$ing with personal
to"ch, can spare time to visit the #an$, conscio"s of interest cost and has no
stigma of #orrowing for cons"mer spending. Estimated mar$et si+e is 85
million.
6c9 Senior citi,ens"retired / Catch them oldQ !s ne0 bu,, 0ord8 85< of #an$
fi&ed deposit is held #y Senior -iti+en. %hey are drawing pension from #an$s
and $eeping their deposits #oth in savings and fi&ed deposit. ,vailing loans
li$e pension loans and against deposits in e&igencies. Ban$s are offering ]<
to 1< higher interest to senior citi+ens.
6d9 4oung generation !- Savvy Customers( -omforta#le with new technology,
li$e pl"sh interior and good am#ience in #ranches, show least loyalty to
relationship and switch #an$s very often, cost as well as prod"ct conscio"s.
33@
HWomen ban8 a$$ount
(older $onstitutes only
5C63* of total a$$ounts6
!ural 'omen (ave a better
s(are in $om%arison to semi
urban and urban 'omen6
!e&ional rural ban8s (ave
mobiliFed more a$$ounts
from 'omen t(an ot(er
ban8s6 H
0 +$onomi$ :imes
3464C6344>
C8A Eomen segment
3omen controls or infl"ence >:< of worldAs ann"al cons"mer spending of
O1!.; trillion. ,nd in the ne&t five years,
womenAs incomes will grow from O18 trillion to O
1! trillion, o"tstripping -hina and IndiaAs
com#ined economies. 6%BI 5>.58.45159
%herefore 2the customer is 'ueen5 is new
#"++word in mar$eting. St"dy reveals that the
$ey decision)ma$ers in home are yo"ng women
of 1!)8: years. 3ith increasing ed"cation and
more and more women ta$ing "p 0o#s, she is
one who either ta$es decision on all)important
#"ying matters or has ma0or say in decision process. She is price sensitive and
("ality conscio"s as well. She is innovator and early adopter of new prod"cts.
%he mar$eters are responding to the ("een c"stomer with respect. %here is
"pward trend of women)oriented financial prod"cts. %a$e for e&ample Mahila
credit card, which is specially targeted to lady c"stomers as women are
considered high spenders, defa"lt rate among them is low and among defa"lters
list women defa"lters are very few. %he card offers free all)women health chec$)
"p facility at select hospitals and health clinics. It is #elieved that women spend
more on credit card than men. %here is a famo"s anecdote a#o"t a man who did
not report the loss of credit card of his wife #eca"se he tho"ght that @thief was
spending m"ch less than his wifeA. ,s per mar$et estimates, women who are
independent career women or women of high strata of society own 1;< of credit
cards. 7oan for p"rchase of 0ewelry is another women centric prod"ct. Ban$s
have also started c"stomi+ing savings acco"nt for them with added services li$e
minorAs acco"nt "nder their g"ardianship* add on de#it card for their children etc.
Ban$s are also adding colo"rs to their 7oc$er room #y providing array of #ea"ty
prod"cts at the dressing ta#le in the loc$er room to serve women c"stomers.
Bther privileges offered to women c"stomers are invitation to events li$e
coo$ery events, fashion show etc. Recently one #an$ has offered free @all ris$A
ins"rance cover to women acco"nt holders for ris$ of loss of 0ewelry either #y
snatching or theft or #"rglary while at home or d"ring travel, hotel stay etc.
33>
Micro financing thro"gh self)help gro"p is also preferred to women d"e to their
#etter repayment c"lt"re.
C8C Student segment
St"dent is also an important segment. G-atch them yo"ngH is watchword
of the #an$ers. Bpening of acco"nt with Rs. 11 in the name of minor st"dent is
one prod"ct, which was recently la"nched #y a #an$. Some #an$s are offering
credit card to st"dent p"rs"ing higher ed"cation and offering spends now and
pay later facilities. Ed"cation loan is very pop"lar prod"ct for st"dent p"rsing
management and technical co"rses.
C8< !slamic Banking:
-onsidering that India has the second highest m"slim pop"lation in the
world, Islamic #an$ing has h"ge potential. %he $ey difference #etween
-onventional #an$ing and Islamic #an$ing is that while conventional #an$ing
offers interest on deposit, Islamic #an$ing wor$ on principle of sharing of profit.
Islamic #an$ing is offered #y leading #an$ing in west. In India, Islamic #an$ing
has not ta$en off d"e to lac$ of clarity of legal and reg"latory iss"es. B"t recent
0"dgment of Jerala High co"rt is li$ely to pave the way for esta#lishment of first
Islamic #an$ in Jerla.
C8D Segmentation by value
B"siness has varying level of c"stomer profita#ility. Normal c"stomer
profit analysis shows that only ;5 per cent c"stomers generation 155 per cent
profits. ,nother 85 per cent prod"ced modest profit while the #ottom 85 percents
generates negative ret"rns and so n"llified the profit prod"ced #y the middle 85
percent. Segmentation #y val"e lies at the heart of an effective c"stomer strategy
for #an$s where c"stomers contri#"ting ma&im"m profits are segmented into a
high priority segments and are rewarded #y #etter service or val"e added
prod"cts technology #ac$ed prod"cts or #y #oth.
;.? %re(re'uisites of effective segmentation
Fsef"l mar$et segments m"st have following characteristics)
a) /easurability) the si+e and p"rchasing power or impact on credit ("ality
of the segment can #e meas"ra#le.
b) &ccessibility( the segment can #e effectively reached and served.
$) Substantiality) the segment is large or profita#le eno"gh.
33B
d) &ctionability /Effective programme can #e designed for attracting and
serving the segment.
e) Responsiveness)%he target c"stomers are li$ely to respond.
f) &cceptability(%he management can #e held accepta#le for res"lt.
&) -estability)Re("ires constant testing of strategies and practices.
<8 -argeting
Bnce segmentation is complete, the prod"cer.service provider has to select the
segment, which it wishes to target. %he process starts with eval"ation of mar$et
segment #y collecting data of potential sales, growth and profit for all the
segments and also to find o"t which segments is attractive eno"gh $eeping in
view its own prod"ct profile vis a vis the potential competition. 7astly, the targeted
segment m"st #e within his o#0ectives and reso"rces i.e. if the segment is as per
o#0ective, if it has eno"gh reso"rces in comparison with its competitors. Bnce
eval"ation e&ercise is done, the prod"cer.service provider has to choose one or
more segments to decide it target mar$et. , target mar$et is a set of #"yers with
common characteristics, which a prod"cer.service provider wants to serve. %he
following strategies are implementing for mar$et targeting)
a9 Fndifferentiated mar$eting i.e. differences #etween mar$et segments are
ignored and the mar$et is approached as a whole with a single prod"ct.
%his strategy foc"ses on common needs of c"stomers and prod"ct is
designed to appeal to the largest possi#le n"m#er of #"yers. S"ch a
strategy provides cost economies #"t fail to satisfy all #"yers.
#9 =ifferentiated mar$eting i.e. several mar$et segments are targeted with
separate mar$eting mi&es for each segment. It is e&tremely pop"lar
model as it tries to satisfy need of all #"yers. Since it increases cost, the
segment sho"ld #e large eno"gh to provide economies of scale.
c9 -oncentrated mar$eting i.e. to concentrate on one or more segment
where one finds more opport"nities as per its S3B% analysis.
D8 %ositioning(
Bnce a company decides a segment to enter, it has to decide how to enter into
it. If it is an esta#lished segment and competitors have already ta$en position in that
segment, it has to st"dy competitors position vis a vis its own position #efore
entering into that mar$et. Mar$et positioning is a process thro"gh which a company
occ"pies a clear, distinctive and desira#le place in the mar$et. 2ositioning is "ni("e
33C
in the sense that it is not the act"al attri#"tes of the prod"ct that is important #"t
perceived ("ality that attract a c"stomer. %he positioning strategies are #ased on
prod"ct attri#"tes, "sage occasions, "sers, prod"ct categories etc. 'or e&ample,
NIRM, "sed price as its weapon and d"e to this mighty Hind"stan 7ever had to
cr"m#le. Body shop did not highlight any prod"ct attri#"te li$e #ea"ty or cleanliness
#"t made different positioning statement that they do not test their shampoos or
soaps on animals. ,m"l ice creams with "se of real mil$ and ,nchor toothpaste with
155< vegetarians positioned themselves in the mar$et. %he $ey elements of
positioning consists of 2ricing, Branding, 2romotional policy, 2rod"ct advertising
policy and -"stomer Service standards.
98 Bonding 0ith the customers through branding
3hile prod"cts are created in the factory, #rands are created in the mind.
Branding is a process of #"ilding a #rand. 2ositioning is a#o"t p"tting the #rand in
the mind of the c"stomer. In fact #randing and positioning is two sides of the same
coin* one witho"t the other does not serve its p"rpose. Bne cannot do #randing
witho"t positioning. ,nd for s"ccess of a #rand, passionate c"stomer relationship is
more important as #rands die not #eca"se of loo$ #"t for lac$ of c"stomer)
relationship.
M8 Challenge &head(
GBne si+e fits all approachH is no longer feasi#le and has to give way to innovation
thro"gh c"stomer segmentation and prod"ct c"stomi+ation. %owards going closer to
the c"stomer in identified mar$et segments, #an$s are esta#lishing SBFs 6strategic
#"siness "nits9 s"ch as -orporate ,cco"nt Dro"p, International Ban$ing division,
Retail #an$ing #o"ti("e, ,gric"lt"ral 'inance #ranches etc. Each SBFs aim to target
the c"stomers with prod"cts s"ita#le for them. %he challenge #efore the #an$s is to
design cost effective ("ality prod"cts that attract c"stomers of vario"s segments and
then position them in the mar$et thro"gh #rand #"ilding.
)555)
33?
-(a%ter03>
Retai$ 5oan
A Risk Management #ers+ecti8e
26ood shoppers kno0 that you should not do grocery shopping 0hen you
are hungry# because you end up buying more than you need8 Similarly#
contractors 0ill usually 0ait till it stops raining to fi) that roof leak8
inancial crisis cycles# like business cycle# are endemic to banking8 1esson
is that there is dire need of timely and effective action to avoid turmoil85
(&nonymous
1. Retail 1oan) Risk /anagement %erspectives ) %he retail loan portfolio of the #an$s
in past few years has grown "p very fast 6-,DR over 85<9 and it now constit"tes
a#o"t 41< of total loan portfolio. %he credit e&pansion has #een shifting from metro to
tier 4.8 cities also. However, high growth in retail loan has started inviting concern of
vario"s sta$e holders s"ch as investors, reg"lators, #an$ers etc. over different matters
and certain important iss"es raised are)
,re Indian #orrowings #eyond their meansR
Is the average c"stomer leveraged too m"ch #eyond his capacityR
33A
3hether the growth is too high to ca"se concentration ris$R
3hether assets ("ality is compromised in vol"me led retail lendingR
3hether the portfolio may deteriorate with agingR
,nd whether it is li$ely to crowd o"t ind"strial creditR
334
!+:)IJ JO)/ /P)
)S * OF
OU:S:)/I/#
JO)/S
-ate&ory *
-onsumer
durable
B6B*
-redit $ards B63*
Ot(er %ersonal
loans
36B*
<ome loans 56A*
:otal 36>*
4. E)ponential 6ro0th in Retail Credit necessitates sound policies of Risk
/anagement( =espite e&ponential growth in past fo"r
years, the retail loan as percentage of D=2 is ("ite low at
>.:< in India in comparison to other co"ntries say 15.4< in
%hailand, >!.;< in So"th Jorea, ?:< in FS, and ;.8< in
Malaysia. 7ow penetration level s"ggests significant
"ntapped potential of retail loan in India. In fact, low interest
rates, fiscal incentives.ta& concession and easier prod"ct
availa#ility had #een $ey driver of retail loan #oom in the
recent past and significantly contri#"ted in credit
e&pansion and profita#ility of the #an$s. %he retail loans
are considered safe as ris$ is diversified among large n"m#er of individ"al #orrowers
located across the geographical dimensions as wide as the networ$ of #an$ #ranches.
%he defa"lt rate 6N2,9 *see bo)9 in retail loan is only 4.:< as against ?.;< of
average N2, of the total credit portfolio. However -RISI7 in its report 6E% :.1.4559
stated that gross N2, of retail loan may rise to ;< as March 455 from 4.?< in March
455? and has th"s ca"tioned for caref"l in e&pansion of retail loans . 'ollowing iss"es
from ris$ management perspective need to #e addressed o#0ectively. 'irstly, too m"ch
foc"s on retail loan may dist"r# the portfolio #alance and conse("ently create
concentration ris$. Secondly, fast e&pansion of retail loans has #ro"ght in its fold a set
of #orrowers who have no reg"lar employment, no collateral to offer and many of them
resorted to m"ltiple #orrowings th"s falling "nder high credit ris$ category. %hirdly,
information a#o"t credit history of #orrower is cr"cial to safeg"ard against
fra"d.forgery which is very often not availa#le. 'o"rthly, rising inflation may create
pro#lem in servicing of loan #y the salaried class who are considered highly leveraged.
'ifthly %here is e&cessive increase in prices of gold and real estate o"tr"nning
inflation rate say for e&ample ho"sing prices clim#ed at 1>)4:< and gold prices has
risen even faster rate at 1;);5<. 6RBI ann"al report 4511)149 ,ny adverse 6downward9
movement in assets price will increase credit ris$. In this #ac$ drop RBI had o#serves
that tho"gh lending to ho"sing and commercial real estate had slowed down #"t close
vigil is still necessary as ho"sing prices inflation has not moderated. MoodyAs
Investors Services in report on ,sia Ban$ing B"tloo$ 455> has noted s"rge in retail
loan #"t has shown apprehension as @these loans are, as yet, "ntested in a negative
credit cycle.A ,ll this necessitates that #an$ sho"ld not only p"t in place a system to
335
recogni+e s"ch ris$s on contin"o"s #asis #"t also initiate meas"res to p"t ris$
management practices in more effective and integrated manner.
8. Retail 1oan( Systemic Risk out of macro ( economic shock( Basel -ommittee II
has ca"tioned that over e&pos"re to ho"sing and other retail sectors co"ld create
#"##les in the mar$et as a conse("ence of over spending #y the salaried class
followed #y defa"lts and ca"tioned the #an$s against limit less financing. In this
conte&t, It is arg"ed that large n"m#er of Indian ho"se hold are over)leveraged and
while their salaries are not inflation lin$ed, the home and other loan which are on
floating #asis are. It is also arg"ed that while corporates are protected #y limited
lia#ility cla"se, ho"se)holds have no s"ch protection. , high inflation sit"ation, as
e&isting in India at present, may increase loan defa"lt. 3hen this happened in FJ and
FS in the 1!5s* the negative effect was e&acer#ated #y a sharp fall in the real estate
prices. %he demand for ho"sing dropped as interest rates rose and defa"lt in previo"s
loan also shot "p. -RISI7 has cond"cted a st"dy of varia#le home loan mar$et
6Economic times 4;.11.5;9 and has o#served that close to 5< loans are "nder
varia#le rate and 1:5)455 #ps rise in interest rate will adversely impact the repayment
capacity of the #orrowers who opted for ten"re of 1: years and a#ove. It has made a
forecast that N2, may rise if interest rises #y 455 #ps or more as a#o"t one)fo"rth of
the #orrowers are already "sing more than :5< of their salary to repay loans.
;. Retail 1oan and Credit Risk management )Retail loans are #asically cons"mption
loans and are largely "nsec"red 6e&cepting ho"sing loans9. %hey r"n the ris$ of
#ecoming #ad as repayment depends "pon discretion of the c"stomer 6Moral ha+ard9
with no sec"rity in the hand of the #an$ to fall #ac$ and time cons"ming and
prohi#itive legal process. In case of ho"sing loan, the ris$ is fall in real estate prices
which has seen h"ge increase in past few years. 3hile economists and #an$ers differ
on impact of rising inflation on f"t"re growth of retail loan, they are all are concerned
that rising interest rate in conse("ence of increasing inflation may impair asset ("ality.
%he effective credit ris$ management necessitates that vario"s ris$s arising o"t of
deficiency in lending policy, incorrect prod"ct str"ct"ring, inade("ate loan screening
and doc"mentation, ineffective post sanction monitoring.follow)"p and wea$
collection.recovery mechanism are ade("ately and timely addressed. ,nd li$e
traditional lending, the #an$ers while ta$ing lending decision of retail loans, sho"ld
strictly adhere to the five @-sA of credit i.e. character, capacity, and credit, convenants
and collateral. ,s ris$ mitigating meas"re, the Reserve Ban$ of India vide mid term
333
review of monetary policy of Novem#er, 15 64515)119 advised #an$s 6i9 that the home
loan #orrowers will have to pay at least 45< margin 6 ceiling on loan to val"e ratio
raised to !5<9 6ii9 %o increase standard provisioning of home loan "nder teaser rates
from 5.;< to 4< and 6iii9 to increase ris$ weight on home loan of Rs. ?: la$hs and
a#ove from ?:< to 14:<. '"rther NHB, is promoting a separate company as
Mortgage D"arantee -orporation to g"arantee payment of principal and interest of
ho"sing loan with a view to mitigate defa"lt ris$. 7i$e wise there is proposal to set "p
-redit D"arantee f"nd for ed"cation loans so that #an$ can #an$ "pon s"ch f"nds in
case of defa"lts. 'inally there is inherent emotional connect of home loan and gold
loan #orrowers with the assets and they will not easily let their assets slip o"t of their
hands #y willf"l defa"lts.
:. Retail loan and assets price risk( RBI has recently shown concern over fast
increase in prices of stoc$s and real estates. In fact s"ch worries ha"nt the central
#an$s world over. However in #"ilt safe g"ards in financing against stoc$s or for real
estate if followed properly can s"rely mitigate s"ch ris$. 'or real estate lending if
#ac$ed #y ade("ate and conservatively val"ed collateral will ens"re that #an$s are
ade("ately protected if property prices fall. Indian #an$ing has to learn a lesson from
recent s"#)prime crises of FS. %hese s"#)prime crises have p"t loss in val"e of
,merican homes G#etweenH 18< to 45< of FS= 48 trillion. S"#)prime loans are those
which were p"shed to people who can not afford to repay. Many loans were sec"red
#y homes. Since home prices were steadily rising co"ld ta$e sec"red loan on the
same ho"se and service the past de#t. ,s long as prices rose, there was no defa"lt.
Based on good history, credit rating agencies gave good ratings to derivatives and
#onds iss"ed #y sec"riti+ing these loans. %he #an$s that initially sanctioned these
loan did not carry it in their #oo$s and sold them to investors. 3hen #"##le #"rst,
defa"lt #egan and #an$s are forced to foreclose loans. ,dditional s"pply of ho"ses
and res"ltant e&pectation that prices wo"ld come down f"rther, together p"sh down
prices f"rther. %his feeds into vicio"s circle of defa"lt.
>. Retail 1oan and Concentration Risk( Retail loan as percentage of Dross Ban$
-redit now constit"tes a#o"t 41< and is largely concentrated in "r#an and metro
centers. ,s stated earlier that credit growth d"ring 455;)5: has #een significantly
higher at 4>< 6previo"s year 1;.><9 and #an$s are aggressively seen increasing their
lending not only to corporate #"t also to other sectors li$e agric"lt"re. '"rther, #an$s
partic"larly 2SBs are ta$ing steps to diversify retail loans in r"ral and semi "r#an
333
areas to leverage their strength of Semi)"r#an and r"ral #ranches where opport"nities
are more and competition is less. %he increase in ris$ weight of retail loan and cap on
"nsec"red loan are other meas"res initiated #y the reg"lator to co"nter e&ponential
retail credit growth.
?. Retail 1oan and !nterest rate risk) Interest Rate Ris$ is another area to address. In
the past two)three years #an$s have #"ilt "p ho"sing loan portfolio, which carries ?.:<
to .:< interest. Since 15< to 1:< of these loans are on fi&ed rate #asis, any
increase in interest rates may ca"se loss to #an$s. %o mitigate interest rate ris$, #an$s
are now p"tting =force maBeure7 cla"se in the home loan agreement to reset interest
rate in case of e&treme volatility in interest rates. Ban$s have also started offering
prod"ct with interest reset cla"se after every : years. Since ho"sing loans are far large
ten"re say 1: to 4: years and ca"se assets lia#ility mismatch, interest rate ris$
management is most important aspect of retail lending.
!. ,eta$4 7oan)-easure rates:( In the recent past many #an$s offered ho"sing loans
"nder fi&ed)c"m)floating rate option "nder which #an$s fi&ed interest rates at !< to
!.:< for one to five years and s"#se("ently #orrowers wo"ld shift to floating rate
"nder which interest wo"ld #e aligned to mar$et rate. %he prod"ct has #een
s"#se("ently e&tended to car loans also. RBI has recently shown concern and
ca"tioned #an$s against ris$s in offering s"ch loans as #orrowers might e&perience
payment shoc$s when interest rates goes "p as e&cessively low interest rates s$ew
the ris$ reward matri& #y ma$ing pro0ects that are act"ally not via#le appears via#le)till
interest rate reverse and the same pro0ect ceases to #e via#le. It is therefore
necessary that #an$s as ris$ mitigation sho"ld loo$ into #orrowerAs capa#ility of
servicing de#t after interest rates aligned to normal rates. %hey sho"ld also $eep
necessary c"shions in margin and repayment conditions so that repayment capa#ility
of the #orrowers is not compromised. RBI to f"rther show its concern on e&pected
rise in delin("ency of s"ch loan has raised standard provisioning from 5.;< to 4<
vide policy anno"ncement of 4
nd
Novem#er, 4515.
. Retain loan and pre(payment penalty( 2enalty on mortgage prepayment has
#ecome a contentio"s iss"e #etween #an$s and the c"stomers who loo$ o"t for ways
to #ring their cost of #orrowings #y switching over to other #an$s. In last two year since
455!, when the central #an$ c"t policy rates #y more than five percentage points, most
#an$s did not pass on the red"ction in interest rates to home loan c"stomers #"t
red"ced rates for new #orrowers. RBI has recently directed the #an$s not to levy
33@
prepayment penalty on floating rate loans in larger interest of c"stomers. 3ith this
possi#ility of #orrowers switching to other lenders have incrased e&posing the #an$s to
#oth ,7M ris$ and profita#ility.
15. Retail loan and operational risk) Bperational ris$ is another area of concern as
fra"d.forgery in retail loan is on rise. It is estimated that 4! 2SBs have reported home
loan fra"ds of Rs. >55 crores #etween 4554 to 455>. -ases of m"ltiple financing are
also reported. %he competition in retail loan segment is very fierce and there is ac"te
press"re on the retail managers to perform. %he retail is vol"me driven #"siness and
while there can #e gen"ine mista$es yet there are instances of ac"te negligence or
mis"se of a"thority #y the retail managers. %o o#viate these happenings, #an$s have
to p"t in place rigid d"e diligence standards on c"stomer identification and acceptance
system .Recent anno"ncement of #"dget 4515)11 to set "p e)loan data registry will
also #e helpf"l to #an$s to satisfy #efore sanctioning home loan that no other lender is
having claim over the property. It is also essential that only officers of proven
intelligence and integrity are selected.assigned handling of retail loans. %he -IBI7,
which has developed data#ase of credit history.report of the #orrowers and also
mortgage defa"lt, will go a long way in mitigating operational ris$.credit ris$. E&perian
-redit Information -ompany Indi la"nched a new prod"ct named @triggerA which is #y
way of daily alerts a#o"t a c"stomer missing a repayment sched"le, moving into
defa"lt, ma$ing application for the same loan with other lenders etc. which co"ld
ena#le the #an$ to loo$ into in its own portfolio and monitor the loan. '"rther in a #id
to overcome the menace of forged.fa$e title deeds, a central registry for registration of
e("ita#le mortgage of ho"ses has #een set "p. .
11. /onitoring of Retail 1oans( Monitoring is essence of ris$ management. ,s earlier
stated, retail loans are vol"me
driven #"siness and re("ires
close monitoring. follow)"p.
%he manager sho"ld ta$e
timely steps for iss"ing
demand notice,
reminders,
Inspection.ins"rance of assets
etc. He sho"ld, as soon as first instance of
defa"lt is noticed, contact the #orrower 6employer where salary tie "p is held9 to
33>
HAA* of defa"lts happen in the first
si& months. Monitor the loan for first
si& months closely and yo" will $now
if the person is a fra"d or not.H
- M. #nandan, Managing $irector,
%holamandalam Investment and
&inance %ompany.
recover over d"e installment6s9. He sho"ld present post dated che("es 62=-s9 on d"e
date witho"t fail and initiate legal action immediately on dishno"r of che("es as per
provision of Negotia#le Instr"ments ,ct. In no case dishonored che("es sho"ld #e
represented and in case #orrower approach the #an$ for payment, he sho"ld #e as$ed
to deposit the installment in cash. '"rther, where loans #ac$ed #y assets t"rns N2,*
immediate action for sei+"re and sale of assets sho"ld #e ta$en "nder provision of
S,R'ES,I ,-%, 4554.
Challenge ahead
Emerging mar$ets are following developed mar$ets in cons"mer revol"tion. %he
cons"mer is #eing leveraged thro"gh mortgages, a"to loan, credit cards, personal loan
and other loans. %his has #ecome foc"s of all #an$s) #oth p"#lic and private sector.
%he retail loan mar$et in India is in early stage of evol"tion. %he retail loan has
contri#"ted significantly in credit growth of the #an$s in past few years. In fact retail
loan is considered as driver of economic growth. ,ssets impairment in retail loan in
India so far is m"ch less than other sector and there is no systemic finance #"##le as
s"ch. Since retail loan is a different #all game and #an$s have no previo"s
e&perience, it is necessary that #an$s sho"ld have an effective ris$ management
system. 3hile serio"s efforts sho"ld contin"e to develop healthy retail loan portfolio ,
the lending policies, prod"ct str"ct"re, loan appriasal, screening and doc"mentation,
post sanction monitoring and follow)"p, collection mechanism all sho"ld #e geared "p
simaltenio"sly to contin"o"sly mange the ris$.%his also necessiciates ris$ awareness
among retail loan mangers. 3ith setting "p of -IBI7 credit history of the #orrowers will
come handy to manage operational ris$s. However overreaction to stop retail credit
will ca"se the #an$s as well as the economy dearly. Ban$s need to p"ll o"t weeds, not
dig "p the garden. ,nd managers sho"ld "nderstand that credit ("ality sho"ld not #e
compromised d"e to press"re of competition or press"re to o"tperform others.
(@(@(@(
%ha"ter-26
Risk Management
33B
G%he down fall of Barings in 'e#r"ary, 1: revealed that the #an$ lac$ed a#ility to
monitor effectively the trading activities "nderta$en #y 7eeson. %his was party d"e to
lac$ of proper ris$ management system and also partly d"e to disregard for proper ris$
management proced"re.H
?8 Risk /anagement ( /eaning and Concept
Ris$ is intrinsic to #an$ing. It is as old as the #an$ing is. 3hat has changed is the
colo"r and conto"r of ris$ management, as approach has changed from defensive to
strategic. Ban$s have changed from simple organi+ation to comple& ones. %heir
geographic reach has spread from local mar$ets to regional, national, and glo#al
mar$ets. %heir operations are increasingly a"tomated and reliance on electronic delivery
system has increased. ,ll this has altered the ris$ profile of #an$s significantly. %hese
changes have raised two interrelated challenges for #an$ management* how to stay
foc"sed to mar$ets and the c"stomers while $eeping overall ris$ e&pos"res within
accepta#le ranges. %o meet these emerging challenges, Reserve Ban$ of India has
#een preparing Indian Ban$ing system for an integrated ris$ management framewor$
since 1. Managing ris$ is now core of #an$ing.
;8 Sources of Risk(
%here are many so"rces from which ris$ may emanate li$e 6a9 Dlo#ali+ation of
#"siness d"e to integration of Indian economy with the rest of the world, 6#9 2rogressive
li#erali+ation of economic policies leading to s"rge in new prod"cts , 6c9 Iicio"s
competitive #"siness environment, 6d9 2romoters.#orrowers, 6e9 %echnology and 6e9
Mar$et dynamics.
3. Risk /anagement process) %his encompasses 6a9 identification, 6#9
("antification, 6c9 management, 6d9 monitoring and 6e9 control.
. -ype of risk(%he #an$ing ris$ spectr"m cover the following main ris$s) 6a9 -redit
ris$, 6#9 Mar$et ris$, 6c9 7i("idity ris$, 6d9 Interest rate ris$, 6e9 Basis ris$, 6f9 Bption
ris$, 6g9 Ind"stry ris$, 6h9 B"siness ris$, 6i9 -o"ntry ris$, 609 Sovereign ris$ and 6$9
Bperational ris$.
5. Credit Risk -redit, for the p"rpose of ris$ analysis, not only involve act"al o"tgo
of f"nds from the lenders to the #orrowers #"t also coversL 6a9 investment in
sec"rities 6which is often named as ("asi)credit9 and 6#9 non f"nded e&pos"res in
form of letter of credit, g"arantee, options etc. -redit ris$ is also $nown as defa"lt
ris$. It involves ina#ility or "nwillingness of a c"stomer or co"nterpart to meet
commitments in relation to lending, trading, hedging, settlement and other financial
33C
transactions. %he credit ris$ depends on #oth e&ternal and internal factors. 6,9 %he
e&ternal factors are the state of the economy, wide swings in commodity.e("ity
prices, foreign e&change rates and interest rates, trade restrictions, economic
sanctions, Dovernment policies etc. 6B9 %he internal factors are deficiencies in loan
policies.administration, a#sence of pr"dential credit concentration limits,
inade("ately defined lending powers for sanctioning of loan #y officers.-redit
-ommittees, deficiencies in appraisal of #orrowersA financial position, e&cessive
dependence on collateral and inade("ate ris$ pricing, a#sence loan review
mechanism and post sanction s"rveillance etc. New capital accord 6B,SE7 II9 has
set new approach for meas"rement of credit ris$ from reg"latory perspective and
prescri#ed reg"latory capital charge for credit ris$, mar$et ris$ and operational ris$.
6. $ilution risk( %he @wordA dil"tion with reference to any sec"rity implies red"ction of
intensity and strength of the relative sec"rity. 'or a trada#le.mar$eta#le sec"rity the
f"ll in reali+a#le val"e may #e constr"ed as dil"tion ris$ #"t Basel lI has descri#ed
dil"tion ris$ sit"ation with respect to receiva#le 6#oo$ de#t financing9 as sec"rity. ,s
per Basel II the dil"tion ris$ refers to the possi#ility that the receiva#le amo"nt is
red"ced thro"gh cash or non)cash credit to the receiva#les o#ligor 6seller who has
sold goods on credit to a #"yer9. It is $nown that in case of financing against
receiva#le the pro#a#ility of dil"tion of sec"rity compared to other financing is more.
98 /arket Risk
Mar$et ris$ is the ris$ arising o"t of "ne&pected change in mar$et varia#les s"ch
as interest rate, c"rrency, commodity E e("ity prices #oth on and off #alance sheets
item. ,s per RBI definition mar$et ris$ covers #oth the #an$ing #oo$ and the trading
#oo$. Basel committee @s definition of mar$et ris$ e&cl"des #an$ing #oo$ and incl"de
only the trading #oo$. Mar$et ris$ in the #an$ing #oo$ is referred to #y the Basel II
as interest rate ris$. Mar$et ris$ th"s incl"de 6a9 Interest rate ris$ #oth Indian r"pee
and other c"rrencies in the #an$ing #oo$ 6#9 2rice ris$ in the trading #oo$ arising as
res"lt of interest rate, c"rrency, commodity and e("ity price movement, 6c9 7i("idity
ris$ of the instit"tion whether it is f"nding or trading li("idity and 6d9 -redit spread
ris$ "nrelated to downgrade.
M8 1i'uidity Risk
%he li("idity ris$ of #an$s arises from f"nding of long term assets #y short)term
lia#ilities, there#y ma$ing the lia#ilities s"#0ect to roll over or refinancing ris$. %he
li("idity ris$ in #an$s manifest in different dimensionsL
33?
6a9 '"nding Ris$L) need to replace net o"tflows d"e to "nanticipated withdrawal.
non)renewal of deposits 6wholesale and retail9*
6#9 %ime Ris$L) need to compensate for non)receipt of "ne&pected inflows of
f"nds, i.e. performing assets t"rning into non)performing assets* and
6c9 -all Ris$L ) d"e to crystalli+ation of contingent lia#ilities and fail"re of
#orrowers to pay.
,7M system has #een introd"ced to meas"re cash flow mismatches at different
time #"c$ets. In addition to ,7M system #an$s are re("ired to fi& pr"dential limits for 6a9
cap on inter)#an$ #orrowing, 6#9 c"m"lative mismatches across all time #"c$ets, and 6c9
d"ration of lia#ilities and investment portfolio.
L8 !nterest Rate Risk
It is the ris$ arising from the impact of the fl"ct"ation of interest rates on the
profita#ility as well of the assets and lia#ilities str"ct"re of the #alance sheet.
=ereg"lation of interest rates has e&posed #an$s to the adverse impact of interest rate
ris$. Interest rate ris$ 6IRR9 refers to potential impact on Net Interest Income 6NII9 or Net
interest Margin 6NIM9 or Mar$et val"e of e("ity ca"sed #y "ne&pected changes in
interest rates. =ifferent type of interest rate ris$ are)
&8 Basis Risk
Mar$et interest rates of vario"s instr"ments seldom change #y the same degree
d"ring a given period of time. %he ris$ that the interest rate of different assets,
lia#ilities and off)#alance sheet items may change in different magnit"de is termed
as #asis ris$. %he degree of #asis ris$ is fairly high in respect of #an$s that create
composite assets o"t of composite lia#ilities.
B8 .ption Risk
Significant changes in mar$et interest rates create another so"rce of ris$ to
#an$As profita#ility #y enco"raging prepayment of cash credit.term loan and e&ercise
of call.p"t options on #onds.de#ent"res and .or premat"re withdrawal of term
deposits #efore their stated mat"rities. It is $nown that #an$ in India has traditionally
#een selling in #"ilt option while accepting deposit and granting loan.
?@8 !ndustry Risk
Ind"stry ris$ analysis is concerned with S3B% profile of the ind"stry within the
economy vis)K)vis economic trends and the $ey s"ccess factors for the ind"stry. %he
Ind"stry ris$ incl"desL )
6a9 B"siness cyclicality, earnings sta#ility and diversify of earnings #ase.
33A
6#9 Economic parameters s"ch as inflation, energy re("irements.
6c9 International competitive sit"ation, demand pro0ections and mat"rity of mar$et
or life cycle of the prod"ct.
6d9 Basic financial characteristics of the #"siness.
6e9 -ost str"ct"re in terms of raw materials, la#o"r, and plant capacity.
6f9 -ompetitive str"ct"re.
6g9 Ease of entry. e&it.
??8 Business Risk
%his is defined as the ina#ility of the #"siness or pro0ect to service its de#t in time.
%his ina#ility stri$es a#o"t inade("ate income generation capacity of the #"siness,
which is affected #y the following varia#lesL )
6a9 Nat"re of #"siness or the prod"ct it sales
6#9 E&ternal economic or mar$et environment
6c9 Internal man"fact"ring organi+ation
6d9 2rod"cts mi&.
?;8 Country Risk
In #road terms, co"ntry ris$ is that "ncertainty which is created when f"nds cross
international frontiers. Management of cross)#order lending and international
investment ris$ calls for co"ntry ris$ analysis periodically as comprehensive as
possi#le. It is defined as ris$ of a foreign #orrower failing to service his foreign
c"rrency de#t o#ligations for reasons #eyond the "s"al ris$s that arise in relation to
lending. %here are two #asic differences #etween domestic and foreign loans. Bne is
that repayment of international loans m"st ro"te thro"gh e&change mar$ets and
therefore, lending #an$s sho"ld assess prospects for e&change rates and controls on
capital flows. ,nother difference is that "nli$e in domestic loans, there is no
esta#lished common legal system to act as an "ltimate ar#itrator to settle claims. It is
#eca"se of these factors that assessment of co"ntry ris$ is critical for #an$s to
safeg"ard their international e&pos"res.
?A8 Sovereign Risk
If the #orrower #elongs to the p"#lic sector, the ris$ is "s"ally referred to as
YSovereign Ris$Y. 2"#lic sector comprise of all state owned agencies and instit"tions.
3hile terming a #orrower as p"#lic sector, there is an "nderlying ass"mption that the
state will, "ltimately, ta$e responsi#ility for the financial o#ligations of the #orrower
concerned.
3@4
?C8 .perational Risk
Managing operational ris$ is #ecoming an important feat"re of so"nd ris$
management practice in modern financial mar$ets in the wa$e of phenomenal
increase in the vol"me of transactions, high degree of str"ct"ral changes and
comple& s"pport systems. %he most important type of operational ris$ involves
#rea$downs in internal controls, corporate governance and legal ris$. S"ch
#rea$downs can lead to financial loss thro"gh error, fra"d, or fail"re to perform in a
timely manner or ca"se the interest of the #an$ to #e compromised. Denerally,
operational ris$ is defined as any ris$, which is not categori+ed as mar$et or credit
ris$, or the ris$ of loss arising from vario"s types of h"man or technical error. It
incl"des legal ris$ #"t e&cl"des strategic and rep"tation ris$. %he so"rces can #e
fra"d, incompetence, transaction mista$e, e&ec"tion error, people ris$, e&ceeding
limit, sec"rity ris$, technology ris$, system fail"re, programming error,
telecomm"nication error, and prod"ct fail"re. In home loan alone p"#lic sectgor
#an$s have reported fra"ds amo"nt to Rs. : croes 6 BS 4;.4.4559 #etween 4554
to 455> mainly fa$e titled deeds, impersonation and inflated val"ation reports.
7egal ris$s primarily arise either d"e to lac$ of clarity of the doc"mentation of the
prod"ct or the act of the co"nterparty. -hange in legal environment d"e to legislative
changes and co"rt interpretations.proceedings also res"lt in legal ris$. Broadly legal
ris$s may res"lt in 6a9 claim against instit"tion, 6#9 fines, penalties and p"nitive
damages, 6c9 "nenforcea#le contracts res"lting from defective doc"mentation and
6d9 loss of instit"tional rep"tation. ,nother important area is legal ris$s arising o"t of
o"tso"rcing of certain activities #y #an$s. In case o"tso"rced activities legal ris$s
may arise owing to #reach of confidentiality or any fra"d hat may #e committed #y
#an$As agent ma$ing the #an$ lia#le for his acts and omissions incl"ding
misrepresentation to the c"stomers and #reach of any law committed #y the service
provider. 7egal a"dit, internal controls and internal a"dit are "sed as the primary
means to mitigate operational ris$. Ban$s co"ld also set operational ris$ limits, #ased
on the meas"res of operational ris$. Ins"rance is also an important mitigation of
some forms of operational ris$. Ris$ ed"cations for familiari+ing the comple&
operations at all levels of staff also red"ce operational ris$. Fnder Basel -ommittee
II g"idelines, RBI has as$ed the #an$ to provide capital charge for operational ris$
e("ivalent to 1:< of their average gross income of previo"s three years.
Challenge ahead(
3@5
%he ris$ sit"ation in Indian Ban$s is no different from the #an$ world over.
In fact, it is more complicated. %he nationali+ed #an$s and SBI and its associates
contri#"te more than !5< of #an$ing #"siness. 3ith adoption of Basle II from
March 455!, ris$ management and ris$ meas"rement has come into sharp foc"s.
Each #an$ is now re("ired to ed"cate and train all officers.employees so that they
are made to "nderstand the process of generation of ris$, its ("antification,
mitigation and management. Ris$ management, c"tting across all hierarchical levels
and activities in #an$s, has #ecome part of every #ody 0o#. 3hile people at #ranch
level are re("ired to ta$e calc"lated ris$s, the top) management level the ris$ is
re("ired to #e monitored and managed. '"rther MIS is core of ris$ management
and has to #e generated in timely and acc"rately. It is going to #e a very #ig
challenge for p"#lic sector #an$s having far fl"ng r"ral #ranches many of which are
still not "nder -BS. %h"s, #an$s sho"ld attach considera#le importance to improve
the competency of their wor$ force to identify meas"re, monitor and control the
overall level of ris$s #y proactive management.
)5)5)5)
3@3
' +7 & '' D *7 7' T0 *:: &' : T0 +' :& ': T' M+ ,: &' :
%ha"ter-27
Bank Marketing
Making of a Successfu$ Sa$es #erson
)eo"4e !#9 not !eca#se the9 #nderstand 9o#r "rod#ct or ser-$ce !#t !eca#se
the9 fee4 that 9o# #nderstand themK.
Bank /arketing
Mar$eting in most credit instit"tions incl"ding #an$s is new phenomenon. Before
that mar$eting was synonymo"s to advertising and p"#lic relation and role of
mar$eting was more tactical than strategic. However d"e to fierce competition
generated #y entry of new generation private sector #an$ mar$eting has #ecome a
strategic tool of prod"ct promotion and #"siness development and all #an$s whether
in p"#lic sector or private sector have f"ll fledged mar$eting department to effectively
p"t in place all the ?2sA of @mar$eting mi&A 6a term coined #y Jotler9 ) prod"ct, price,
place, promotion, people, process and physical evidence. %o p"t in mar$eting terms,
it is not only necessary for a #an$ to have right prod"ct #"t also to have right price,
delivered #y right people, "sing right processes, pac$aged in right manner and at a
right place. %he sales person is a very cr"cial part of mar$eting mi&.
/aking of a sales person( sales skills
@2eople with right soft s$illA is the re("irement of
mar$eting. , sales person sho"ld have pleasing
personality, attractive mannerism, positive attit"de,
good comm"nication and negotiation s$ill and gen"ine
concern of c"stomersA pro#lem. He sho"ld #e
attractive, smart, simple, serio"s, relia#le, tr"st)worthy,
optimistic, positive, efficient, o"tgoing, aggressive, passionate and energetic. He
sho"ld have high level of energy and a#o"nding self)confidence to win and hold
passionate desire to perform. In fact, mar$eting is for the fittest, fastest and smartest
person. 'it and fast sale person m"st $now and tr"ly identify with his company and
3@3
$now its prod"ct, c"stomers, competitors, responsi#ilities and art of ma$ing sales
presentations. He sho"ld val"e relationship and follow ethical practices to offer val"e
for money to its c"stomers. He sho"ld #e fast eno"gh to respond to c"stomerAs
demand and satisfy his ("eries acc"rately and promptly. He sho"ld #e smart
eno"gh to greet the c"stomer with smile, treat the c"stomer with all the comfort he
e&pects and meet his prod"ct.service wants and needs. , smart salesperson is one
who chec$s and ma$es his selling style and lang"age a perfect fit.
/aking of Sales person( 3otler7s model
Selling is an art. It pre)s"pposes that sales person "nderstands c"stomerAs need
and is competent to offer effective sol"tion. It is a c"stomer pro#lem solving
approach. %his approach ass"mes that 6a9 c"stomer have latent needs that provides
opport"nity to the #an$, 6#9 they li$e s"ggestions and 6c9 they will #e loyal to the
sales persons if they satisfy their long)term interest. JotlerAs model consists ofL )
*i+ %rospecting the customer
'irst step in selling is to identify a prospective c"stomer. -"rrent
c"stomers are #est so"rce to develop a lead. Bther so"rces li$e
associations of traders, pensionersA, and ind"striesA, residentsA etc. can
assist the #an$ in identifying prospecting c"stomers. =ata so"rces li$e
newspaper* maga+ine, directories, #"lletin etc are other important so"rces
to find o"t details of the prospective c"stomers who can #e approached. ,
sales person sho"ld have a#ility to convert all these information into a data
wareho"se to approach and mar$et his prod"cts to the potential c"stomers.
*ii+ 1earning and approaching a potential customer
%here is small piece of wisdom that I learnt from practical e&perience as
a sales man) and that is salesman never sales^ %hen what is he selling
a#o"tR In my e&perience, the #est salesman is one who ma$es the #"yer
#"y. I "sed to tell my sales staff, G=onAt try to sell, #"t try to help yo"r
prospective c"stomer to #"yH.
1
, sales person m"st, therefore, learn as
m"ch as possi#le a#o"t potential c"stomersA needs, ha#its, preferences,
personal characteristics, #"ying styles and #"ying decision process.
,pproach is concerned with attit"de, manners and appearance of the sales
person and relates to his a#ility to comm"nicate with the prospective
c"stomer. %he sales person sho"ld decide #est approach i.e. how 6personal
5
My Master Pu;aya Part(asart(i !a;a&o%al$(ari0 %a&e C? Molume I o'n Memory Jane
3@@
visit, or telephone or letter9, when 6time of visit9 and where 6office or
residence9 to contact the prospective c"stomer.
(iii) %reparing for presentation
'irst impression is the last impression. S"ccess of a sales person lies in
opening lines and his follow "p remar$s. %he spo$en worlds are the most
powerf"l tool that creates sale. Sales person m"st prepare himself f"lly
#efore he act"ally meet the c"stomer to ma$e presentation.
*iv+ %resentation
2resentation signifies conveying prod"ct feat"res, #enefits and ("alities
to the prospective c"stomers to stim"late #"ying. Jotler s"ggested ,I=,
approach i.e. getting attention, holding interest, aro"sing desire and
o#taining action. Sales presentation can #e of three types ) 6a9 -anned
approach #ased on memori+ed sales tal$ covering the points a#o"t prod"ct
feat"res. It is #ased on stim"l"s response theory that s"ggests that #y
proper "se of words, pict"res, action and terms, and sales person can
prompt c"stomer to #"y the prod"ct 6#9 'ormatted approach is also #ased
on stim"l"s response thin$ing #"t lays emphasis on first identifying #"yers
need and #"ying style and thereafter approaching him. 'or e&ample, if the
c"stomer is cost conscio"s, the sales person sho"ld offer him low cost
and no frill prod"cts. 6c9 Need satisfaction approach is #ased on search of
c"stomerAs need. In this approach, the c"stomer is enco"raged to come o"t
with his re("irement and #ased on his need, the prod"ct is tailor made.
Bther way of identifying c"stomerAs need is mapping his #ehavior and
identifying gap from which c"stomer derives val"e. 3ith introd"ction of
technology, sales presentation has #ecome very scientific and foc"sed,
which not only saves time and reso"rces of the sales person #"t also
ena#le the target c"stomer to "nderstand the prod"ct #etter.
*v+ Juestion and &ns0er session(
, common complaint a#o"t sales person is that they tal$ too m"ch. ,
good sales person sho"ld, therefore enco"rage c"stomer to raise ("estions
so that all the do"#ts.o#0ections are cleared to his.her total satisfaction.
-"stomers may raise o#0ections #eca"se he may find certain gaps either in
his "nderstanding or in the ade("acy of information or 0"st the fact that he
does not li$e the sales person. Sales person sho"ld $now and appreciate
3@>
that o#0ections are nat"ral #ehavior from cons"mers and cannot #e wished
away. %hese o#0ections and do"#ts can #e classified into two categories)
6a9 psychological resistance that incl"des resistance to interference,
preference for e&isting #rands, tendency to resist change, disli$e to decide
new things, pre determined ideas and "npleasant past e&perience. 6#9
7ogical resistance that incl"des o#0ection or do"#t for price, ("ality, delivery
sched"le, or prod"ct feat"res. , s"ccessf"l sales person is one who
"nderstands the o#0ections clearly and addresses them to the #est of
satisfaction of the c"stomer. 'or this, it is important that the sales person
sho"ld have thoro"gh prod"ct $nowledge and sho"ld effectively and clearly
comm"nicates its feat"res. #enefits to the prospective c"stomers. He
sho"ld answer all the o#0ections in s"ch a way that all do"#ts are
reasona#ly clarified and c"stomer is prompted to #"y the prod"ct. Handling
o#0ections is a very tric$y #"siness and most diffic"lt part of the
salesmanship. Negotiation s$ill plays a ma0or part in handling o#0ections
tactf"lly and firmly. ,#ove all sales person sho"ld always #e enco"raged
and motivated to face challenges, as it will ena#le him to stay foc"sed and
deliver res"lt. %he sales person m"st #e a creative learner. He m"st #e
willing to e&periment and to learn from his mista$es.
*vi+ Closing the deal
Bnce presentation is made and o#0ections are satisfied, sales person
sho"ld fetch the orders. It is his "ltimate o#0ect. It is his moment of tr"th.
-losing re("ires confidence, competence and capa#ility to read closing
signals from the c"stomers and decide right timing of o#taining order. 'iner
details li$e terms and conditions, repayment period, interest)rate, option
fi&ed or floating etc. sho"ld #e repeated once again so that there remains
no am#ig"ity. Most selling is pers"asive today. In a demand led mar$et
where the s"pply of goods and services is on over drive, pers"asion is the
name of the game. 3hen a sales person feel that the c"stomer is avoiding
or postponing a #"ying decision, he sho"ld tactf"lly l"re him #y free#ies,
disco"nt etc. He can also tactf"lly say that offer will lapse if not availed or it
is lifetime opport"nity, which the prospective c"stomer sho"ld not miss. He
sho"ld say @than$sA once the deal is over.
*vii+ %ost sales follo0(up
3@B
, sale never really ends with the physical clos"re. %he e&perience of the
prod"ct or service is therefore 0"st as important if not more to the selling
process. 2ost sales follow)"p is an e&ercise of esta#lishing long)term
relationship with the c"stomers so that sales man remains in to"ch with
post sales iss"es and get the repeat orders. 'or #an$s, follow)"p also
means to loo$ into cash)flow pro#lem of the c"stomer so that de#t is
resched"led or e&tension is allowed if it is so re("ired. 'ollow "p also
means to provide post credit co"nseling so that sales person remains in
to"ch with the c"stomer and e&ploit the opport"nity for cross selling or "p
selling. It is the d"ty of sales person to chec$ that c"stomer is totally
satisfied with the prod"ct and in case he.she is having any pro#lem that is
sorted o"t to his.her f"ll satisfaction. , sales person sho"ld $eep on
calling his c"stomers to stay in to"ch, not necessarily to sell more.
Selling over %hone
3ith mo#ile penetration on the rise, #an$s are opting to sell their
prod"cts over phone. Selling of credit card, life policies, m"t"al f"nds are very
common. %he #enefit of the selling over phone is that it allows the #an$ to sell
prod"cts at low cost where dep"ting the sales persons is cost prohi#itive. ,s
general impression is not very good for this channel as selling over phone is
s"scepti#le to misselling, #an$ has to #e caref"l in recording s"ch sales to
overcome the iss"es arising o"t of complaint of misselling or legal non
compliance. Sales persons while selling the prod"cts over phone m"st $eep in
mind some #asic principles namelyL)
6a9 Sales person sho"ld clearly tell her name, address and location from where
she is calling. %his will add to the confidence of the #"yer in the sales person.
6#9 Sales person sho"ld specify the terms and conditions of the prod"cts
clearly. It is advisa#le to spea$ slowly so that c"stomer "nderstands the
things properly.
6c9 Sales person sho"ld not give any false promise to ind"ce sale. Benefits and
e&cl"sions m"st #e clearly spelt o"t.
6d9 %o meet reg"latory re("irements, #an$s are re("ired to record conversation
that ta$es place thro"gh the call centre. Sales person sho"ld $eep in mind
that he is morally as well as legally #o"nd to #e fair with the c"stomer.
3@C
)o D$dd$ng
H.uyin& a $ar may be an adult
de$ision but it9s t(e 8ids '(o
de$ide models7 variants7 features
and $olours '(en a family &oes
ve(i$le s(o%%in&6I
0 ) study of :urner India
+: 3364@6344B
6e9 %ypically the online sale is offered #y a written confirmation offer where
c"stomer is given choice to ref"se to accept the prod"ct if he does not li$e it.
%his cardinal principle m"st #e complied in #oth letter and spirit so that
c"stomer confidence in selling over phone is esta#lished.
6f9 RBI has as$ed #an$s to disclose to their c"stomers fees and other
commission earned #y selling m"t"al f"nds.ins"rance policies etc. %his has
#een done to protect the c"stomers from rec$less selling of financial prod"cts
witho"t protecting their interest.
$ecision !nfluencing
,ltho"gh a cons"mer may get
information for a prod"ct or service thro"gh
m"ltiple so"rces of comm"nication
6incl"ding 1L1 with sales person9, he.she
many times cons"lts others #efore ta$ing
the #"ying decision. %hese persons may #e
ho"sewives, $ids, elders)in)family 6village
elders in r"ral areas9. *See Bo)+ , smart
sales person always remains active and agile to watch s"ch infl"ence. %he sales
person sho"ld st"dy and analy+e social and c"lt"ral ha#its that infl"ence the
p"rchase decision and approach the mar$eting #y addressing their priorities and
concerns. In Indian conte&t, ho"sewives play an important role in decision
ma$ing partic"larly in #ig)tic$et loans li$e ho"sing, car, ins"rance etc. Sales
person sho"ld #e aware of their li$ing 6incl"ding disli$ing9 and so that their
concerns are addressed satisfactorily.
air practices code
Many a time c"stomers are complaining of too m"ch intr"sion in their
private life #y the sales persons li$e "nsolicited telephone call #y -redit -ard
-ompany or an ins"rance agent. 3ith cons"mer awareness increasing for
privacy and RBI insisting for anti)tying meas"res, #an$s are p"tting in place fair
practices code for their salesperson. %hese practices incl"de maintaining do not
call list, chec$ing the calling per month, respecting privacy of the c"stomer,
identifying ho"rs and day of calling, p"tting complaint handling process and
response time in place. , sales person sho"ld #e sensitive of these fair practices
3@?
to avoid disli$e of the c"stomer. Ethics, caring and service are now fo"ndation of
selling.
Selling to internal customers
2eople create, deliver and s"stain val"e for the organi+ation.
Brgani+ations that adopt a disciplined and integrated approach to the
management of people can harness their organi+ational intellect and transform it
into economic val"e. In order to leverage employee intellect towards val"e
creation, enterprises need to create a sales c"lt"re. Ban$ staff is #an$As @#randA
that greets the c"stomers at the co"nter, entertain re("est for opening acco"nt or
processing a loan application, answers ("eries or solve pro#lems etc. %he
challenge #efore p"#lic sector #an$s is to ma$e each and every employee a
sales person. %his re("ires a whole lot of selling to internal c"stomers to change
their mindset and ramping "p #elief that mar$eting is s"pport f"nction which
whole organi+ation need in present day #an$ing.
Behind every successful investor is a sound advisor
%he easy and passive prod"cts li$e fi&ed deposits are no longer attractive to
c"stomers given the low rate of interest. 3ealth management and private
#an$ing is fast emerging as l"crative preposition for #an$s since c"stomers are
now loo$ing to invest in alternate prod"cts li$e ins"rance and m"t"al f"nds,
which gives higher yields with ta& shield. Since these prod"cts comes with higher
ris$s, the #an$ need to ed"cate c"stomers so that potential investor "nderstand
the inherent ris$ of these prod"cts f"lly. %he IR=, and ,M'I ) who are
reg"latory.advisory #odies for ens"ring fair practices in mar$eting of these
prod"cts ) has mandated that the val"e proposition and ris$s of ins"rance and
m"t"al f"nds prod"cts have to clearly e&plained #y the sales person to
prospective investor and for that the sales person m"st #e d"ly accredited for
selling s"ch prod"cts after ("alifying.passing the prescri#ed test. ,nd with this
o#0ect #an$s have started recr"iting people from finance and mar$eting
#ac$gro"nd to offer advisory services to c"stomers in addition to c"stomary
selling. -hese financial advisors are not merely the sales person but in true
sense financial =guides78
)5)5)5)
3@A
%ha"ter-28
Customer Centric Banking
>a$king 2it* t*e Customer
<nless you have good idea that adds value to a customer, there is no point in
proceeding further# &our product or service must provide one of the following benefits
reduce cost, reduce cycle time, improve productivity or improve free time of user of the
product# ,ost failures are due to negligence of this cardinal principle#$
) N. R. N,R,1,N, MFR%H1
In sellersA mar$et #"sinessmen were hardly #othered to $eep the c"stomers
happy. However, with change of sellers mar$et to #"yers mar$et, whole approach to the
#"siness 6incl"ding #an$ing9 has changed. 3hat is important is to recogni+e that
following the crowd will pro#a#ly not ena#le an organi+ation to o"tperform the crowd)if
one does what his competitors do, he can not #e e&pected to perform #etter than others
do. %hat is why e&ceptional performers have always #een willing to avoid following
conventional wisdom and attempts to do things differently. %o wal$ with the c"stomer is a
tool that ena#les an organi+ation to e&plore #etter ideas to act. %o $now the concept, let
"s first e&amine some applicationsL )
,N ,F%BMBBI7E -BM2,N1 offering night servicing of car and two wheeler where
car or two wheeler is pic$ed "p in the night and delivered in the morning so that
vehicle owner does not face any inconvenience for going to office.#"siness place.
DI77E%%E DII 27FS %3IN B7,=E S,IIND system introd"ced new lubrastrip to
l"#ricate the face while one shave.
%%J 2restige introd"ced two innovations in its prod"ct range of press"re coo$ers) a
vis"al press"re indicator that indicates when press"re has #een released within the
coo$er and a silicon gas$et that need not #e replaced d"ring the life time of a
3>4
coo$er /a#o"t 11 years. By this innovation, %%J steamed ahead in the coo$er
segment #y 8:< d"ring 4558)5;.
IN=I,N 2BS% offer of B"siness 2ost as complete sol"tion for #"l$ mailing of
invitation cards, share holders notices, #ills, etc. #y offering services li$e pic$ "p,
insertion, g"mming, addressing, fran$ing and mailing the letters.
BRI%,NAS 'IN,N-I,7 SERII-E ,F%HBRI%1 6'S,9 go)ahead to first Islamic #an$
in Britain to open its first #ranch in 7ondon and wor$ as per Islamic Sheriat 7aw i.e.
not to pay interest and %o#acco and ,lcohol sector will #e o"t of #o"nd. %he #an$ will
allow 1.! million British M"slims access to #an$ing strictly as per sheriat law.
M,R%IN 7B%%ER1 ,DEN-1 7td. rolled o"t a scheme in which company will
mo#ili+e small savings from its on)line lottery sale. %he company wo"ld have
investment advisory staff at each o"t)let with separate co"nter and each winner will
#e given investment co"nseling.
E&13!N6 E!-H -HE C>S-./ER( & S-R&-E6!C -..1
%he o#0ective of the wal$ing with the c"stomer approach is to have competitive
advantage /the ability to earn above normal economic returns over a sustained
period of time( #y offering prod"cts, which add val"e to the c"stomer in terms of
-onvenience, -ost and or M"ality.
,s one wal$ with the c"stomer from very #eginning of identification of his need
and is with him right thro"gh while selecting, #"ying, "sing and disposing the prod"ct,
one can identify great deal of happening that can #e "sed for creating val"e for the
c"stomer and can lead to competitive advantage for the organi+ation. %he wal$ing with
the c"stomer is however, different to what a c"stomer feels a#o"t the prod"ct, its
intrinsic val"e or price #"t it is a#o"t "nderstanding the whole process of #ehaving and
feeling e&actly li$e what c"stomer wo"ld do. !t is thus a process of mapping the
customer7s behavior by analy,ing various activities that he performs 0hile
selecting# purchasing# using and disposing a product and then to locate gaps
from where he derives value8 -he ne)t strategy is to close the gap by introducing
product innovation or renovation8 %he concept is simple yet a powerf"l strategy for a
c"stomer centric approach. In service industry li+e ban+ing wal+ becomes a strategic
tool for growth and survival#
&pplication in Banking !ndustry
, ("estion is often raisedL ) Is ban'ing today is different from any other
consumer goods business= In addition to accepting deposit and lending, the #an$s
3>5
are offering vario"s prod"cts.facility li$e collection of telephone.electricity.ins"rance #ills,
selling ins"rance policies.#onds.m"t"al f"nds, collecting income ta&, dis#"rsing salaries,
home delivery of cash.draft and home.office pic$ "p of cash.che("e etc. ,ll this
m"ltifario"s #an$ing is targeted to c"stomer ac("isition either #y developing a new
prod"ct or #y val"e addition in the e&isting prod"ct. %h"s, increasing foc"s on c"stomer
ac("isition has made the #an$ing similar to that of cons"mer goods #"siness.
7et "s see application of this concept in Indian #an$ing and financial sectorL )
6a9 Having reali+ed that for opening new acco"nts prospective c"stomers have to
face lot of inconvenience #oth in terms of time and dislocation of wor$ for
visiting a photographer, a #an$ provided digital -amera to its staff to ta$e
photographs of the persons intending to open acco"nt.
6#9 Home delivery and pic$ "p facility of cash.che("e.draft recently introd"ced #y
few #an$s.
6c9 'ollowing innovations and renovations in Home)loan prod"cts have #een
introd"ced)
Det loan approved first and select the property later to ena#le the
c"stomer to select the property as per his financial reso"rces,
Short)term #ridge loan /against mortgage of e&isting ho"se to ena#le the
#orrower to #"y a #igger ho"se and loan will #e repaid from sale proceed
of old ho"se.
%op "p offer of cons"mer loan "p to 15< of ho"sing loan to its e&isting
#orrowers at same rate of interest and at same sec"rity.
Bver)draft facility against sec"rity of ho"se to provide li("idity against
assets which c"stomer till now felt as an "nprod"ctive.
New home loan prod"ct in which e&cess f"nds in #orrowerAs saving
#an$ or c"rrent acco"nts is a"tomatically swapped in Home loan acco"nt
to red"ce the interest #"rden. In case of need f"nds will get reverse
swapped to savings .c"rrent acco"nt so that c"stomer can withdraw the
money.
($) -ash #ac$ offer of credit card companies( I-I-I Ban$ has ta$en lead in credit
card n"m#er thro"gh this offer.
(d) Money transfer fa$ility from $ard to $ard- from debit $ard to $redit $ard or
vi$e versa6 )n innovative -3- %rodu$t6
3>3
SY/+!#IS:I- .)/NI/#
3ith c"stomers loyalty shifting to cheaper loans, fle&i#le repayment plans, #etter
terms and free#ies, it is d"ty of each and every employee of the organi+ation to ma$e
collective efforts to identify new opport"nities to increase #"siness thro"gh wal$ing with
the c"stomer strategy..
-000-
3>3
%ha"ter-29
Se$$ing of t*ird +art" +roducts
Emerging o++ortunities for 0anks
G Ban$ing is laid #ac$ whereas third party prod"cts li$e ins"rance and m"t"al f"nds are
sold aggressively. Ban$ people do not sell their own credit cards. %he s$ill development
re("ires lot of orientation, attit"dinal change and training of the employees.H

?8 Eelcome to the 0orld of selling of third party product(
%his #it of information is real. In days of Ra0, scotch was stored in the va"lts of
some foreign #an$s. 3areho"sing was an iss"e and #y agreeing to $eep in their
va"lts these #an$s earned the fee income. Scotch has not ret"rned to #an$ va"lts for
s"re, #"t something on those lines is happening. Now wal$ into any s"permar$et,
#an$, post office, ,%M, Internet $ios$, -redit -ard -ompany or departmental store to
pic$ "p an ins"rance prod"ct virt"ally off the shelf. ,s competition is hotting "p, the
alternate delivery channel is developing on win)win concept. %he #arrier #etween
prod"ct and service is also disappearing. Bne can now #"y toothpaste and have
dental ins"rance and #"y a home loan and have life ins"rance cover too. Ban$s are
not staying #ehind and now across the #oard selling prod"cts ranging from m"t"al
f"nds 6M's9 to ins"rance to e("ity to government sec"rities on another partyAs
#ehalf.
;8 Selling of third party products( & ne0 business model for banks
%here are many reasons for this vent"re #y #an$s. %he race for #ecoming a
one)stop financial s"permar$et is hotting "p li$e never #efore and even smaller
#an$s are now tal$ing a#o"t #ecoming the destination for all $inds of financial
prod"cts. ,nother reason is that developing own prod"cts is an e&pensive
proposition and is a time cons"ming process. %hro"gh this process, #an$s get the
#enefit of associating with another recogni+ed #rand in segments where the #an$
itself possesses no e&perience. ,nother reason is that with spread "nder press"re,
#an$s are loo$ing for alternative income. 'ee #ased income #y selling third party
3>@
prod"ct is an answer to the pro#lem. Selling of third party prod"cts also help the
#an$ to cross sell its own prod"cts to its c"stomer th"s "tili+ing s"rpl"s staff in
prod"ctive p"rpose. %his can also helps the #an$ in improving mar$et share #y
retaining the e&isting c"stomers and #y providing those right options as $nowing
what a c"stomer re("ires is more important than what the #an$ is having. %his also
helps #an$ in developing c"stomerAs loyalty. Iast net wor$ of the #ranches is #an$As
real strength, which adds tremendo"s val"e to this sort of #"siness.
A8 Bank as Super /arket
In many co"ntries, #an$s have virt"ally #ecome s"per mar$ets selling
chocolates, coffee and pharma prod"cts. In India also, a #an$ has tied "p with
B,RIS%, to promote concept $nown as B,NJ-,'E)where c"stomers can refresh
them)selves with coffee E snac$s while doing the #an$ing #"siness.
C8 1imitations
%he mar$eting of third party prod"cts li$e ins"rance is p"sh #"siness whereas
traditionally #an$ing is laid #ac$ #"siness. %his is d"e to c"lt"ral differences of #an$s
and ins"rance. %his ta$es "s to mar$eting that occ"pies center stage in "nderta$ing
this #"siness. Ban$s are re("ired to develop mar$eting s$ills in the employees
selected for the 0o#. %he training has a cr"cial role. In competitive environment,
selling of third party prod"cts pres"pposes certain service standard, partic"larly
selling to "p mar$et c"stomers. %he am#ience of #ranches will have to #e "pgraded
and will have to #e manned #y forward loo$ing and committed employees.
<8 Skills re'uired to sell third party products
However to offer correct prod"ct to the c"stomers, #an$ers need to have s$ill in
$nowing the prod"cts, to have speed in mar$eting the prod"cts, and to have pool of
well defined attractive prod"cts. %hey m"st also "nderstand c"stomerAs investment
need so that he can offer him #est prod"ct availa#le and not the one, which he is
having. It is also important that while selling third party prod"cts, #an$ers m"st
convey "nconditionally to the c"stomers that they are only selling some thing for
which responsi#ility to service and performance lies with the third party. B"t since
#an$s own credi#ility is at sta$e, they sho"ld do proper chec$ "p a#o"t service
standard of alliance partner. It sho"ld also #e remem#ered that new age c"stomerAs
loo$ for convenience and informed advice from #ranch officials and they prefer #an$s
that display this attit"de at the front des$. %his re("ires lot of orientation, attit"dinal
change and training of the employees. Ban$s in all co"ntries that have vent"red in
3>>
selling third party prod"cts li$e ins"rance have faced the tas$ of transforming their
staff into effective salesman thro"gh systematic training and attit"de orientation.
Ban$s in India have e&cellent training facilities that can #e geared "p to meet the
re("irement.
D8 Regulatory compliance
In a move to c"r# mis)selling of financial prod"cts and ens"re transparency, the
RBI has mandated that #an$s sho"ld disclose to their c"stomers details of the
commission and other fees received #y them while selling m"t"al f"nds and
ins"rance policies. %his has #een done to ens"re that #an$ sho"ld not rec$lessly
p"sh prod"cts which earn them higher commission witho"t #othering whether the
prod"ct is #eneficial to the c"stomer or not.
98 Emerging .pportunities in !ndia
3ith li#eralisation of financial sector, many new opport"nities are emerging in
India for selling third party prod"cts ) mainly financial prod"cts. %his are L)
6a9 Bancassurance is globally a big business8 ,ccording to a report of IR=,,
premi"m collected thro"gh #anc ass"rance was Rs. 41;? croes in 455)15
which is ?.81< of the total premi"m income of life and non)life ins"rance
companies. '"rther 4!< of new premi"m income ins"rers got thro"gh #an$
ass"rance channel. IndiaAs ins"rance sector is li$ely to to"ch a#o"t O;55
#illion in premi"m income #y 4545 ma$ing the co"ntry of the top)three life
ins"rance and top 1: non)life ins"rance mar$ets #y 4545 as per s"rvey of
'I--I and Boston -ons"lting Dro"p. In last few years many p"#lic sector
#an$s in India have vent"red into #oth life and non life segment. Ban$
ass"rance model is low cost model and helps the #an$ in capt"ring #"siness
leveraging on its own distri#"tion capacity. ,s per s"rvey cond"cted #y
3atson 3yatt 3orld 3ide private ins"rerAs premi"m income will rise to ;5<
#y March 4515 from Ban$ass"rnce #"siness. 2rivate ins"rers paid Rs.45:
crores as commission for #anc ass"rance d"ring 455!)5. Bf late ta$ing
advantage of reg"latory permission, #an$s are ta$ing e("ity sta$e in
ins"rance company and entering into #an$ass"rnce model to sell their
prod"cts which in t"rn help ins"rance companies to red"ce their operational
cost. It "ltimately wor$s as 3IN 3IN model for #oth of them.
6#9 Credit protection insurance is a #ig #"siness worldwide which provide
protection to loan lia#ilities. ,fter home loan, it is ins"rance mar$et for home
3>B
.(7/ %(*)' 5
;+,' '(7/
2010-11
*n
Dg.
S.I 3B54
IO. 53A3
Indian .an8 55>4
)nd(ra .an8 34>
Sour$eD .usiness Jine
5@6>63455
loan repayment that is #ooming in India. Borrowers are sc"rrying for home
loan covers, where the life ins"rer repays the entire loan amo"nt in event of
the death of the #orrower and prevent the #an$ from ta$ing away the
financed property. Ed"cation loans are also covered "nder credit protection
plan.
6c9 Credit insurance is other segment 0hich is catching fast. Fnder credit
ins"rance seller of goods.services are offered protection against any defa"lt
of payment #y #"yer. 3here sellers are not insisting for letter of credit or #an$
g"arantee, credit ins"rance helps to overcome crisis when #"yer defa"lts.
Many non)life ins"rance companies are offering this prod"ct which can #e
mar$eted #y #an$s "nder #an$ass"rance.
6d9 ,ssets "nder the management of m"t"al f"nds on Bcto#er 455? end have
crossed the Rs. : la$hs crores mar$. '"nds ind"stry estimates indicate that
#an$s now #rings in a#o"t ;5< of retail m"t"al f"nds investments "p from
45< a co"ple of years ago. '"nds are entering into distri#"tion pacts with
p"#lic sector #an$s to reach o"t small investors who are already availing
traditional #an$ing services from #an$s.
6e9 Selling of Dilt also offers good #"siness opport"nity which many #an$s have
already started enchasing. Ban$s are also selling RBI Relief Bonds.
6f9 Selling credit cards, de#it cards and e)card is another area where #an$s are
"tilising synergy of their e&isting c"stomers to #"ild #"siness.
6g9 ,fter fa$e stamp paper scam, new #"siness opport"nity of stamp fran$ing
has emerged as n"m#ers of state governments are now selling stamp paper
thro"gh #an$s.
6h9 'inance Ministry has mandated r"ral and "r#an #ranches of the p"#lic sector
#an$s to generate minim"m 1:5 and :5 s"#scription "nder new pension
scheme every year. %his has #een done to ens"re that all citi+en in
"norganised sector and "nderprivileged are given opport"nity to get pension.
,ltho"gh mandated yet it is an opport"nity for #an$s to promote the scheme
and earn e&tra money.
6i9 Ban$s now see opport"nity in selling gold
coins and bars. ,ccording to 3orld Dold
-o"ncil cons"mption of gold for 0ewellery
pl"nged 45<, while investor demand for
3>C
gold increased :1< in second ("arter of 455. India is now largest
cons"mer of yellow metal and imported ;; tonnes of gold worth O: #illion
in 4511)14. , good n"m#er of #an$s have started selling this prod"ct to earn
e&tra fee #ased income. B"yers find investment in gold as attractive option
since interest income in fi&ed deposit is comparative low to increase in the
price of gold in the recent past. Since gold coins and #ars are hallmar$ed,
#"yers feel sec"red.
609 Ban$s are now offering new channel that is #eing developed #y share
#ro$ers in alliance with the #an$ where three in one services of saving #an$
acco"nt, depository services and internet #ased trading acco"nt are offered.
M8 /arket Si,e
6a9 H='- m"t"al f"nd has tied "p with I-I-I Ban$, H='- Ban$, -anara Ban$,
-iti#an$ and Standard -hartered Ban$ to sell its m"t"al f"nds prod"cts. ,s
per press release of H='-, as m"ch as 4?< of the mo#ilisation of #"siness
is now coming thro"gh this channel.
6#9 7I- e&pects that sales of its prod"cts thro"gh #an$s will to"ch Rs. >55 clrores
#y end of March 455>. 7I- has signed MBF with 8; #an$s for sale of its
prod"cts thro"gh #ancass"rance.
6c9 In M8 of 455;)5: SBI 7ife total premi"m collection was Rs. 8>5 crores. SBI
7ife is loo$ing for No. 4 slot in life ins"rance #"siness. It is at present selling
its prod"ct thro"gh :555 #ranches.
6d9 Ba0a0 ,lliance 7ife, which has tied "p with Standard -hartered Ban$,
Syndicate Ban$, Ind"sind #an$ and -ent"rion Ban$, mo#ilised a#o"t 4>< of
premi"m income thro"gh #ancass"rance mode.
6e9 ,viva #ancass"rance s"ccess is st"pendo"s as it earns >!< income thro"gh
this mode.
6f9 E&port -redit D"arantee -orporation of India 7td. 6E-D-9 has signed
corporate agency agreements with 11 leading #an$s in the co"ntry to sell
e&port credit g"arantee cover.
6g9 %he Ban$ of Ra0asthan has reportedly s"rpassed the Rs. 155 crores mar$ in
its stamp fran$ing #"siness #y end March, 455:.
3>?
De9 e4ements of Po4$c9 and
"roced#re to o"en new acco#nts
1. Formalities %referably
$om%leted in ban8 %remises6
4. )s$ertain %ur%ose of a$$ount
and li8ely amount and 8ind of
transa$tion intended6 .an8s may
fi, t(res( (old limit for li8ely
transa$tion in t(e a$$ount to
monitor turnover6
8. )$$ount (older 'it( a$$ount of
minimum B mont(s must
introdu$e an a$$ount6
;. Introdu$er to $onfirm t(at (e
8no's t(e a$$ount (older for a
reasonable time and also to
$onfirm (isL(er o$$u%ation and
address6
:. Obtain %(oto&ra%( of all a$$ount
(oldersL%artnersLdire$tors6 In
case of legal person, verify
relevant doc"ments and verify
stat"s of the persons acting on
its #ehalf.
>. Obtain $o%y of P)/7 rivin&
li$ense7 Moter Identity $ard et$6
?. -orroborate information from
inde%endent sour$es to $(e$8
aut(enti$ity6
!. Send letter of t(an8s to a$$ount
(older and introdu$er6
. on9t issue $(e=ue boo8 unless
address is $onfirmed6
15. Nee% tab on t(e a$$ount of
%oliti$ally e,%osed %ersons6
11. .an8in& fa$ility on Internet 'ill
be sub;e$t to e,istin& re&ulatory
frame'or86 Only ban8s
%(ysi$ally %resent in India $an
offer internet fa$ility to resident
Indian only6
6h9 Birla S"n life offered advance commission of Rs. >55 crores to Syndicate
Ban$ which in t"rn will #"y >< in the company.
6i9 Metlife has sold 85< sta$e to 2"n0a# National Ban$ for life ins"rance.
(@(@(@(
%ha"ter-30
CAno2 Dour CustomerC!Guide$ines
There is need to sensiti;ing front office staff so as not to antagoni;e customers#$
%( .# ># >handelwal 4,%, *an+ of *aroda
?8 34C( Concept and Coverage
=Jnow 1o"r -"stomerA 6J1-9 principle, has
#een laid down #y RBI to p"t in place systems and
proced"res 6a9 to control financial fra"ds, 6#9 to
identify money la"ndering and s"spicio"s activities,
and 6c9 to do scr"tiny.monitoring of large val"e
cash transactions. -"stomer means any person
availing any type of #an$ing facility who may not
necessarily maintain a #an$ acco"nt. %his incl"des
foreign)e&change transactions and acco"nts as
well. %he $ey elements of J1- policy are 6a9
-"stomer identification policy, 6#9 -"stomer
acceptance policy, 6c9 2olicy of monitoring of high
val"e cash transaction and 6d9 Ris$ management.
4 8 23no0 4our CustomerR *34C+ (guidelines
4.1 J1- 2olicy for opening acco"nts
6a9 YJnow 1o"r -"stomerH 6J1-9 proced"re is
the $ey principle for identification of an
individ"al.corporate opening an acco"nt.
%he c"stomer identification entails
verification thro"gh an introd"ctory
3>A
reference from an e&isting acco"nt holder or a person $nown to the #an$ or on
the #asis of doc"ments provided #y the c"stomer. No #an$ing relationship sho"ld
#e accepted "ntil and "nless the c"stomersA identity is esta#lished to f"ll
satisfaction of the #an$.
6#9 :(e %res$ribed %ro$edure (see bo,) for o%enin& and o%eration of ne' a$$ounts
in$lude verifi$ation of bonafide and identifi$ation of individualL $or%orate
o%enin& ne' de%osit a$$ounts6 :(ese &uidelines $ontains %ro$edure of
verifi$ation on t(e basis of do$uments li8e %ass%ort7 drivin& li$ense et$6 and
system of $orroboration of information from inde%endent sour$es6
6c9 Uni=ue Identifi$ation )ut(ority of India (UI)I) is li8ely to $ommen$e eNY-
aut(enti$ation servi$e for o%enin& of a$$ount '(i$( 'ill %ave t(e 'ay of identity
of a$$ount (older and (is address %roof and !.I as 'ell as #OI is li8ely to
a%%rove ))<))! as valid I %roof for o%enin& a$$ounts6 Fa$ility is li8ely to
minimiFe o%erational %roblem in o%enin& a$$ounts and is also li8ely to bio0metri$
identifi$ation of t(e a$$ount (older6
6d9 Joo8in& to t(e %roblem of lo'0in$ome &rou% $ustomers7 !.I (as %ermitted
ban8s to o%en a$$ounts of t(ose $ustomers7 '(o are not in a %osition to submit
address or identity %roof7 on t(e basis of introdu$tion of an e,istin& $ustomer
(avin& minimum si, mont(s old a$$ount 'it( satisfa$tory turnover7 %rovided
introdu$er (as been sub;e$ted to NY- %ro$edure and sub;e$t to annual de%osit
limit of !s6 5 la8(7 mont(ly 'it(dra'al $an not e,$eed !s6 54444 and balan$e
does not $ross !s6 >47444L0 6 !.I (as also advised t(at individuals '(o do not
(ave an individual %roof of residen$e $an no' o%en an a$$ount by %rodu$in&
utility bill of $lose relative as a %roof of residen$e alon& 'it( a de$laration of
$lose relative t(at %ros%e$tive $ustomer is livin& 'it( (im6 *t has !een c4ar$f$ed
that the c#stomer acce"tance "o4$c9 "roced#re sho#4d not 4ead to den$a4 of
!an6$ng ser-$ces to the genera4 "#!4$c.
6e9 !.I (as also advised ban8s not to o%en a$$ounts or $lose an e,istin& a$$ount
'(ere ban8 is unable to a%%ly a%%ro%riate $ustomer due dili&en$e standard i6e6
ban8 is unable to verify $ustomer9s identity or do$uments re=uired6 Furt(er to
3B4
build safe&uard de$ision to $lose a$$ount or not to o%en a$$ount must be ta8en at
(i&(er level after &ivin& due noti$e to t(e $ustomer indi$atin& reason6
6f9 !.I (as advised ban8s to identify %oliti$ally e,%osed %ersons '(o are resident
outside India and verify t(eir sour$e of funds before a$$e%tin& de%osits6
Politi$ally e,%osed %ersons are individuals '(o are or (ave been entrusted 'it(
%rominent %ubli$ fun$tions in forei&n $ountries su$( as (ead of states7 senior
%oliti$ians7 senior &overnment7 ;udi$ial or military offi$ers7 im%ortant %oliti$al
%arty offi$ials and senior e,e$utives of state o'ned $om%anies6 It is may be
re$alled t(at &lobally %oliti$ally e,%osed %ersons are seen as (i&( ris8 $ate&ory
%arti$ularly if t(ey ori&inates from $ountries (avin& (i&( level of $orru%tion6 !.I
(as furt(er advised t(at de$ision to o%en t(e a$$ount of %oliti$ally e,%osed %erson
s(ould be ta8en at senior level6
6g9 :(e !.I (as advised ban8s to $ondu$t e,tra due dili&en$e of a$$ounts o%erated
by /#Os to monitor and redu$e ris8s of money launderin&6 Furt(er t(rou&( an
amendment in PMJ) 34437 $(aritable trusts7 non0&overnment or&aniFations7
edu$ational institutions or so$ieties (ave been mandated to dis$lose t(e sour$e of
t(eir funds and (as also been mandated t(at lar&e monetary transa$tions may be
s$rutiniFed6
6h9 !.I (as advised ban8s to obtain a de$laration from t(e a$$ount0(older to t(e
effe$t t(at (e is not en;oyin& any $redit fa$ility 'it( any ot(er ban8 or obtain a
de$laration &ivin& %arti$ulars of $redit fa$ility en;oyed by t(e intendin& $ustomer
'it( any ot(er ban8(s)6 .esides7 in t(e latter $ase7 t(e $on$erned lendin& ban8(s)
'ere re=uired to be duly informed so t(at suitable %re$autionary measures7 '(ere
ne$essary $ould be ta8en by t(em6
6i9 .an8in& fa$ility on Internet is sub;e$t to t(e e,istin& re&ulatory frame'or86 .an8s
(avin& %(ysi$al %resen$e in India only are allo'ed to offer ban8in& servi$e over
Internet to residents in India and any $ross border transa$tions are sub;e$t to
e,istin& e,$(an&e $ontrol re&ulations6 .an8s to establis( identity and also ma8e
en=uiry about inte&rity and re%utation of t(e %ros%e$tive $ustomer6 Internet
a$$ount s(ould be o%ened only after %ro%er introdu$tion and %(ysi$al verifi$ation
3B5
'#s"$c$o#s transact$ons
,ed-a4ert s$gna4s
56 ) $ustomer submittin&
unusual or sus%i$ious
identifi$ation do$uments
t(at $annot be readily
verified6
56 ) $ustomer9s (ome or
business %(one
dis$onne$ted or letter of
t(an8s returned ba$8 'it(
va&ue remar8s6
36 Wat$( $as( transa$tions
'(i$( are out of business
or in$ome %rofile of t(e
a$$ount (older6
36 Wat$( if $ustomer is found
s%littin& transa$tions to
avoid filin& of mandatory
re%orts6 .an8 to $(e$8
series of transa$tion 'it(
a&&re&ate belo' $ut off
date6
@6 Wat$( $(arity or relief
or&aniFation lin8ed
transa$tions6 )lso a$$ounts
o%erated t(rou&( %o'er of
attorney and a$$ounts of
%oliti$ally e,%osed %ersons6
>6 !easonable &round to
sus%e$t t(at %ro$eeds of
$rime money is de%osited
even if belo' $ut off limit6
of t(e identity of t(e $ustomer6 Similarly -reditLebitLSmartL#ifts $ards s(ould
also be issued on $om%lian$e of NY- &uidelines6
609 !.I (as also advised ban8s to sub;e$t lo$8er (irer to NY- norms and '(ere it is
found t(at lo$8er remain ino%erative for more t(an one year in medium ris8
$ate&ory or more t(an t(ree year in (i&( ris8 $ate&ory7 ban8 s(ould brea8 o%en
t(e lo$8er after servin& noti$e to t(e $ustomer6 :(ese &uidelines (ave been issued
on t(e ba$8&round of instan$es t(at not only arms and ammunition but also
bombs 'ere found in t(e lo$8ers6
6$9 !.I is also 'or8in& on brinin& %re%aid $ards7 &ift vou$(ers travel7 e,%enses $ards
and food $ou%ons under NY- and )MJ &uidelines6 Institutions issuin& t(ese
instruments 'ould also be re=uired to file S:! 'it( Finan$ial Intelli&en$e Unit of
India6
6l9 Ban$s have #een advised to prescri#e
thresh hold limit for partic"lar type of
acco"nts and to pay attention to the
transactions which e&ceed these limits.
%ransactions that re("ire large amo"nt of
cash inconsistent with the normal and
e&pected activity of the c"stomer sho"ld
partic"larly attract the attention of the
#an$. Iery high acco"nt t"rnover
inconsistent with the si+e of the #alance
maintained may indicate that f"nds are
#eing @washedA thro"gh the acco"nt.
6m9 RBI has advised #an$s to revisit 6a time
frame has #een prescri#ed9 all the
e&isting acco"nts where s"mmation of
credit.de#it transaction is more than Rs.
15 la$hs or acco"nts of tr"sts,
intermediaries or acco"nt operated
thro"gh mandate to rechec$ that J1-
g"idelines so framed have #een followed
3B3
and where)ever there is any discrepancy the same sho"ld #e got rectified at the
earliest.
4.4 J1- 2olicy for iss"ance of %%.==.M% etc.
6a9 J1- policy stip"lates that #ranches sho"ld iss"e travelers che("es, demand
drafts, mail transfers, and telegraphic transfers for Rs.:5, 555 and a#ove only
#y de#it to c"stomersA acco"nts or against che("es and not against cash.
6#9 '"rther, the applicants 6whether c"stomers or not9 for %%.M%.==.%raveler
-he("e etc for amo"nt e&ceeding Rs.:5,555 sho"ld affi& permanent 6Income
ta&9 acco"nt n"m#er on the applications.
6c9 Some time to #ye pass the re("irement, c"stomers resorts to splitting of the
transaction, which send warning signals to the #an$. %he #ranch officials
sho"ld #e vigilant to chec$ s"ch transactions where they find that
transactions are splitted "p to avoid compliance.
4.8 J1- policy for monitoring high val"e transactions
6a9 %he #ranches are also "nder o#ligation to monitor transactions of a
s"spicio"s nat"re *See Bo)+ and to report s"ch transactions to law
enforcement agencies and to free+e s"ch acco"nts as per their direction and
also report to their corporate office within seven days of arriving at the
concl"sion that that a transactions or series of transaction incl"ding
attempted transaction are of s"spicio"s nat"re.
6#9 %he #ranches are re("ired to $eep a close watch of cash withdrawals and
deposits for Rs.15 la$hs and a#ove in deposit, cash credit or overdraft
acco"nts and record details of these large cash transactions in a separate
register.
4.; J1- policy for terrorism finance and money la"ndering
6a9 It is estimated that the si+e of money la"ndering worldwide thro"gh the
#an$ing sector, is more than FS O :55 #n to FS O1 tn ann"ally. Diven the
staggering vol"me of this crime, #road international cooperation #etween
reg"latory and law enforcement agencies is important to identify so"rce of
illegal money, trace the f"nds to specific criminal activities and confiscate
s"ch assets. 2ost Septem#er 11, the iss"e that #an$ s"pervisors the world
over a grappling with is GHow to root o"t the menace of money la"nderingRH
%he law #eing enacted typically re("ire a #an$ to G$now the c"stomerH to #e
confident that his money is o#tained #y legitimate means and to report any
3B3
s"spicio"s activity. %his means #an$ m"st $now their c"stomersA c"stomer as
well. RBI has reemphasi+ed that #an$s can effectively control and red"ce
their ris$s only if they have an "nderstanding of the normal and reasona#le
activity of the c"stomer so that they have means of identifying transactions
that fell o"tside the reg"lar pattern of activity. However the e&tent of
monitoring will depend on ris$ sensitivity of the acco"nt. Ban$ sho"ld pay
special attention to all comple& "n"s"ally large transactions and all "n"s"al
patterns, which have no apparent economic or visi#le lawf"l p"rpose.
6#9 3here #an$s #ecome aware of facts which lead to the reasona#le
pres"mption that money held on deposit drives from criminal activity or that
transactions entered into are themselves criminal in p"rpose, appropriate
meas"res, consistent with law, sho"ld #e ta$en, for e&ample, to report the
matter to law enforcement agencies, deny assistance, severe relations with
c"stomers and close or free+e acco"nts.
6c9 , 'IF 6'inancial Intelligence Fnit9 has #een set "p "nder 2revention of
Money 7a"ndering ,ct, 4554 and Ban$s .'Is are re("ired to $eep record of
the dealings a#ove thresh)hold 6e&cepting dealing with corporate clients, 2SF
etc. specifically e&empted #y the government9 and to report s"ch transactions
to 'IF. Reporting threshold has #een fi&ed at Rs. 15 la$h for cash transaction
and Rs 155 la$hs for non)cash transactions which cover payment thro"gh
che("e, demand draft etc. 'IF has #een entr"sted with the responsi#ility to
trac$ s"spicio"s transactions that involve potential money)la"ndering or
violation of the Ban$ing secrecy act, Indian 2enal -ode, Narcotic =r"gs E
2sychotropic S"#stance ,ct 1!: and ,rms ,ct 1: etc.
6d9 RBI is circ"lating list of terrorist entities notified #y DBI to #an$s from time to
time. Branches sho"ld cons"lt s"ch list #efore opening new acco"nts.
However as and when the list is received the e&isting acco"nts sho"ld also to
#e chec$ed and if any acco"nt is fo"nd e&isting appropriate meas"re for
sei+"re and reporting sho"ld immediately #e "nderta$en.
6e9 Indian Ban$sA ,ssociation has listed 48 co"ntries in the high)ris$ category for
implementation of J1- and ,M7 norms #y the #an$s. %hese high ris$
co"ntries are) Myanmar, Nigeria, %"r$menistan, F$raine, D"atemala, -oo$
islands, St Iincent E the Drenadines, R"ssia, ,ngola, Nim#a#we,
,fghanistan, -"#a, Ira(, 7i#ya, ,+er#ai0an, Moldova, Ja+a$hstan, Deorgia,
3B@
F+#e$istan, Belar"s, ,rmenia, Jyrgy+ Stan and %a0i$istan. -"stomer living in
these co"ntries will #e classified in high ris$ irrespective of their nationality
and opening their acco"nt will need specific approval from higher a"thorities.
6f9 IntegraScreen Dro"p, a Singapore #ased company has compiled glo#al anti)
money la"ndering 6,M79 data#ase having list of high)ris$ individ"als. ,#o"t
141,555 individ"als have #een categori+ed as high ris$ in this data#ase. Most
foreign #an$s and few private #an$s in India have started "sing this data#ase
to chec$ profile of individ"als while opening new acco"nts.
6g9 IN -BS environment #an$s can a"tomatically monitor.detect money
la"ndering, fra"d and o"t)of)profile #ehavior of the c"stomers and acco"nts
thro"gh software. %he software ena#les the #an$ to p"t every transaction
thro"gh validation chec$ and helps to detect any a#normal transfer of f"nds
into "ndesira#le hands. It is estimated that ,M7 software mar$et is a#o"t 4
FS #illion in India.
6h9 RBI has as$ed Indian #an$s to p"t in place ,M7 system and s"#mit their
action plan with regard to deployment of ,M7 system #y C"ne 455> and final
report on the sol"tions and infrastr"ct"re installed #y =ecem#er 455>.
A8 34C(Compliance of CR& ?L9D
6a9 Branches sho"ld adhere to the instr"ctions on the provisions of the 'oreign
-ontri#"tion Reg"lation ,ct, 1?> regarding opening of acco"nts or collection
of che("es only in favo"r of association, which are registered "nder the ,ct
with Dovernment of India. , certificate to the effect that the association is
registered with the Dovernment of India sho"ld #e o#tained from the
concerned associations at the time of opening of the acco"nt or collection of
che("es.
6#9 Branches sho"ld e&ercise d"e care to ens"re compliance and desist from
opening acco"nts in the name of #anned organi+ations and those witho"t
re("isite registration.
*c+ Fnder '-R, 1?> only designated #ranches of #an$s are allowed to accept
deposit whose name is given in the application form to government. %he act
also ma$e it mandatory for the #an$s to s"#mit half)yearly statement to
government giving details of the contri#"tion received #y associations and
organi+ations.
C8 Risk management and monitoring procedures
3B>
6a9 Non -ompliance of J1- norms may p"t the #an$ to vario"s ris$s s"ch as
rep"tation 6loss of rep"tation in case of fra"d9, Bperational 6loss d"e to
fra"d9, legal 6legal action against the #an$ d"e to fra"d9 and concentration
6gro"p of #orrowal acco"nts t"rning #ad or chain of deposit acco"nts fo"nd
involved in fra"d9 ris$s. J1- policies are essentially meas"res of preventive
vigilance and are framed to mitigate aforesaid ris$s.
6#9 In order to chec$ possi#le a#"se of #an$ing channels for illegal and anti)
national activities, the internal control system laid down #y the #an$ sho"ld
#e strictly followed. ="ties and responsi#ilities allocated at vario"s levels
sho"ld #e e&plicit and policies and proced"res are managed effectively to
ens"re f"ll compliance of J1- programme in respect of #oth e&isting and
prospective deposit.#orrowal acco"nts.
6c9 ,n independent eval"ation of the controls for identifying high val"e
transactions sho"ld #e carried o"t on a reg"lar #asis #y the inspection team
of the #an$.
6d9 -onc"rrent.internal a"ditors m"st specifically scr"tini+e and comment on the
effectiveness of the meas"res ta$en #y #ranches in adoption of J1- norms
and steps towards prevention of money la"ndering. S"ch compliance report
sho"ld #e placed #efore the ,"dit -ommittee of the Board of #an$s at
("arterly intervals.
6e9 RBI decision to p"t penalty in p"#lic domain is a meas"re, which may trigger
rep"tation ris$.
<8 Record 3eeping
Ban$ sho"ld prepare and maintain doc"mentation on their c"stomer relationships
and transactions to meet the re("irements of relevant laws and reg"lations, to ena#le
any transaction effected thro"gh them to #e reconstr"cted. In the case of
electronic.telegraphic transfer transactions, the records of electronic payments and
messages m"st #e treated in the same way as other records in s"pport of entries in the
acco"nt. ,ll financial transactions records sho"ld #e retained for at least five years after
the transaction has ta$en place and sho"ld #e availa#le for per"sal and scr"tiny of a"dit
f"nctionaries as well as reg"lators as and when re("ired.
>. -raining of staff
It is cr"cial that all the operating and management staff f"lly "nderstand the need for
strict adherence to J1- norms. %he reg"lar inp"t on J1- sho"ld #e given to staff
3BB
thro"gh training as per for their roles so that they "nderstand their responsi#ility of
implementing J1- policies clearly.
98 %enalties and Restrictions
6a9 J1- g"idelines are iss"ed "nder Section 8: 6,9 of the Ban$ing Reg"lation
,ct, 1; and any contravention of the same attracts penalties "nder the
relevant provisions of the ,ct.
6#9 Bffice of the -omptroller of the -"rrency which reg"lates and e&amines
appro&imately 4,555 national #an$s and :1 federal #ranches of foreign #an$
in the FS anno"nced on May 18, 455; that, it has assessed a O 4: mn civil
money penalty against Riggs #an$ N.,. for violation of the Ban$ Secrecy ,ct
as it has failed to implement an effective anti)money la"ndering programme
and it did not detect and investigate s"spicio"s transaction and had not filed
s"spicio"s activity report as re("ired "nder the law.
6c9 , prove #y FS senateAs permanent committee fo"nd that HSB- "sed its FS
#an$ as gateway into the FS financial system to provide FS dollar services to
clients while playing fast and loose with FS #an$ing r"les and charges it
giving terrorist, dr"g cartels and criminals access to the FS financial system.
6 %BI 1.5?.149
6d9 RBI has recently ha"led "p . fined cross -iti Bn$ rs. 4: la$hs for fail"re to
follow J1- and anti)money la"ndering r"les which led to Rs. ;55 crores fra"d
in -itiAs D"rgaon #ranch. 6E% >.?.45119
6e9 ,nother reported violation is #y a so"th #ased private) #an$ in a case of two
'-NR 6B9 deposits amo"nt to O 455,555 held #y an NRI. RBI as per reports
has proved the negligence and is contemplating imposing fine.
6f9 'ollowing I2B scam of I%?4 and &es ban+ where (*I identified certain
wea+nesses on the part of ban+s in customer identification and acceptance
system# It has decided to impose financial penalties as well as decided to
indefinitely$ put on hold all applications from concerned ban+s see+ing
clearance for various businesses, including opening of new branches#
6g9 RBI has advised #an$s to ens"re that information called from the c"stomer is
relevant to the perceived ris$, is not intr"sive and is conformity with
g"idelines iss"ed #y RBI. ,ny other information from the c"stomer sho"ld #e
so"ght separately with his or her consent and after opening the acco"nt.
Ban$s sho"ld not mis"se personal information given to them while opening of
3BC
acco"nts for cross)selling or passing on to s"#sidiary.#"siness associates. If
o#tained specific disclos"re sho"ld #e made to c"stomer that information so
o#tained wo"ld #e "sed for this p"rpose.
M8 Summing >p
J1- is a tool of c"stomer d"e diligence and preventive vigilance. RBI directive is
mandatory in nat"re. It creates responsi#ility on officials to follow laid)down meas"res in
#oth letter and spirit #efore opening of the acco"nts and also to monitor high
val"e.sensitive transactions. 7oo$ing to the pro#lems of small depositors and micro
finance instit"tions, RBI has rela&ed J1- norms for opening acco"nts of small
depositors provided introd"cer has #een s"#0ected J1- norm.
%ha"ter- 31
Risk Based Su+er8ision
I believe that ban'ing institutions are more dangerous to our liberties than
standing armies in the field.
- (homes )efferson
?8 !ntroduction
1.1 %he prime concern of central #an$s across the glo#e is to ens"re safety and
so"ndness of the #an$ing system and for this they are vested with s"pervisory
powers that incl"de cond"cting inspection, iss"ing direction, levying penalties and
p"tting #an$ to reha#ilitation, moratori"m and li("idation. 2ost 14 #an$ing in India
is witnessing strong dereg"lation, tightening of pr"dential norms, and enhancement
of disclos"re standards and adoption of internationally accepted #est acco"nting
practices, consolidation and glo#ali+ation and increasing "se of technology. %his has
on the one hand provided massive opport"nity of growth to #an$s #"t at the same
time enhanced ris$ which otherwise is essence of #an$ing. %his has also thrown
challenge on reg"lator i.e. Reserve Ban$ to ma$e the s"pervisory policies and
process more efficient and sophisticated.
1.4 %he traditional system of #an$As s"pervision of one si+e fits all approach is
largely #ased on assessing the acc"racy of #alance sheet and profit and loss
acco"nt and ade("acy of internal control meas"res and is done to f"lfill the
o#ligation of section 44 of BR ,ct 1;. %he c"rrent system p"ts reliance on
3B?
, ;'
a "" r o a ch
Su%erviso ry
%ro&ram mes
and tools
!is8
Profilin&
!evie' evaluation
Follo'
0u%
M)P
Su%ervi sory
-y$le
Ins%e$ tion
Pro$ ess
transaction testing li$e ade("acy of appraisal, assessing the ("ality of credit and
ade("acy of the provisioning. It is largely done thro"gh on site inspection. %he
system has merit for determining the c"rrent conditions of the operations of the #an$
#"t has limitation that it can not throw light on pro#lem areas that may have adverse
#earing on f"t"re performance of the #an$.
1.8 %he ris$ #ased s"pervision 6RBS9 has evolved as a more dynamic approach to
#an$ s"pervision. It attempts to overcome the aforesaid deficiency. It also attempts
to address the competencies of the #an$ to identify, meas"re, monitor and control
ris$ arising o"t of vario"s #"siness activities. Ris$ management is cr"cial element of
#an$ing and hence of #an$ing s"pervision. %he RBS can not only promote safety
and so"ndness of #an$s #"t it can also mitigate and offset ris$s inherent in traditional
form of s"pervision.
;8 RBS( .bBectives
4.1 %he RBS aims to enhance the effectiveness and efficiency of s"pervisory
capa#ilities of the central #an$. It also aims to direct central #an$s reso"rces towards
the areas of greater ris$ to ena#le it to meet its s"pervisory o#0ectives in a more
meaningf"l and effective manner.
363 :(e RBS entails paying s"pervisory attention in accordance with the ris$ profile of
the #an$. %he approach is e&pected to optimi+e "tili+ation of s"pervisory reso"rces
and minimi+e the impact of crisis sit"ation in the financial system. %he RBS is #ased
on -,ME7S approach on on)site e&amination and off)site monitoring and is forward
loo$ing #eyond foc"sing attention on the rectification of deficiency with reference to
on site inspection.
A RBS approach(
8.1 RBI introd"ced the concept of RBS in -redit and
Monetary policy of ,pril 51. In ,"g"st 51, it #ro"ght o"t a
disc"ssion paper entitled @Move towards RBSA. Based on the
feed #ac$, RBI has started s"pervision on pilot #asis from
last ("arter of 4554)58.
8.4 RBS framewor$ starts from preparation of ris$ profile of
the #an$ on 14 identified areas of #"siness and control ris$s
and then proceeds to 6a9 determining s"pervisory cycle, 6#9 determining s"pervisory
programme, 6c9 cond"cting inspection, 6d9 reviewing eval"ation and 6e9 follow "p
3BA
thro"gh M,2. %he ris$ profiling is essence of RBS and all s"pervisory action are
re("ired to #e #ased on ris$ profile as assessed #y the reg"lator.
C RBS %re( approach
;.1 %he RBI over a period of time has advised #an$ to initiate certain meas"res so
as to prepare for smooth implementation of the RBS.
;.4 %he preparations are 6a9 Setting "p of Ris$ Management ,rchitect"re, 6#9
,doption of ris$ foc"ssed internal a"dit, 6c9 Strengthening of management
information system, 6d9 Selection, training, ed"cation and deployment of the staff and
6e9 Setting "p of the compliance "nit and nomination of the compliance officer.
< RBS( Risk %rofiling
:.1 %he ris$ profiling is #ased on assessment of 6a9 #"siness ris$s and 6#9 control
ris$s in 14 critical areas of #an$s f"nctioning. B"siness ris$ assessment wo"ld
cover 6a9 capital ris$, 6#9 -redit ris$, 6c9 mar$et ris$, 6d9 Earnings ris$, 6e9
7i("idity ris$, 6f9 B"siness strategy and environment ris$, 6g9 operational ris$ and
6h9 gro"p ris$. %he control ris$ wo"ld cover 6i9 internal control ris$ 609
organi+ation ris$ 6$9 management ris$ and 6l9 compliance ris$. %here co"ld #e
more than one type of ris$ "nder the same assessment.
:.4 Nat"re of ris$ relevant to vario"s areas is as "nderL )
No. Ris$ category ,ssessment area Nat"re of ris$
1. B"siness ris$ -apital ade("acy
6So"ndness of
#an$9
,de("acy of capital
-omposition and ("ality of
capital
,ccess to capital mar$et
Shareholders assessment
Economic capital
4. B"siness ris$ -redit Ris$
6Ris$ of defa"lt or
N2,9
-redit concentrations
-redit ("ality
,de("acy of provisions
-omposition of credit portfolio
Bther credit ris$ li$e trading
#oo$, off #alance sheet items,
co"ntry ris$ etc.
8. B"siness ris$ Mar$et ris$
6-hange of interest
M"ality of investments
3C4
or e&change rate or
price of investment9
Interest rate ris$
-omposition of trading #oo$.
'ore& ris$
E("ity price ris$
;. B"siness ris$ Earnings Ris$
6profita#ility9
Earnings and e&penses
Spread and #"rden
Earnings ("ality and sta#ility
B"dget and profit planning
'"nd cost and ret"rn
:. B"siness ris$ 7i("idity Ris$
6ris$ of li("idity9
7i("idity ris$
-omposition of lia#ilities
7i("idity profile
>. B"siness ris$ B"siness strategy
and environment
ris$.
B"siness strategy
Strategic #"siness initiatives
E&ternal environment and macro
indicators
?. B"siness ris$ Bperational ris$ 2eople ris$
2rocess ris$
%echnology ris$
7egal ris$ and Rep"tation ris$
E&ternal events
Bperating environment
!. B"siness ris$ Dro"p Ris$ -apital and investment
Bperations and performance
. -ontrol Ris$ Internal -ontrol Ris$ Ris$ management system
Internal controls and
ho"se$eeping
Ris$ #ased internal a"dit
,nti money la"ndering controls
15. -ontrol Ris$ Brgani+ational Ris$ E&ternal and internal
relationships
7egal str"ct"re and ownership
11. -ontrol Ris$ Management Ris$ Board of directors)composition
3C5
and competencies
Senior management profile
-orporate governance
14. -ontrol Ris$ -ompliance Ris$ Stat"tory and reg"latory
compliance
Monitoring action plan
compliance
:.8 RBI has developed the ris$ profile templates to standardi+e the ris$ profiling
system. %he g"idance sheet prepared #y RBI facilitates assessment of these
ris$s. %hro"gh this process, the level of ris$ / low, moderate and high and
direction of ris$ ) increasing, decreasing and sta#le is determined.
:.; %he review and "pdating of the ris$ profile will have to #e done on ("arterly
#asis.
:.: Since ris$ profiling is essence of RBS, it is necessary that in ho"se ("ality
assessment #e done from time to time so that the #an$ may do independent
eval"ation of ris$ assessment.
D RBS( Supervisory Cycle(
>.1 %he s"pervisory cycle depends "pon the ris$ profile of each #an$. %he principle
#eing higher the ris$ shorter is the cycle and vice versa.
>.4 %he cycle will generally remain at 14 months #"t can #e e&tended #eyond 14
months for low ris$ #an$s. In cases of high)ris$ #an$s, cycle can #e lower than
14 months.
>.8 RBI will prepare a c"stomi+ed cycle programme for each #an$ after completing
the ris$ profiling.
9 Supervisory %rogramme
?.1 %he o#0ective of this steps is to prepare RBI s"pervisory programme to set o"t
the wor$ which #an$ as well as RBI will "nderta$e d"ring s"pervisory period. %he
wor$ will relate to areas of concern identified thro"gh ris$ profiling.
?.4 3hile drawing the s"pervisory programme, RBI will prepare ris$ matri& #ased on
#"siness ris$ and control ris$ to decide level of monitoring and remedial action. ,
typical s"pervisory ris$ matri& will #e as follows)
3C3
<i&( Monitorin& but little remedial
a$tion unless t(e ris8 is found
e,$essive6
;
=
'
*
)
&
'
'
,
*
'
D
?.8 It will also decide tool of s"pervision that RBI will employ. RBI will s"ggest action
plan which #an$ will "nderta$e to rectify the sit"ation d"ring a given period. %he
programme will set o"t specific lin$age to the area of ris$s so that #an$
management can "nderstand and appreciate why partic"lar action has #een
recommended.
?.; %he programme will #e first disc"ssed with the #an$ at draft stage and thereafter
listening to the management side, it will #e finali+ed.
?.: %he s"pervisory tools to #e deployed "nder the programme shall vary from
targeted on)site inspection, commissioned e&ternal a"dit, str"ct"red meeting with
the #an$ and specific s"pervisory direction etc.
!. !nspection %rocess
M8? %he inspection "nder the new approach will largely #e system #ased rather than
laying emphasis on "nderlying transaction and asset val"ation.
M8; %he inspection will target high)ris$ areas from RBI perspective and wo"ld foc"s
on effectiveness of mechanism in capt"ring, meas"ring, monitoring and
controlling vario"s ris$s.
M8A %he inspection process will contin"e to test transaction and eval"ation the e&tent
of which will depend "pon materiality of the activity, integrity of the ris$
management system and control process.
. /onitorable &ction %lan */&%+ (
L8? %he follow)"p will aim to eval"ate progress in corrective action ta$en #y #an$.
%he ma0or devise in this regard will #e M,2.
L8; %he M,2) Monitora#le ,ction 2lan) will decide time frame within which specific
action will #e ta$en #y #an$ to remedy a sit"ation. It will also clearly spell o"t
the $ey persons responsi#le for the same. It action and timeta#le decided #y the
RBI is not complied with, RBI wo"ld e&amine f"rther co"rse of action. If satisfied
3C3
<i&( Monitorin& 6 /eed for
immediate remedial a$tion to
im%rove t(e ris8 %rofile6
Jo' monitorin&7 little remedial a$tion
is ne$essary6
Moderate monitorin&6 /eed for
remedial %ro&ramme to im%rove
$ontrol6
% ( ) : , ( 7 , * ' D '
with the progress, may give f"rther time to improve or ma$e compliance. RBI
may also decided restrictions in #ranch e&pansion, new #"siness line, or new
prod"cts or may levy penalties.
L8A Bver all o#0ective of the M,2 is ris$ mitigation. It wo"ld s"ggest action from the
reg"lator if time #o"nd actions #e not ta$en.
L8C Enforcement process and incentive framewor$ is centre)stage of M,2. If the ris$
profile is low or compliance is as per M,2 #esides longer inspection cycle,
incentive will #e #y way of less intervention or more a"tonomy. 2-,) 2rompt
-orrective ,ction will #e part of M,2.
15. /oving to risk based internal audit *RB!&+ S
?@8? RBS will leverage on the wor$ of internal a"ditor8 So #an$ will #e re("ired to
move to ris$ #ased internal a"dit of their #ranches where greater emphasis will
#e on identifying ris$ and drawing action plan in mitigating these ris$s. Internal
a"ditor will not only offer s"ggestions to mitigating the c"rrent identified ris$s #"t
will also anticipate areas of potential ris$ and will play a $ey role from protecting
the #an$ from these possi#le ris$s.
?@8;Every care has to #e ta$en that the wor$ of ris$ management department and
ris$ #ased internal a"dit is not over lapping. RBS is e&pected to #e an aid to the
ongoing ris$ management in #an$ #y providing necessary chec$ and #alances in
the system. In other word there sho"ld not #e d"plication of wor$ process. RBS
will loo$ into effectiveness of Ris$ Management System of the #an$ and draw
action plan if any deficiency is o#served.
?@8ARBI, will give insight to RBI for cond"cting RBS in general and preparing ris$
profile in partic"lar.
11. .ther issues(
??8? E&ternal ,"ditors are very important part of a"dit chain. RBI will disc"ss
and percolate the #asis and o#0ective of RBS with them so that they may also
"nderstand "nderlying process and s"pplement the RBS.
??8; RBS is s"pplementary to the e&isting system and is not a s"#stit"te. %he
process re("ires ela#orate disc"ssion and training to change the mindset of
employees.
??8A HR= iss"es li$e training, ed"cation, placement and posting are important
for s"ccessf"l implementation of RBS. %his will also help in developing
coordinated effort of reg"lator and #an$ for smooth transition.
3C@
??8C Dood corporate governance and doc"mented policies for acco"nta#ility
and responsi#ility are pillar of RBS.
??8< %he setting "p of ins"rance, merchant #an$ing, m"t"al f"nds and ho"sing
finance and investment companies as 0oint vent"re or s"#sidiaries has #ro"ght
into foc"s need of consolidated s"pervision #y vario"s reg"lator li$e RBI, SEBI
and IR=,.
)5)5)5)
%ha"ter- 32
Risk Based Interna$ Audit
! An Out$ine
!ntroduction
RBI, is part of #an$ level preparedness to implement RBS 6Move %owards Ris$
Based S"pervision of Ban$s / RBI disc"ssion paper, ,"g"st 8, 45549.
RBI circ"lar of =ecem#er 4?, 4554 provides an o"tline of RBI,.
Drad"al switch over from transaction #ased #ranch internal inspection to RBI,.
B"t internal control.a"dit thro"gh conc"rrent a"ditor sho"ld contin"e and #ecome
stronger.
Ban$s to report to the RBI on ("arterly #asis regarding the progress on RBI,.
eatures of RB!&
Ris$ Management -ommittee 6RM-9.=epartment 6RM=9 and the role of RBI, need to
#e disting"ished. RBI, is an independent ris$ assessment at #ranch level solely for
form"lating the ris$ #ased a"dit plan. B"t the RM=.RM- foc"sses on areas s"ch as
identification, meas"rement and monitoring of ris$s at #an$ level. Broad policy
g"idelines of RM-.RM= on ris$ management, ris$ profile of the #an$, etc. are e&amined
for developing RBI, policy.%he foc"s of RBI, is to provide reasona#le ass"rance to the
3C>
Board and the top management a#o"t the ade("acy and effectiveness of the ris$
management and control framewor$ in the operations. ,lso, to indicate potential ris$
which a #ranch is e&posed to. %he cond"ct of RBI, will shift emphasis from the present
system of f"ll scale transaction testing to ris$ identification, prioriti+ation of a"dit areas
and allocation of a"dit reso"rces in accordance with the ris$ assessment.'or RBI,,
limited period is allotted which sho"ld #e "tili+ed mainly for high ris$ areas. If time
permits, low ris$ areas may also #e covered.Fntil the switch)over ta$es place, internal
inspection will contin"e. In that case, the #ranch sho"ld #e inspected first #y a team of
internal inspectors and thereafter, the same team sho"ld cond"ct the RBI,. 7imited
transaction testing is advised. If ma0or deviations are o#served in respect of a"dit of
sample cases, all transactions will #e considered for verification after cons"lting the
higher a"thorities.Switch)over to RBI, is e&pected in the ne&t 4)8 years. Initially, E7Bs
and I7Bs may #e covered and all other #ranches thereafter within 4)8 years.
Risk &ssessment
Ris$ assessment is "nderta$en as part of RBI, solely for the p"rpose of
form"lating the ris$ #ased a"dit plan. Ris$ assessment may #e done at
corporate, #ranch, portfolio and individ"al levels, which involves the process to
identify, meas"re, monitor and control the ris$s. ,t present, the RBI, is
proposed at #ranch level only.
%he ris$ assessment involves*
Identification of #oth inherent #"siness ris$s and control ris$s.
=rawing "p a ris$/matri& for ta$ing into acco"nt #oth #"siness ris$
and control ris$. 6Ris$ matri& is shown s"#se("ently9
Ris$ to #e assessed in terms of 7evel 6High, Medi"m, and 7ow9 and
=irection 6increasing, sta#le and decreasing9. %he #asis of
assessment of ris$ in terms of 7evel and =irection sho"ld #e spelt)o"t.
Methodology / Bn site a"dit / deviations / magnit"de / fre("ency.
Ris$ ,ssessment framewor$ in one #an$ is s"ggested as "nderL
Mar$s
* ;#s$ness ,$s6 500
1. -redit Ris$ 455
4. Earning Ris$ !5
8. 7i("idity Ris$ ;5
3CB
;. B"siness Strategy Ris$ !5
:. Bperational Ris$ 155
** %ontro4 ,$s6 500
>. Internal -ontrol Ris$ ;55
?. -ompliance Ris$ 155
:ota4 Mar6s 1000
7evel of Ris$ for B"siness and -ontrol separately
6In percentage9
7ow ) Bver !5
Medi"m ) >: / ?
High >; and Below
$irection : Increasing, sta#le and decreasing
Composite *Business as 0ell as Control+ Risk /atri)
!nhe
rent
Bus
ines
s
Risk
7ig*
,
High Ris$
B
Iery High Ris$
-
E&tremely Ris$
/edium
=
Medi"m Ris$
E
High Ris$
'
Iery High Ris$
1o0
D
7ow Ris$
H
Medi"m Ris$
I
High Ris$
1o0 /edium High
Control Risk
It wo"ld #e possi#le to identify : levels of ris$ from the a#ove matri& / low,
medi"m, high, very high and e&tremely high.
Magnit"de and fre("ency of ris$.
3hile the ("ant"m of credit, mar$et and operational ris$s co"ld #e largely
determined #y ("antitative assessment, the ("alitative approach may #e adopted
for assessing the ("ality of controls in vario"s #"siness activities. Identification of
ris$ may #e done activitywise 6#"siness segmentwise9 or locationwise
6#ranchwise9. In the initial stage, #an$s may confine to #ranchwise ris$
assessment.
%he ris$ assessment methodology incl"des the following parametersL
2revio"s internal a"dit report and compliance
2roposed change in #"siness lines or change in foc"s
3CC
-hange in management.$ey personnel
Res"lts of the latest reg"latory e&amination report
Report of e&ternal a"ditors
B"siness trends and other environmental factors
%ime lapsed since last a"dit
Iol"me of #"siness and comple&ity of #"siness activities
2erformance variations from the #"dget
'or acc"rate ris$ assessment, MIS and data integrity is essential. Hence, the
a"dit department sho"ld #e informed #y all other departments a#o"t introd"ction of
new prod"ct, changes in reporting lines, changes in acco"nting policies and
practices, etc.
%he ris$ assessment sho"ld #e done on yearly #asis which may "pdated
periodically in the light of changes in #"siness environment, wor$ process etc.
&udit %lan
Ban$s have to prepare the ann"al a"dit plan. %he areas 6#ranches9 or activities
identified as high, very high or e&tremely high ris$ 6#ased on ris$ matri&9 may #e a"dited
at shorter intervals and at longer intervals for medi"m or low ris$ areas.activities.
!n one bank# the audit plan is suggested as under:
7evel of Ris$ 2eriodicity of RBI,
Iery High 3ithin > months
High 3ithin 14 months
Medi"m 14)1: months
7ow 1:)1! months
%ransaction testing depends "pon the ris$ assessment.
!n one bank# the e)tent by transaction testing is suggested as under:
< %esting 7evel of Ris$.=irection
155 High and increasing
:5 Medi"m and sta#le
15)45 7ow and decreasing
RB!& &udit Report ormat
RB!& auditor at the minimum must report the follo0ing points in his report:
0 2rocess #y which ris$s are identified and managed in vario"s areas
0 %he control environment in vario"s areas
3C?
0 Daps, if any, in control mechanism which might lead to fra"ds, identification of
fra"d prone areas
0 =ata integrity, relia#ility and integrity of MIS
0 Internal, reg"latory and stat"tory compliance
0 B"dgetary control and performance review
0 %ransactions testing.verification of assets to the e&tent considered necessary
0 Monitoring compliance with ris$ #ased internal a"dit report
0 Iariations, if any, in the assessment of ris$s "nder the pre)a"dit plan vis)K)vis
RBI,.
%he scope of RBI, sho"ld also incl"de review of the systems to ens"re compliance with
money la"ndering controls, identifying potential inherent #"siness ris$s and control ris$s
and s"ggesting steps to mitigate ris$s.
E,it meeting
%he a"dit report sho"ld #e prepared after holding disc"ssion with the Branch
Manager.Management regarding a"dit findings relating to ris$ assessment, ris$ matri&,
positive and negative factors and steps to mitigate ris$s, as also identify the areas of
potential ris$s. Ban$s are e&pected to develop RBI, report format. Special letter stating
serio"s irreg"larities, if noticed d"ring the RBI,, sho"ld #e sent to the management
immediately and see$ instr"ctions therefrom.
Rating of Branches
,s part of RBI, report, #ranches may #e rated in different categories on the #asis of
level and direction of ris$. In one #an$, #ranches are rated in nine categories ) 7evels 8
T =irections 8 619 High increasing 649 High sta#le 689 High decreasing 6;9 Medi"m
increasing 6:9 Medi"m sta#le 6>9 Medi"m decreasing 6?9 7ow increasing 6!9 7ow sta#le
69 7ow decreasing. 'or each category, reasons sho"ld #e stated and steps sho"ld #e
s"ggested to mitigate ris$ #y #ranches.
RB!& .utsourcing
3ith the permission of the Board, o"tso"rcing can #e done for RBI,. B"t eno"gh care is
needed to ens"re that internal control is not wea$ened d"e to o"tso"rcing.
RB!& %rocess
1. 2re)a"ditL ) St"dy of RBI, policy g"idelines
) St"dy of Branch 2rofile to get an idea a#o"t nat"re of ris$ i.e.
level and direction.
) 2reparation of pre)a"dit plan.
3CA
4. Bn)site a"ditL ) ,ssessment of ris$ #ased on deviations o#served d"ring the
co"rse of a"dit* =evelopment of Ris$ Matri&.
8. 2ost a"ditL ) Implementation of the RBI, report #y a #ranch within the
specified
time. 6Monitora#le ,ction 2lan / M,29
) 'ollow)"p of the implementation of the report #y the RB.NB
) -los"re of the report #y the regional inspectorate on the recommendations of
the RB.NB
) ,"dit -ommittee of the Board to #e informed a#o"t the gist of the RBI, report.
.rganisational &spects of RB!&
0 , %as$ 'orce of senior e&ec"tives to #e formed to prepare a plan for switch)over
to RBI, d"ring the ne&t 4)8 years.
0 %he %as$ 'orce to develop RBI, policy g"idelines, #ranch profile format, ris$
assessment framewor$, ris$ matri&, RBI, report format, Monitora#le ,ction 2lan
6M,29 format, etc.
0 Regional Inspectorate.Regional Bffice to develop Branch profile data ann"ally
0 Inspectors to #e identified to cond"ct RBI, and necessary training to #e imparted
0 , 2ilot RBI, sho"ld #e introd"ced to test the a"dit tools. %hereafter, the RBI,
sho"ld #e cond"cted on f"ll scale.
0 Internal a"dit inspection shall #e cond"cted alongwith RBI, "ntil the total switch)
over is done.
0 %he s"ccess of RBI, depends "pon MIS, efficiency of internal control.conc"rrent
a"dit.I% a"dit machinery, competence of inspectors
0 ,s far as possi#le, RBI, sho"ld #e cond"cted #y internal staff only.
0 %he %as$ 'orce is e&pected to prepare an ann"al plan for cond"cting RBI,. ,
road)map has to #e prepared for switch)over to RBI, d"ring the ne&t 4)8 years.
(@@@
3?4
%ha"ter-33
#re8enti8e Eigi$ance in Banks
Truth has a bad habit# It surfaces and emerges and reemerges li+e that of 3iberian bird
-hoeni! who rises from its own ashes#$
.non
56 !ntroduction( Ban$s in India lost a#o"t Rs. 1!!8 crores d"e to fra"ds d"ring 455!)
5. Bf late, fra"ds in #an$ing ind"stry are
showing "na#ated sp"rt year after year. %he
magnit"de is also increasing on acco"nt of
financial sector reforms and glo#ali+ation. e)
Ban$ing has added a new dimension of fra"ds
as necessary sec"rity awareness, $nowledge
and e&pertise are not availa#le with staff in
operation. 'ierce competitions amongst the
#an$s to e&cel performance and to gra# more
and more #"siness from others have made the
#an$s to let loose internal control system,
norms and proced"res. '"rther with the opening "p of the financial sector, a desire
for earning ("ic$ money has cropped "p amongst a section of people who
increasingly design new ways and means to commit fra"ds. ,ll this has made the
Iigilance an important aspect of #an$ing #"siness management and responsi#ility of
the ape& management to strengthen the fra"d management practices.
36 Higilance a mental state( Iigilance is a mental state and in general parlance refers
to awareness, alertness, watchf"lness, fore)sightedness, e&ercising ca"tion and
pr"dence on the part of the employees to save the property of the #an$s from
"nscr"p"lo"s elements. It is a fight for "prooting corr"ption and malpractice, which
are harmf"l to the organi+ation as well as to society. %he vigilance protects the
honest persons to stim"late operational efficiency and p"nishes dishonest persons
as a deterrent meas"re.
A8 -hree .7s of Higilance(
A8? .ffenders(Bffenders who perpetrate the fra"ds can #e #oth insiders and
o"tsiders. %he e&perience has shown that ma0ority of fra"ds are committed #y the
insiders either singly or 0ointly with o"tsiders. , recent incident at 'rench Ban$,
3?5
2004-05 779
2005-06 1381
2006-07 1194
2007-08 1059
2008-09 1883
Frauds in Banking Sector
(Amount in croes
!" 31
st
#anuar$ 2010
Societe Deneral S.,. which was defra"ded #y FS O 8.4 #illion #y its trader has
e&posed v"lnera#ility of #an$ #y insider. Hence strict vigil has to #e e&ercised on
activities of the insiders to chec$ fra"ds. '"rther, the #an$ has to closely o#serve the
principle of G$now yo"r c"stomersH to chec$ perpetration of fra"d #y the o"tsiders.
A8; .bBects(B#0ect means target of fra"d. Bffenders commit fra"ds #y targeting
#ranches where the system and proced"res are not metic"lo"sly complied with or
targeting loophole in the system and proced"re. %he RBI has the identified following
areas as fra"d proneL )
=eposit ,cco"nts) opening of fictitio"s deposits acco"nts #y persons not
properly identified.introd"ced to the #an$ followed #y deposit of
fa$e.stolen.forged instr"ments in s"ch acco"nts and withdrawals of the
proceeds and fra"d"lent operations in Impersonal acco"nts.
2ayment of =emand =rafts and other %ransfer Instr"ments)payment of
altered.forged drafts E 'orged inter)#ranch transfer advice.
7etters of -redit.D"arantees and -o)acceptances) Bpening . iss"e of 7etter
of credit and #an$ g"arantees, co)acceptance of #ills witho"t proper
a"thority and consideration, iss"e of letter of -redit. #an$ g"arantees witho"t
recording in the #ranch #oo$s,
'oreign E&change) 'ra"ds in foreign e&change transactions thro"gh non)
adherence of RBIAs prescri#ed norms and proced"res li$e acceptance of non
resident deposits thro"gh middlemen and thereafter allowing.availing of
overdraft against fra"d"lent discharge of these deposits receipts #y forgoing
power of attorney and loan doc"ments of third parties witho"t proper
identification.introd"ction,
-redit 2ortfolio) Mis"tilisation.overstepping of lending.discretionary powers
and non o#servance of prescri#ed norms. proced"res in credit dispensation,
s"#mission of false stoc$. financial statements to avail of finance,
clandestine removal of goods hypothecated and siphoning of sale proceeds,
manip"lation of stoc$ and financial statements and financing against
accommodation #ills,
-learing operations)-ollection of an instr"ment in the acco"nts of a party
other than its payee, 3ithdrawal of f"ll amo"nt #efore realisation of proceeds
and s"#se("ent fail"re of the party to ma$e good the amo"nt of the
3?3
6ood model#
Bad people
6ood model#
6ood people
Bad model#
Bad people8
Bad model#
6ood people8
instr"ment is received #ac$ dishono"red, 'ail"re to send the instr"ment to
the drawee #ranch, =estr"ction of the instr"ment while in transit or at the
drawee #ranch, ,vailing the @withdrawal against clearingA facility against
instr"ments $nown to have #een drawn witho"t f"nds, Bne party and its
associate or two different parties having acco"nts in two #ranches ind"lging
in $ite flying operations.
Bthers )Raising "na"thorised de#its on nominal heads of acco"nt,
manip"lating and tampering with the #oo$s of acco"nts #y passing
"na"thorised entries, iss"e of pay orders.demand drafts witho"t
consideration, fa$e doc"mentation, Fnlimited comp"ter access provided to
vendors and staff not related to the comp"ter operation etc.
A8A .pportunity(7ac$ of 0o# $nowledge, Non)compliance of system and proced"res,
Non)#alancing of #oo$s, Non)reconciliation of clearing and inter)#ranch acco"nts,
7ac$ of safe $eeping of critical stationery items, -as"al approach to sec"rity alertness
and 2oor monitoring of #ranches #y controlling offices provide opport"nity to
"nscr"p"lo"s elements to commit fra"d.
C8 Juality of management( Every organi+ation has #"siness model, which g"ides its
#"siness policies. %hese models are not
fort"ito"s, #"t are often chosen #y design
and predilection of the person #ehind the
pro0ect. %here can #e good #"siness
model r"n #y good people* #ad model r"n
#y #ad people* #ad model #y good people
and good model #y good people. %he
("ality of model and people r"nning it is
f"nction of ("ality of management and
ethics and integrity of the people
managing it. 3hile we have #"siness model r"n with greed, fear, l"st and selfishness
li$e Ramalingra0"As of Satyam, Jenneth 7ayAs of Enron, Ro#ert Ma&wellAs of Ma&well
comm"nication -orporation and Harshad Mehta of #ro$ing firm , we have #"siness
model r"n #y visionaries, patriots and great entreprene"rs.
<8 .bBective of the Higilance( %he #roadly the vigilance aims to achieve the following
o#0ectives)
6a9 -hec$ing.preventing fra"d and forgery,
3?3
6#9 2rotecting honest employees,
6c9 2"nishing dishonest employees,
6d9 Simplification of the system and proced"res,
6e9 Review of system and proced"res to pl"g loopholes,
6f9 Bringing a#o"t fairness and p"rity in service,
6g9 Bringing awareness among employees to create a corr"ption free
organisation .society.
D8Higilance /anagement( Iigilance activities can #e gro"ped "nder following heads
from management perspectives(
D8?8Educative Higilance Ed"cative Iigilance aims to achieve awareness of
r"les and reg"lation, system and proced"res etc. among employees. %his is
done #y cond"cting training and seminar on vigilance management and #y
highlighting importance of vigilance thro"gh articles in ho"se)maga+ine on
vario"s aspects of vigilance management.
D8; %reventive Higilance( It is #etter to prevent and prepare than to repent and
repair. %he o#0ective is achieved #y creating alertness and foresightedness
among employees to prevent fra"d and forgeries and #y creating a sense of
responsi#ility among employees to o#serve system and proced"res. It is a most
important approach of the Iigilance Management as it treats the ca"se of
disease rather than to treat the disease.
D8A $etective Higilance)%his refers to detection of fra"d and forgery thro"gh
investigation. %he o#0ective is to ascertain the ca"sative factors, which facilitated
perpetration of fra"d and to identify the persons responsi#le for the same. It aims
to fi& acco"nta#ility and to initiate meas"res to recover the involved amo"nt.
D8C %unitive Higilance)%his refers to process of initiating disciplinary action #y
iss"ing show ca"se notice E charge sheet, cond"cting en("iry and awarding
p"nishment as per disciplinary and appeal reg"lation of the #an$.
98 %reventive Higilance &ction %lan( 2 -revention is better than cureH is an old saying.
Hence, all o"t efforts sho"ld #e made to create vigilance awareness among employees
to prevent occ"rrence of fra"d and forgeries. %he action plan for preventive vigilance
comprises of the following)
98? &t corporate level(
6a9 Recr"itment of officers.employees sho"ld #e caref"lly verified*
3?@
6#9 ,ll employees handling vario"s d"ties sho"ld #e made aware of the essential
safeg"ards, which sho"ld #e o#served in the discharge of those d"ties*
6c9 %he d"ties and responsi#ilities of employees sho"ld #e clearly laid down
thro"gh 0o# cards, instr"ction man"al, comp"ter sec"rity policy etc.
6d9 %he principles of d"al c"stody and concept of chec$er and ma$er sho"ld #e
o#served at all times.
6e9 ,ll the officers.employees sho"ld #e transferred at prescri#ed intervals and
#an$ m"st insist on their going on leave periodically.
6f9 Monitoring and scr"tiny of control ret"rns to find o"t deviation.non)
compliance.over)stepping of lending .non)lending a"thority, chec$ing of
"n"s"al variation in deposit.advances E non personal.reven"e heads in
wee$ly, monitoring position of #alancing of #oo$s, reconciliation of inter)
#ranch .inter)#an$ acco"nts.cash movement etc.
6g9 2osting officers of s"spected integrity at non)sensitive assignments.
6h9 Scr"tiny of ,ssets and 7ia#ility Statement of officer employees.
6i9 -a"sing S"rprise Iigilance Inspection at 'ra"d 2rone #ranches.
609 S"rprise visit of #ranches #y -ontrolling ,"thority.
6$9 Review of System and 2roced"re in the light of fra"d cases and modification
of the system and proced"re to contain fra"ds.
6l9 -ond"cting reg"lar inspection.conc"rrent a"dit.reven"e a"dit. stat"tory
a"dit.system a"dit.comp"ter a"dit etc. at #ranches and following "p
rectification of irreg"larities.
6m9 Enco"raging and praising performance of individ"al.#ranches when fra"ds
are prevented.
98; &t branch level(
6a9 %o ens"re metic"lo"s compliance and o#servance of systems and
proced"res.
6#9 Reg"lar and timely s"#missions of control ret"rns. inter #ranch sched"les.
6c9 Reporting irreg"larity in #orrower acco"nts incl"ding e&cess drawings,
drawings against "ncleared effects etc. to controlling a"thority reg"larly.
6d9 -ompliance.rectification of Inspection and ,"dit reports.
6e9 Implement 0o# rotation policy of #oth officers.employees.
3?>
6f9 Reg"lar reconciliation of inter #an$ acco"nts, clearing acco"nts and doing
reg"lar #alancing of #oo$s and not allowing any vo"cher, register, ledger to
remain "nchec$ed #y officials.Special ,ssistant.
6g9 =oing rotation of #alancing wor$ among employees.
6h9 Jeeping an eye on life) styles of s"#ordinates. %he cases of living #eyond
$nown so"rces of income m"st #e closely e&amined and reported to higher
a"thorities confidentially.
!. %reventive vigilance in computeri,ed branches: ( e)Sec"rity has #ecome a
center)stage of concern for #an$ers d"e to vario"s reasons s"ch as lac$ of
$nowledge of I% sec"rity, fear of loss of p"#lic faith in case of system #rea$) down,
fear of financial loss d"e to I% related fra"ds etc. ,ccording to India 'ra"d S"rvey
report 455> #ro"ght o"t #y J2MD, financial sector s"scepti#ility to fra"d ris$ and
Indian corporate preparedness to address fra"d is very low. It, therefore, calls for an
effective preventive action to avoid fra"d and forgeries in comp"teri+ed set "p.
S"ggestive steps can #e as "nderL )
6a9 %o ens"re compliance of I% sec"rity meas"res in comp"teri+ed and networ$
#ranches as per I% sec"rity policy of #an$.
6#9 %o o#serve principle of @least privilegeA and that of @ma$er and chec$erA.
6c9 %o do 0o# .d"ty allocation #y proper office)order.memorand"m.
6d9 %o o#serve proper physical sec"rity control s"ch as to $eep comp"ter screen
o"t of sight of visitors, to $eep server loc$ed with minim"m access, do not
allow visitors into wor$ station area and do not leave comp"ter witho"t
logging o"t.
6e9 Ed"cate people a#o"t physical sec"rity and tell them that they are part of
sec"rity chain.
6f9 %o chec$ active "ser list and chec$ that there is no "na"thori+ed "ser.
6g9 %o ens"re that no single "ser is allotted more than one password.
6h9 %o ed"cate employees to $eep the password secret and change it periodically
as per norms.
6i9 %o allow access to the system to soft ward and hardware vendor thro"gh
a"thorised I=.2assword and $eep an eye on their wor$.
609 %o follow disaster management and #"siness contin"ity plan.
6$9 %o chec$ that time off mechanism is active.
6l9 %o do data consistency chec$ periodically.
3?B
Fraud in <ome Joan
Year )L- )mou
nt 1
3443043 33B 3?
344304@ @>B C4
344@04>
<5
3?4 >4
1 )mount in $rores
6m9 %o create e)sec"rity conscio"sness among employees.
. Retail 1oan and %reventive Higilance( Bf late fra"d and forgeries in retail loan are
on rise. *See bo)+ Even in ho"sing segment
where #an$s draw comfort #y way of sec"rity,
there are instances of m"ltiple financing against
fa$e title deeds and impersonation. %he
fa#rication of income doc"ments, #alance sheets
etc. are common mod"s operandi to defra"d
#an$s. Bther common mod"s operandi is mis"se
of loan in connivance of #"ilder.dealers. %he preventive vigilance is an important tool
to chec$ s"ch fra"d and forgeries. %his helps the #an$s in creating alertness,
foresightedness and a sense of responsi#ility among employees.
15. 34C( as a tool of %reventive Higilance( RBI has #een reiterating the e&tant
g"idelines and instr"ctions on J1- from time to time to prevent fra"ds. %hese
g"idelines pertain to identification of new c"stomers) #oth individ"al.corporate,
esta#lishing identity of the c"stomers #y o#taining 2,N, driving license voter identity
card etc., implementing process and proced"re to monitor transactions of s"spicio"s
nat"re in acco"nts, cond"cting d"e diligence and reporting of s"ch transactions,
o#taining credit report of #orrowers dealing with other #an$s #efore ma$ing
advance.ta$ing over acco"nts, o#taining report of overseas e&porters.sellers in
respects of high val"e imports, etc. %he RBI has recently reiterated following
g"idelines for strict compliance #y the #an$s )
6a9 %o do c"stomer identification #efore opening acco"nt either thro"gh
introd"ctory reference or thro"gh doc"ments s"ch as voter identity card,
2,N, passport, driving license etc.
6#9 %o o#tain photograph of the c"stomers #oth in deposit and loan acco"nts.
6c9 %o record cash transactions /#oth deposit and withdrawal )of Rs. 15 la$hs
and a#ove in a separate register and to report s"ch transactions incl"ding
any other s"spicio"s transaction to controlling office.
6d9 %o o#tain 2,N for iss"ance of travellers che("es, demand drafts, mail
transfers and telegraphic transfer a#ove Rs. :5,555.).
6e9 %o ens"re compliance of 'oreign -ontri#"tion Reg"lation ,ct 1?> while
opening acco"nts or collecting che("es #y insisting to acco"nt holder to
f"rnish certificate of registration with the DBI.
3?C
6f9 %o train.ed"cate staff for anti money la"ndering g"idelines and implementing
J1- policies consistently.
6g9 %o as$ conc"rrent a"ditors.internal inspector to chec$ and report compliance
of J1- norms.
11. Role of Ethics and Halue8 Ethics and val"es play a
ma0or role in preventive vigilance. Ethics is
framewor$ of val"es for moral #ehavio"r. It is a
code of cond"ct for individ"als which prescri#es do
and donAt of doing #"siness. In #"siness of #an$ing,
the essence of ethics lies in integrity and honesty.
%he c"rrent de#ate on 4orporate )overnance of
ban+s G is #ased on growing reali+ation that #an$
m"st not do any illegal or "nethical things. %he age)
old concept of @onesty is the best policy$ is still a
"sef"l and practical g"ide for s"rvival in this
material word. 'ollowing vers"s from the J"ral, %ir"
Iall"var translated in English #y =r. -
Ra0agopalachari are relevant L)
6a9 ,void at all times action that is not in accordance with the moral law*
6#9 %hose who see$ to #e great sho"ld refrain from everything that might tarnish
their good name,
6c9 =o not do that which good men wo"ld condemn* even if it means helplessly
loo$ing on witho"t finding food for yo"r starving mother*
6d9 S"ccess achieved witho"t minding the prohi#itions of the moral law #rings grief in
the wa$e of achievement*
6e9 %o see$ to f"rther the welfare of the state #y enriching it thro"gh fra"d and
falsehood is li$e storing water in an "n#"rnt m"d pot and hoping that it can #e
preserved.
3??
%&o not do t'at
('ic' $our
)etter sense
te**s $ou t'at
$ou (i**
a+ter(ards
regret, But i+
$ou 'a-e done
suc' a t'ing it is
(e** $ou at *east
decide to re+rain
14. %reventive Higilance &ctions %oints( 2reventive vigilance action points in fra"d
prone areas in credit as well as in operation are given #elow)
*a+ ,-.-/(I.- .I0I1#/%- I/ 12#/3- IM,2(#/( #%(I2/ ,2I/(3
Retail 1oan
-ype
Committed
by
Nature of rauds %reventive Higilance /easures
19 Ho"sing
7oan )
-ommitte
d #y direct
selling
agents .
real estate
agents
.#"ilders
'a#rication of income
doc"ments li$e salary slip,
#alance sheet, income ta&
ret"rn etc.
Ierification of salary slip with the
employer.
Salary slip sho"ld #e crosschec$ed with
#an$ statement.
-ross Ierification of Balance sheet with
#an$ statement.
Interview of the #orrower to cross chec$
details.
49 Ho"sing
7oan /
-ommitte
d #y
direct
selling
agents.
real estate
agent
.#"ilders .
#orrowers
Incl"ding income #y way of
agric"lt"re, t"ition,
coaching, etc to inflate loan
amo"nt .
,gric"lt"ral income can only #e
considered if it is s"pported #y land
record and income is reported in income
ta& ret"rn tho"gh not ta&ed.
In case agric"lt"ral income is
considered, installment sho"ld coincide
with harvesting of crop.
Bther income li$e coaching, t"ition etc.
sho"ld reflect in income ta& ret"rn.
89 Ho"sing
7oan /
Involveme
nt of
middle)
men
=is#"rsed che("es. drafts
were collected #y third party
thro"gh fictitio"s acco"nts.
Money is withdrawn later
-he("e sho"ld #e iss"ed in the name
of the #an$er to #"ilder with #an$
acco"nt no.
-he("e sho"ld not #e handed over to
the #orrower or to the middlemen. It
sho"ld #e delivered #y hand to #"ilder
at the address recorded in the sale
3?A
deed.
;9 Ho"sing
7oan )
Stamped
doc"ment
s forged
#y
c"stomes.
#"ilders.
-olo"red Tero& of all
doc"ments with fa$e
stamps s"#mitted) diffic"lt
to identify.disting"ish with
gen"ine one.
%rac$ing and sharing of information
among #an$s a#o"t #lac$ listed
#"ilders.
%he title deeds to #e handed over to
advocate #y #an$ only and all his
("eries sho"ld #e ro"ted thro"gh #an$
only. %he fee will also #e paid thro"gh
#an$.
Ban$ officers sho"ld verify gen"ineness
of the doc"ments independently thro"gh
their own advocates.solicitors.
In case of large val"e loans, #an$ can
approach s"#)registrar to verify the
gen"ineness of title deeds.other
doc"ments.
:9 Ho"sing
7oan)
Bver
val"ation
of
property
#y
#"ilders .
val"ers
%o draw higher loans in
connivance with #"ilders.
%he val"e is inflated #y
incl"ding val"e of additional
amenities, fi&t"res, legal
charges, society advance,
maintenance charge etc.
'or val"ation report over Rs. 4: lacs,
two independent val"ers sho"ld do it.
Dovernment sho"ld introd"ce certificate
co"rse for approved val"er.
Ban$s sho"ld develop in ho"se
e&pertise for val"ation of properties.
Ban$ to o#tain indemnity from val"er
while approving them so that
"nscr"p"lo"s val"er can also #e made
lia#le of losses of #an$s.
>9 Ho"sing
7oan)
M"ltiple
'inancing
'a#rication 6fa$e9 of
doc"ments that are
prod"ced to different #an$
and financial instit"tion to
commit fra"d.
%rac$ing and sharing of information
among #an$s and ho"sing finance
companies a#o"t #lac$ listed #"ilders.
,greement to sale and doc"ments of
title sho"ld #e in demat form.
62RB2BSE=9
Ban$. 'I sho"ld insist on original
3A4
doc"ments of title deed on which
str"ct"re is #"ilt.
?9 Ho"sing
7oan )
-ancellati
on of
#oo$ing of
flat.apartm
ent in
coll"sion
#etween
c"stomer
and
#"ilder.
,fter availing loan the
#oo$ing is cancelled and
loan is ref"nded to the
#orrower directly.
-redit Rating of B"ilders #y -RISI7
sho"ld #e made mandatory
Ban$ sho"ld chec$ past trac$ record,
financial via#ility, pro0ect e&ec"tion
capacity, clear titles, c"stomer
satisfaction of previo"s pro0ects and
technical competence of the #"ilders.
Registration receipt iss"ed #y Registrar
of ass"rance sho"ld #ear hypothecation
cla"se. 62RBS2BSE=9
Ban$ sho"ld o#tain tripartite agreement
with #"ilder #an$ and #orrower stating
that if #oo$ing is cancelled, the money
will #e ref"nded to #an$ only.
!9 Ho"sing
7oan )
Sale of
property
#y loanee
witho"t
clearing
e&isting
loan.
2roperty sold thro"gh
d"plicate or fa$e title deed
even tho"gh the original
legal title deed is with the
#an$.
Ban$s to represent to RBI and DBI to
enact legislation for creation of
E("ita#le Mortgage in the office of
registrar of ass"rances.
-redit Rating of the B"ilders.realtors
sho"ld #e stip"lated as terms of
sanction.
Internal d"e diligence li$e inspection of
property plays cr"cial role in preventing
s"ch fra"ds.
9 Ho"sing
7oan )
Misrepres
entation of
end "se of
loan
7oan ta$en for residential
ho"se #"t commercial
property is constr"cted.
Ban$s officer to verify end "se of loan in
addition to verification #y
architect.engineer as per system.
159 Ho"sing
7oan
)Sale of
B"ilders sold
constr"cted.semi)
constr"cted ho"ses #"t did
-onstr"ction. f"nding of loan sho"ld #e
closely s"pervised.
3A5
property
#y #"ilder
witho"t
clearing
d"es of
financing
#an$.'I.
not pay the d"es of
#an$s.'I raised for
constr"ctions of the
#"ilding.
Briginal title doc"ments sho"ld #e
called for appraisal at the time of
sanction of loan.
Ban$ to $eep eyes on #"ilder and see$
information for sale of flat.ho"ses on
reg"lar #asis.
119 -ar 7oan)
%he
middlema
n, car
dealer and
proponent
s
connived
in
mis"tili+ati
o)n of the
loan.
Misrepresentation of end
"se of loan
'ollow J1- for identification and
verification of c"stomerAs profile and
ascertain gen"ineness of
paper.doc"ments tendered.
Margin money sho"ld #e reali+ed
thro"gh acco"nt or #y che("e.
-ar financing sho"ld #e thro"gh
approved dealers only.
149 NRI
=eposits
)fra"ds
NRI cheated #y
"nscr"p"lo"s #ro$ers who
gave them forged.altered
'=R, availed loan thro"gh
power of attorney witho"t
#orrowerAs consent.
2"#licity vo"cher) no agent can solicit
deposit.
'ollow J1- g"idelines.
'ollow proced"re for opening and
operation of the acco"nt)verify
signat"res with care E verify the
gen"ineness of the loan application.
Hand over '=R to depositor only or
send a registered ,= letter to depositor
having handed over '=R to a"thori+ed
person. =o not hand over '=R to third
party witho"t a"thority.
'ollow prescri#ed proced"re for
3A3
sanction and dis#"rsement of the loan.
2,)Bperations can #e permitted to
resident on the #asis of 2, for
withdrawals for local payments. ,lso
s"#0ect to RBI permission local resident
can ma$e payment for investment on
the #asis of 2,. 7oan thro"gh 2,
)Satisfy f"lly a#o"t gen"ineness of the
doc"ments.
No third party advance against NRE
deposit on the #asis of 2. ,. can #e
allowed.
189 Bpening
7etter of
credit)
Imports
7- opened against 155<
cash margin for the
c"stomer $eeping c"rrent
acco"nt only. Ban$ felt no
need to loo$ into #orrowerAs
need, relia#ility and why
c"stomer has not
approached his #an$er from
whom he was availing
reg"lar credit facilities.
155< cash margin was
ta$en as comfort for not
appraising the proposal
properly.
J1-) $nows yo"r c"stomerAs need
relia#ility and a#ility) chec$ that he is
engaged in the same trade.
=o not normally open 7- for c"stomer
who are not availing credit facilities and
only maintaining c"rrent acco"nt. In
case c"stomer is availing facilities with
other #an$, ascertain reason of not
availing facility with that #an$ #efore
opening letter of credit.
Ma$e thoro"gh scr"tiny of the 7-
proposal li$e a credit proposal.
Satisfy that importer will #e a#le to retire
#ills incl"ding payment of c"stom
d"ties.
Ialidity of import license, identity etc. to
#e proved reasona#ly.
7arge val"e imports) o#tain credit report
of overseas seller from overseas #an$er
or rep"ted credit agency that e&porter is
engaged in p"rchase.sale of goods
so"ght to #e e&ported to India and is
3A3
good for ordinary #"siness
engagements.
1;9 Negotiatio
n of #ills
"nder
Inland
letter of
credit
Branch negotiated #ill
drawn against letter of credit
witho"t confirming
gen"ineness of the letter
of credit.
Branch sho"ld see$ confirmation of the
a"thori+ed signatory on the letter of
credit from or nearest so"rce of iss"ing
#an$ #efore negotiating #ills.
-onfirmation m"st #e o#tained thro"gh
#an$As own accredited official and not
thro"gh the #eneficiary or any other
third party.
'ollow J1- )verify antecedents,
#"siness records, financial health and
rep"tation of the party.
1:9 Imports
Bills /fa$e
Ban$ made 'T remittance
against forged import
doc"ments)doc"ments
incl"ded import license,
ETIM scrip, E- copy of #ill
of entry, ,irway #ill,
-ertificate of origin etc.
Same c"stom and clearing
agent in all #ills)#an$ raised
no ("ery. 2artial remittance
was made against each
license and small #alance
remained "ndrawn) 7icense
was ret"rned to importer /
hence none of the original
license reaches RBI with R
ret"rns.
Ris$ of fa$e #ill is higher in import #ills
received on collection #asis. Hence
follow J1- rigidly.
-hec$ #"siness #onafides of yo"r
importer c"stomers.
=irect #ills received #y importer from
overseas sellers) e&ercise ca"tion.
Importer #ills #y #"yer #an$er thro"gh
seller #an$er only) e&ception "pto FSO
4:555 provided BM is f"lly satisfied #y
financial standing and past trac$ record.
Non)e&isting imports / Manager to
e&ercise ca"tion thro"gh vario"s means
s"ch as 6a9 Indian c"stomer #an$ing for
a reasona#le long time. 6#9-"stomer
has availed credit facilities from the
#an$. 6c9 Ban$ has any time in the past)
e&amined #alance sheet of the
c"stomer. 6d9 -"stomer is an
esta#lished dealer.trader."ser of the
imported goods. 6e9 2lace of the
3A@
#"siness, godown etc. has #een visited
#y #an$As officials 6f9 Sales are ro"ted
thro"gh acco"nt.
In case of do"#t, #an$ sho"ld as$ for
detailed verification importerAs #oo$ of
acco"nts, inspection of place of wor$,
en("iry with #"siness c"stomers to
chec$ #"siness #onafides, and
comprehensive opinion report from
#an$ers of overseas seller.
2roof of imports)o#tain #ill of entry)
co"nterfeit #ill of entry in case of fa$e
import) do caref"l scr"tiny) -hec$
inconsistency.inacc"racy to verify
gen"ineness)send few #ills of entry to
c"stom and see$ confirmation) $eep
correspondence on record for
verification #y RBI.a"ditors.
1>9 'ra"d
thro"gh
e&ports
#ills
E&port #ills s"pported #y
fictitio"s materially altered
doc"ments) availed pac$ing
credit #y inflating stoc$s)
availed advances against
false.altered cash incentive
claims)availed large credit
witho"t valid doc"ments)
Borrower dealing with the
#an$ for over seven years)
earned confidence of the
staff) he was himself ta$ing
the doc"ments to 'T #ranch
and than ta$ing #ac$
doc"ments to #e sent #y
their co"rier.
Ierify that doc"ments represents
gen"ine transactions) caref"lly verifies
RR.M%R.B7 to chec$ that it is gen"ine.
Ierify standing and creditworthiness of
the #orrower and his prospective #"yer.
In case of 2re)accepted #ills /
confirmation sho"ld #e o#tained from
the drawee 6#"yer9.
See that #ill facility is not
disproportionate to the #"siness need of
the #orrower.
B#serve "s"al safeg"ards s"ch as
verifying doc"ments, see approval of
the carrier, follow "p remittance of the
overd"e #ill.
3A>
1?9 'a$e
g"arantee
%he g"arantees were
iss"ed 6a9 #y mis"sing the
ro"nd seal and letterhead of
the #an$ 6#9 #y forging the
signat"re of the #an$As
officials and 6c9 #y #an$
officials witho"t recording in
#oo$ of acco"nts. %he firm
met it o#ligation, hence
there was no ("estion of
invocation of the g"arantee.
,fter f"lfillment of the
contract, the g"arantees
were ret"rned to
#eneficiary. %he government
department did not verify
the gen"ineness of the
g"arantees from the #an$.
-ond"ct proper pre credit appraisal to
ens"re that the c"stomer is in a position
to discharge g"arantee in case it is
invo$ed. Ban$ sho"ld refrain in iss"ing
g"arantee for those who are en0oying
credit facilities with other #an$.
,ll g"arantees m"st carry #ranch code,
date and serial n"m#er of the
g"arantee.
2roper recording in #oo$s of acco"nt
sho"ld #e done incl"ding passing of the
lia#ility vo"cher.
D"arantee sho"ld #e iss"ed only "nder
signat"re of two officials.
2aragraph for see$ing confirmation from
controlling office sho"ld #e added in
g"arantee #ond or otherwise g"arantee
sho"ld accompany a letter from #an$
advising the #eneficiary to see$
confirmation from controlling office of
the iss"ing #an$.
*b+ %REHEN-!HE H!6!1&NCE !N B&N3!N6 .%ER&-!.NS(!/%.R-&N- /E&S>RES(
Sl8
no
raud prone areas %reventive vigilance measures
1!9 'a$e entries in D7 to ad0"st
"na"thori+ed clean advances
#y "sing others passwords.
2assword sho"ld not #e shared.
No one sho"ld #e given more than one password
and I=.
Ma$er and chec$er concept sho"ld #e
implemented.
Manager sho"ld chec$ a"dit trail of transactions
daily.
19 ,lteration in sanctioned limit
#y "sing some one else
Jeep the password secret.
'ollow ma$er and chec$er norm.
3AB
password. Manager or =B, sho"ld chec$ active I= list
periodically.
Manager sho"ld chec$ non)financial a"dit trail.
459 %ransfer of #alance to other
acco"nt #y "sing staff
password #y the software
vendor.
Software vendor sho"ld #e allotted separate
password and in no case manager or =B, sho"ld
allow him to "se his.her password to access the
system.
2roper record of long in and log o"t sho"ld #e
maintained.
,s soon as vendor finishes his.her wor$, his. her
I= sho"ld #e disa#led. In case of need in f"t"re,
I= can #e restored.
=ata if re("ired #y the vendor sho"ld #e sent to
companyAs head office directly #y #ranch thro"gh
floppy mailer.
419 Misappropriations of cash
showing it in transit or
$eeping fewer notes in
pac$ets.
Manager sho"ld o#serve d"al c"stody norm
caref"lly. %hey sho"ld not share their $eys with
others.
Manager sho"ld verify cash each day and do
sample chec$ing of cash pac$ets #efore cash is
finally closed.
="plicate set of $eys m"st #e properly lodged
with the other #ranch.#an$.
Bfficers "nconnected with its c"stody sho"ld
periodically verify cash.
449 2arallel #an$ing)
misappropriation of cash
deposited #y the c"stomers
#y the cashier.
2re scrolling norms m"st #e followed
metic"lo"sly. -ash department sho"ld not accept
cash "nless pre scrolling is done.
, notice sho"ld #e displayed in the #ranch
prominently in cash co"nter stating that 6a9 cash
sho"ld #e deposited at the cash co"nter only and
d"ring #"siness ho"rs and 6#9 c"stomer sho"ld
ens"re that co"nterfoil of the pay in slip is
co"ntersigned #y the Head -ashier.Bfficer a#ove
3AC
thresh hold limit say Rs.8, 555.) in addition to the
signat"re of the receiving cashier.
=o 0o# rotation of cashier as per e&tant r"les.
/9A 'orged withdrawal in
inoperative and dormant
,cco"nts) Instances of
replacing signat"re cards #y
forged card also reported.
Signat"re cards of all inoperative acco"nts
sho"ld #e $ept separately in 0oint c"stody.
3ithdrawal in dormant.inoperative acco"nts will
not #e allowed witho"t permission of #ranch
manager, who will satisfy that transaction is
gen"ine and is in order #efore granting
permission.
In case of do"#t the acco"nt holder sho"ld #e
contacted over phone or in person #efore a
withdrawal is passed.
/:A 'ra"d thro"gh forged or
chemically altered drafts and
mail transfer.
1. 'ollow normal preca"tions for opening and
operation of the acco"nt in which draft is
collected. ,lso follow J1- norm of iss"ing draft
a#ove Rs. :5,555.) either thro"gh acco"nt or #y
che("e 6NB% ,D,INS% -,SH9 and to o#tain
2,N.
4. =raft iss"ing #ranch sho"ld follow following
preca"tions)
6a9 E&ercise care #y iss"ance of draft on
proper series and Iss"ance of Non)MI-R
drafts on MI-R centers properly.
6#9 B#serve system of "sing reverse car#on
paper on #ac$ of draft
6c9 B#serve proced"re of p"tting slash
6transverse line9 mar$ed after each word
while writing amo"nt in words.
6d9 B#serve system of writing the words
"nder r"pees.
6e9 ,ll c"ttings or over)writings sho"ld #e
a"thenticated witho"t fail.
6f9 =o p"nching of cages in draft and affi&
3A?
transparent adhesive stic$er on amo"nt in
fig"re.
6g9 Bfficers sho"ld to ta$e care to p"t stamp
of a"thori+ed signat"re n"m#er #elow
signat"re of a"thori+ed officials in draft or
advice.
6h9 ,ffi& acco"nt payee crossing
6"nless otherwise re("ested #y the
c"stomer9.
6i9 =ispatch draft advice to paying #ranch on
the date of iss"e it self.
609 Small val"e drafts of Rs. 155 or #elow /
f"lly satisfy a#o"t identity of the p"rchaser
and gen"ineness of the p"rpose.
8. 2aying #ranches sho"ld follow following
preca"tions)
6a9 -hec$ that draft is complete in all respect
with regards to its contents and te&t. High
val"e draft sho"ld #e s"#0ect to closer
scr"tiny and passing #y at least two
officials.
6#9 Bverwriting and c"tting m"st receive d"e
attention. In case of do"#t, iss"ing #ranch
m"st #e contacted.
6c9 ,"thori+ed signat"res m"st #e
chec$ed.verified very caref"lly. In case of
do"#t, iss"ing #ranch m"st #e contacted
#efore draft is paid.
6d9 -hec$ reported loss series witho"t fail
#efore a draft is passed.
6e9 In case of large cash payment, e&ercise
d"e care and diligence.
/BA Bpening of new acco"nts in
fictitio"s name and then
2rospective acco"nt holder sho"ld visit
personally for opening the acco"nt 6where ever
3AA
withdrawing therefrom the
proceeds of che("es, drafts,
dividend warrants etc.
deposited 6which may #e
forged or materially altered9.
possi#le9 and where there is no face to face
contact proper care to #e ta$en while dealing with
s"ch c"stomers so that identity is verified to the
satisfaction of the #an$. ,cco"nt opening
formalities sho"ld #e completed in #an$As
premises and the doc"ments sho"ld not normally
#e ta$en o"t for e&ec"tion.
3here it is a#sol"tely necessary to ma$e
e&emption of the a#ove r"les, #an$s may ta$e
preca"tion s"ch as dep"ting an officer to verify
the partic"lars, o#taining signed photograph on
s"ita#ly formatted verification sheet, forwarding
#y registered ac$nowledgement d"e mail a copy
of acco"nt opening form and accompanying
instr"ctions to the client for necessary verification
#efore any operation are cond"cted in the
acco"nt.
-"stomers sho"ld esta#lish identity thro"gh
Electoral card, Identity card, 2assport, =riving
license, -redit card, Sales %a& No., 2,N no, and
information sho"ld #e corro#orated from
independent so"rces. ,lso B#tain recent
photograph 6no photograph is re("ired for term
deposit "p to Rs. 15,555.) . B#tain and record
2,N n"m#er.
,cco"nt holder having satisfactory SB.-%
acco"nt for at least > months can introd"ce new
acco"nts. %he introd"cer, e&cept "nder
"navoida#le circ"mstances, sho"ld sign the
acco"nt opening form in presence of the #an$
officials. Introd"ction sho"ld not #e treated as
formality #"t as a meas"re of preventing opening
of fictitio"s acco"nts.
-omplete mailing address of the acco"nt holder
344
sho"ld #e o#tained. B#tain confirmation of
address of acco"nt holder and introd"cer #y
sending letter of than$s "nder Registered
ac$nowledgement d"e post. =o not iss"e
chec$#oo$ "nless address of acco"nt holder and
introd"cer is confirmed. Bnly cash transactions
sho"ld #e permitted till address of introd"cer or
acco"nt holder is confirmed.
B#tain information regarding p"rpose of opening
of acco"nt and li$ely amo"nt and $ind of
transactions intended. 2repare a ris$ profile of
c"stomer as per J1- norm.
'ollow G-are new ,cco"ntsH for cash
deposit.transfer . 3ithdrawal etc.
/CA -ollection of che("e, drafts,
and dividend warrants etc. in
acco"nts of the party other
than its act"al payee. ,lso
ind"lging in $ite flying #y
granting accommodation
against "ncleared che("es.
If the acco"nt is opened after the date of
instr"ment intended to #e deposited in the
acco"nt, address indicated on the dividend
.interest warrant.ref"nd orders m"st #e
independently verified with that recorded with the
#ranch to ens"re gen"ineness of the instr"ments
and person depositing it. In case address is
mentioned the depositor sho"ld #e as$ed to
tender its co"nterfoil to verify the address.
,cco"nt payee che("es sho"ld #e collected only
for the named payee and not in third party
acco"nt.
Internal inspector sho"ld specifically #e as$ed to
loo$ into advances allowed #y the manager
against "ncleared effects and f"rnish comment in
their inspection reports.
-omp"ter operations sho"ld #e chec$ed to
ens"re that effects are cleared only as per
clearing cycle in consistent with time prescri#ed
#y the clearing ho"se.
345
/DA 'ra"d"lent withdrawal #y
o#taining new che("e #oo$
on false gro"nd thro"gh
forged re("isition slip or letter
forging the signat"re of the
acco"nt holder.
Re("est of fresh che("e #oo$ sho"ld #e
e&amined caref"lly. It sho"ld #e chec$ed that
re("isition slip is gen"ine and #elongs to the
che("e #oo$ iss"ed to the acco"nt holder earlier.
In case of delivery of che("e#oo$ to a third
person, the signat"re of the person a"thorised to
collect che("e#oo$ sho"ld #e confirmed on
re("isition slip. ,n intimation c"m
ac$nowledgment letter sho"ld #e sent to the
acco"nt holder at the recorded address if the
che("e#oo$ is delivered to third party.
In case che("e#oo$ is sent at new address #y
post at the re("est of the acco"nt holder, the
intimation of having sen:t the che("e#oo$ at new
address sho"ld also #e sent at old address.
2roper care a#o"t c"stody of pass#oo$ sho"ld #e
ta$en. In #ranch "ndelivered pass#oo$ sho"ld #e
$ept in a #o& "nder loc$ and $ey.
Ban$s may fi& internally some limit of cash
payment and in case cash payment e&ceeds
these limits, d"e preca"tions sho"ld #e ta$en
#efore cash payment
(@(@(@(
%ha"ter-3
Securit" Issues in Com+uteriBed En8ironment
343
(he cyber crime world is thriving and is among the largest illegal revenue
earning industry today.
- .allier Mc /iven- 43 (reasury #dvisor
0
?8 !ntroduction
?8? %aradigm shift in BankingL -omp"teri+ation has #ro"ght in advantages in terms of
reach, efficiency, convenience, speed and economy in #an$ing thro"gh host of e)
#an$ing sol"tions li$e ,%M, Mo#ile #an$ing, Internet #an$ing, %ele)#an$ing, Electronic
-learing System, Electronic '"nd %ransfer, 2ayment of Ftility Bills etc. %his has made
any time anywhere and anyhow #an$ing possi#le. ,#o"t :.1< of #"siness of 2"#lic
Sector Ban$s is now comp"teri+ed.
?84 !nformation -echnology &ct# ;@@@: India has already #een "shered into the I%
revol"tion #y enacting the Information %echnology ,ct, 4555. %he ,ct has p"t in place
law for electronic contract made on electronic medi"m, addressed the legal re("irement
of electronic record $eeping and has clearly defined rights and o#ligation of all the three
important parties of e-ontract vi+. the originator, the addressee and the intermediary.
%he act has created -ertifying ,"thorities 6-,9 and new arena of p"#lic $ey and private
$ey. %his has paved way for growth of eBan$ing in India #y addressing to vario"s
sec"rity and legal iss"es. %he ,ct has also laid down laws for cy#er)policing for safety
of neti+en s"ch as it empowers police officers to enter and search p"#lic places, li$e
cy#er)cafes witho"t a warrant and arrest s"spects when they #elieve that a cy#er crime
is #eing committed.
?8A e(Record /anagement( Recording the #"siness transaction in the electronic form is
fast emerging as an alternative to physical records d"e to its advantages in terms of
convenience and f"nctionality over paper #ased record and its legal recognition #y I% ,ct
4555. %o facilitate legal acceptance of electronic records of #an$s, Negotia#le Instr"ment
,ct 1!!1, Indian Evidence ,ct, 1!?4 and Ban$ers Boo$ Evidence ,ct, 1!1 have also
#een amended. ,mendment in NI ,ct has incl"ded electronic che("e in the definition of
che("e and defined @tr"ncated che("eA for electronic clearing. ,mendment in Indian
Evidence ,ct, 1!?4 has ena#led prod"ction of electronic record s"ch as comp"ter
o"tp"t, whether paper print or information stored, recorded or copied in optical or
magnetic media prod"ced #y a comp"ter as evidence in co"rt of law. '"rther as per
amendment in Ban$ers Boo$ Evidence ,ct, 1!1 all #an$ers #oo$ li$e ledger, long)#oo$
and day #oo$ now incl"de #oth physical as well as electronic record.
343
%**-PA% *nformat$on '9stem
'ec#r$t9 '#r-e9
Eho determines security
policyK

India #lobal
-IO @3* >C*
I: Mana&er
34* >3*
President 33* @5*
Se$urity
Mana&ement
54* @5*
-FO 54* 5>*
Se$urity
)dministratio
n
54* @5*
Information
Se$urity
Offi$er
53* 3>*
-onsultant >* 5C*
Ot(ers >* 34*
;8 e(Security
;8? Cause of security concernL ,ny time anywhere #an$ing has opened ris$ of any
time anywhere fra"d. Bo"ndary less #an$ing has
no law to deal with cy#er criminals. e)Sec"rity has
now #ecome a centre)stage of concern for
#an$ers d"e to vario"s reasons s"ch as lac$ of
$nowledge of I% sec"rity, fear of loss of p"#lic faith
in case of system #rea$down, fear of financial loss
d"e to I% related fra"ds etc. Ernst E 1o"ngAs
Dlo#al Information Sec"rity S"rvey 4554
cond"cted across 1? co"ntries says that ?5< of
Indian -hief Information Bfficers 6-IBs9, I%
=irectors and B"siness E&ec"tives s"rveyed
indicated that they e&pect to e&perience greater
v"lnera#ility as connectivity increases. It is
therefore necessary to p"t in place an effective I%
Sec"rity Management 2olicy 63ho determines
sec"rity policyR) 6see bo)+ so that #an$
employee can #etter accept, "nder stand, monitor and manage I% related ris$s. %his also
means more investment in employeeAs ed"cation thro"gh training.
;8; Computer rauds($efinedL 'ra"d is defined as an intentional or deli#erate
perversion of tr"th in order to gain an "nfair advantage. 'inancial fra"d is intentional or
deli#erate act to deceive other persons who s"ffer a financial loss. -omp"ter fra"ds are
committed #y an "na"thori+ed "ser 6whether insider or o"tsider9 to the comp"ter
networ$s for ca"sing economic or financial gains to the "ser or for an economic or
financial loss to the information system 6i.e. hardware, software and data9 owner 6i.e.
#an$9.
;8A -ypes of fraud: %he most important types of comp"ter fra"d are thro"gh
manip"lation of inp"t, manip"lation of o"tp"t, or thro"ghp"t of a comp"ter system. 3hile
in inp"t manip"lation, inp"t data s"ch as deposit amo"nts in ledgers, limits in acco"nts
are changed* o"tp"t manip"lation is achieved #y affecting the o"tp"t of the system, s"ch
as "se of stolen or falsified cards in ,%M machines. %hro"ghp"t manip"lation co"ld #e
#y way of ro"nding off s"ms credited to different acco"nts and siphoning of the ro"nded
digits to another acco"nt. Bther types of comp"ter fra"ds co"ld #e #y way of
34@
"na"thori+ed access to comp"ters #y hac$ing into systems or stealing passwords,
deli#erate damage ca"sed to comp"ter data or programs thro"gh %ro0an Horse or 7ogic
Bom#, comp"ter forgery 6changing of data or images stored in comp"ters9 and
"na"thori+ed reprod"ction . modification of comp"ter programs. Recently, c"stomers of
a #an$ received email as$ing them to provide re("ired data for verifying acco"nt
information and many of the c"stomers who responded #y giving their 2IN n"m#er and
password reali+ed later that it was a Spam mail from "n$nown fra"dsters. In another
reported case a -hinese national hac$ed into 41 online acco"nts at Singapore Ban$
=BS, transferred O 8:,555 into his acco"nt, withdrew the money at a #an$ #ranch and
then fled to neigh#oring co"ntry Malaysia. It is #elieved that hac$er might have "sed a
%ro0an horse programme to capt"re "ser $eystro$es to learn identification codes and
pass words.
;8C Role of !nsiders: ,s per st"dy cond"cted #y S%,N=,R= RESE,R-H INS%I%F%E
611)?9 the o"tsiders committed only 18< fra"ds
whereas internal people li$e "sers committed 8?< and
system people committed 4>< of the fra"ds. %his
indicates that disgr"ntled employees li$e operators and
system administrators commit most of the fra"ds. %he
reason is that these insiders have a good
"nderstanding of the systems and wea$nesses in
controls and hence are in an advantageo"s position to
e&ploit the loopholes easily. Bther important reasons of
comp"ter fra"ds are lac$ of $nowledge, alertness and
awareness among employees, la&ity in implementation
of sec"rity policies, non)compliance of system and
proced"res, improper allocation of d"ties, wea$ sec"rity feat"res of the software and
negligence on the part of "sers 6employees9 in password management and in
cond"cting data consistency chec$s.
4.< Risk management and !-: (%he operational ris$ is generally associated with fail"re
of man, machine or the system. 3ith more and more reliance on comp"ter in #an$ing
operation, I% related operational ris$s have increased. %he operational ris$s are 6a9
Error Ris$ 6error made d"ring development.modification of comp"ter program, simple
error in data entry and mis"se of tool.facilities res"lting into inacc"racy of data, 6#9
-omp"ter fra"d ris$ 6s"ch ris$s are more when sec"rity and control system is not
34>
':+)/+,/ ,&'&+,%>
*)':*:=:& B1991-97C '=,F&?
56 :(e outsiders $ommitted
only 53* frauds6
36 Internal %eo%le li8e users
-ommitted 3C* and system
%eo%le $ommitted 3B* of t(e
frauds6
properly implemented9, 6c9 =isclos"re Ris$ 6accidental or intentional disclos"re of
c"stomerAs information is possi#le, and 6d9 Interr"ption Ris$ 6d"e to fail"re of the
comp"ter system9. 3ith this #ac$gro"nd, the Basel -ommittee II has advised #an$s that
all ris$s arising o"t of electronic #an$ing sho"ld #e recogni+ed, addressed and managed
#y #an$s in a pr"dent manner.
A8 !mplementation of !- Security /anagement: (
8.1 !- Security /anagement Best %ractices: ( Best practices are set of commercially
proven approaches to I% sec"rity management that, when "sed together, stri$e at root
ca"se of sec"rity pro#lems. %he application of these #est practices in a "nified manner
helps the #an$s in designing its sec"rity policy in effective and integrated manner.
34B
:*P' () P>?'*%+7 +%%&''
%():,(7
56 o not allo' visitors into
'or8station area6
36 Nee% $om%uter s$reen out of si&(t
of visitors6
36 Nee% server lo$8ed 'it( minimum
a$$ess6 It s(ould be va$uum
$leaned and mo%%ed 'it( 'et
$lot(6
@6 o not leave $om%uter 'it(out
lo&&in& out6
>6 /o smo8in& in $om%uterLserver
room6 Install <alon based fire
e,tin&uis(ers
A8; !- Security /anagement(%rinciplesL) I% sec"rity management in #an$ has #een
esta#lished on the two #asic principles, the
principle of =least privilege7 and that of =maker
and checker78 %he principle of least privilege
means that "ser is given access to the system
strictly on the @need to $nowA #asis and is given
only those rights to access data and programs,
which are in line with his d"ties 60o# allocation9
and responsi#ilities. 3hile giving lesser rights
than re("ired may decrease the efficiency of
wor$ing, giving more rights has associated ris$s
of mis"se or possi#le fra"ds. Here "nderlined
o#0ective is to $eep the $nowledge of the
officials handling the comp"ter transactions limited to their f"nctional responsi#ility so
that possi#ility of s"ch officials ca"sing the
sec"rity ris$ is minimi+ed. %he 0o# .d"ty
allocation sho"ld #e done #y proper office)
order.memorand"m so that there is clarity in
responsi#ility on one hand and proper record is
$ept on the other hand for f"t"re reference.
%he principle of @ma$er and chec$erA means
that for each transaction, there m"st #e at least
two employees necessary for its creation and
validation. 3hile one may create a transaction,
the other sho"ld #e involved in confirmation or
a"thori+ation of the same. In this way, the
system e&ercises d"al control in recording .
committing transactions.
A8A %hysical &ccess Control and the
Hard0are management ( -he first step in
prevention of fra"ds in comp"teri+ed systems
involves setting "p of proper physical access
control on the hardware. %he physical access
control means physical protection and access control of comp"ter and networ$ systems
34C
:*P' ()
7(.*%+7 +%%&'' %():,(7
56 -(e$8 a$tive user I to ensure
t(at all users I are aut(oriFed
one6
36 o not allot more t(an one I to
one user6
36 +du$ate em%loyees to 8ee% t(e
%ass'ord se$ret and to $(an&e t(e
%ass'ord %eriodi$ally6
@6 )ssi&n I O %ass'ord to
(ard'are and soft'are vendors
and 8ee% a $lose 'at$( on t(eir
a$tivities6
>6 o data $onsisten$y $(e$8
%eriodi$ally6
B6 Ins%e$torL)uditors to $(e$8
$om%lian$e I: se$urity measures6
A6 Gob rotation7 dele&ation of ;ob7
$(e$8in& of re%orts7 assi&nments
of level et$6 must be done as %er
laid do'n system and %ro$edures6
546 Follo' disaster mana&ement
system6
and the devices. 2hysical controls are f"rther divided into preventive and detective
physical control. 2reventive physical control shall incl"de access control thro"gh sec"rity
g"ards, installation of code loc$s, smart card driven door opening devices or modern
#iometrics devices 6which control the access on the #asis of certain individ"al
characteristics s"ch as finger)prints9. 2rotection to peripheral "nits 6terminals, printers,
and modems9 can #e provided #y $eeping them in room and allowing.restricting
physical access only to a"thori+ed persons. =etective physical controls incl"de smo$e
and fire detectors, closed circ"it television, sensor and alarms. No smo$ing in
comp"ter.server room sho"ld #e permitted and appropriate type of fire e&ting"ishers
sho"ld #e installed to have protection from accidental fire. -ontrol. s"pervision is also
e&ercised on ta$ing o"t comp"ter devices or tape.dis$ette #y the vendor for
maintenance as it may carry important.sensitive data, which may #e mis"sed. 7astly all
employees sho"ld #e ed"cated a#o"t physical access control as they are important
element of sec"rity chain.
A8C 1ogical &ccess Control and the Soft0are management /If software is
o"tso"rced, it is first c"stomi+ed after d"e re("irement analysis and design control. ,
("ality a"dit is also cond"cted #y a relia#le software)testing agency. %o p"t in place
logical access control system 6i.e. controls over operating systems, data#ase systems
as well as application systems9 each "ser is allotted an FSER I= and a 2,SS3BR= as
per his 0o# hierarchy 6s"ch as #ranch manager, =B,, officer, operator, a"ditor etc.9 to
limit his access to the system as per his powers 6a"thority9. =B, . #ranch manager m"st
periodically chec$ from active "ser I= list that no "na"thori+ed I= is e&isting in the
system and I=s of retired employees . transferred employees .deceased employees .
employees on dep"tation to other #ranches . employees on long leave have #een
disa#led. He sho"ld also ens"re that not more than one I= is allotted to a single "ser.
Iendors sho"ld #e allowed access to the system 6where hardware and software has
#een o"tso"rce9 s"#0ect to proper log in and log o"t #y allotting temporary "ser I= which
m"st #e s"spended.deleted immediately on completion of the 0o# #y the vendor. System
,"ditors . Internal Inspectors sho"ld also do necessary chec$ing while cond"cting
comp"ter a"dit to ens"re compliance of I% sec"rity g"idelines.
A8< %ass0ord /anagement:( %he password is a $ey to commit a transaction in the
system and is a tool of access control. In prevention of fra"ds, proper password
management #y the "sers is very important. %he password management incl"des
password validation 6a "ser is disa#led after say three "ns"ccessf"l log in9,
34?
password aging 6"ser is o#liged to change password periodically say within 85 days9
and password ("alification 6password is made #y mi& of alpha, n"meric and special 6li$e
S, ), O9 characters which can not #e anticipated and deciphered #y "na"thori+ed
persons9. 2asswords are $ept one way encrypted in the system, so that even a "ser
with higher rights does not $now the passwords of other "sers. 3ith an average
employee having 14 passwords every year, remem#ering them has #ecome a diffic"lt
0o#. %he pro#lem gets compo"nded when the same employee has to access m"ltiple
systems and m"ltiple servers for which he need to have n"m#er of passwords. No
do"#t, if an employee forgets his password, he can approach the =B,.BM for another
password, #"t precio"s time is wasted in doing this e&ercise in which cost too is
involved. Hence software sol"tion has #een developed for an a"tomatic password
management system. %he employee, who has forgotten his password, can log into the
system and can answer the ("estion, which the system will as$ If he identifies him)self
right, the system allots him a new password witho"t any h"man intervention. %he "ser
m"st #e ed"cated to $eep his password strictly secret and in that process ta$e all
possi#le preca"tion so that his password is not mis"sed. In case it is felt that password
has #een compromised, it sho"ld #e changed immediately. In one reported case, the
perpetrator was a#le to change the #orrowerZs limits #y sharing the password of the
a"thori+ed personnel. %his s"ggests that the password cannot 0"st #e treated as a
friendly word. %his aspect in the Indian wor$ c"lt"re needs to #e closely loo$ed into and
the system of password management has to #e made foolproof. ,ll staff.officers sho"ld
#e advised that in case of mis"se of the password they wo"ld #e held acco"nta#le.
A8D $ata Consistency Checks) Software is designed to $eep a chronological record of
the events occ"rring in the system 6i.e. commands e&ec"ted #y the "sers, actions on
files, messages displayed #y the system, reso"rces cons"mption #y the "sers,
transaction entry and sec"rity violations9 in the form of a"dit trails. %hese can #e
retrieved as and when re("ired to $now the details of the "sers. Hard copies of these
trails are also periodically ta$en, chec$ed and filed for reference. %he #ranch officials .
=B, has to carry o"t data consistency chec$ as also other chec$s s"ch as B,7,N-E
-HE-J %HRBFDH SM7 on reg"lar intervals and any discrepancy, even if minor, sho"ld
immediately #e doc"mented for logical analysis and rectification. %he #ranch in)
charge.=B,. m"st ens"re that access to SM7 mod"les are made strictly as per office
order* a"dit trails of SM7 access are printed and safely filed.
34A
A89 !C Check# Check Sum and Hash -otal Check( Software sol"tion "s"ally contains
some simple #"t effective processes li$e I- chec$, chec$ s"m or hash totals to ens"re
protection and integrity of data. =B,. manager m"st chec$ periodically that I- chec$ .
chec$ s"m . hash total chec$ is not disa#led and is effectively "sed to chec$ data
integrity and consistency.
A8L Compliance of System and %rocedures) %he system and proced"res as
prescri#ed #y the #an$ s"ch as assignment of d"ty thro"gh office order, 0o# rotation,
passing of transaction singly .0ointly as per delegated a"thority, recording of entry
n"m#er on the vo"cher, chec$ing of financial and non financial a"dit trails, chec$ing of
financial a"dit trails with vo"chers, printing of month.("arter end reports etc, sho"ld #e
metic"lo"sly o#served. Branch manager m"st s"pervise compliance of these
instr"ctions as is done in the man"al system. %he old dis$.tapes sho"ld #e erased .
formatted and "seless printed reports sho"ld #e shredded as it may contain
sensitive.important information.
A8?@ &dditional Security -ools()In net)wor$ environment the following additional
sec"rity tools are "sed)
*a+ $ata Encryption)It scram#les the data #efore and d"ring transmission and is "sed
as a tool for data protection. In case encryption is not done it is possi#le for the other
people to view the page when it is transmitted.
*b+ ire Eall)It is first line of defense from the o"tside. 'irewall acts as sec"rity g"ard for
#an$As internal networ$, filtering all incoming traffic from the Internet or networ$ing.
T !ntrusion $etection System( *!$S+( It scans the net)wor$ for a#normal activity,
"na"thori+ed reso"rce access and sec"rity #reaches. It protects networ$ from #oth
inside and o"tside access
*d+ 3ey /anagement)It acts li$e G$eyH to access encrypted data and affords ma&im"m
protection to protect data from "na"thori+ed parties. It is "sed in con0"nction with
encryption to limit the n"m#er of eyes reading encrypted file.
*e+ $igital Certificates:(It is an electronic identification card that esta#lishes "ser
credential while doing Internet #an$ing. It verifies the a"thor of the message or if the
message has #een tampered in transit.
*f+ Hirus $etection( It scans the networ$ for vir"s)#oth prevention and c"re.
6g+ Security Solution( Sec"rity sol"tions are also availa#le to +ero in more effectively
on indicators with massive amo"nt of data to alert them on potential or ongoing
354
pro#lems. %hese sol"tions provide for analysis and doc"mentation capa#ilities for
discovering, preventing, remedying and prosec"ting inappropriate or malicio"s #ehavior.
*h+ Iero !nteractive &uthentication *I!&+ In order to o#viate sit"ations when laptop
or des$top falling into wrong hands either d"e to theft or remaining "nattended, NI,
manages the a"thentication process "sing 2authentication token5 which "ser has to
wear 6e.g. li$e a wrist watch9 to remain in constant to"ch with the 2-. ,s long as
laptop.des$top is a#le to contact the to$en the comp"ter f"nctions normally and once the
contact is #ro$en all the data inside is a"tomatically encrypted.
*i+ -0o factor authentication(%he two factor a"thentication re("ires a c"stomer to go
thro"gh a two)step a"thori+ation process. ,fter a c"stomer $eys in his "sername and
internet #an$ing password to access to his acco"nt, another sec"rity screening is
sched"led if the c"stomer wants to carry o"t a transaction. %he second stage of sec"rity
screening involves the mo#ile phone. 3hen a c"stomer clic$s on the transaction men"s,
the system generates a one)time "se transaction password and sends it to mo#ile hand
set with the c"stomer "sing the short messaging service.
A8?? %utting System to !ndependent &udit( %he wor$ing gro"p to review the Internal
-ontrol and Inspection .,"dit Systems in #an$s 6Cilani -ommittee9 recommended for
E=2 a"dit in chec$ing data integrity, sec"rity and control meas"res s"ch as system
development, system maintenance, application control, data sec"rity, data access and
contingency planning. %o cond"ct s"ch test, E=2 a"ditor sho"ld frame logical ("estions
s"ch as /
6a9 Is it possi#le to earn higher rate of interest on a deposit acco"nt than a"thori+edR
6#9 Is it possi#le to pre)close a fi&ed deposit and still earn f"ll interestR
6c9 Is it possi#le to ma$e #ac$ dated correction .modification after day end processR
6d9 Is it possi#le to ma$e correction . modification #y a "ser singlyR
6e9 Is it possi#le to access program . files . setting meant for higher level #y a lower
"serR
6f9 Is it possi#le to ma$e changes in parameter setting, master data, transaction data
etc. witho"t reflecting in a"dit trailR
6g9 Is it possi#le to #ypass printing of mandatory a"dit trailsR
6h9 Is there any transaction, which is not associated with any I=R
6i9 Is there any transaction not associated with any a"thori+ed I=R
%he E=2 a"dit sho"ld cover compliance chec$ on all technology and process related
sec"rity aspects to detect violation. #reaches if any. 2ro#lem detected sho"ld #e
355
appropriately doc"mented to s"pport remedial action. Ban$s own inspectors . a"ditors
sho"ld also #e ed"cated and trained in cond"cting s"ch a"dits.
A8?; Business Continuity %lan *BC%+ and $isaster Recovery %lan *$R%+: ( , cr"cial
element in I% sec"rity management is B-2) the "#i("ito"s terms covering events
ranging from any disastro"s event thro"gh to
assessment, mitigation and contin"al readiness to
f"t"re disasters and =R2 ) to ade("ate d"plication of
important files and applications and storing them off)
site for recovery of data either d"e to sa#otage or d"e
to nat"ral calamity s"ch as flood, fire, earth("a$e etc.
%he event li$e .11 has re)esta#lished the need of
proper B-2 and =R2 policies. J2MD s"rvey of
#an$s.'Is o#served that only 81< of #an$s.'Is have
doc"mented and tested B-2. *See bo)+ %he methods
commonly "sed for data protection are ) 6I9 %ape or
floppy #ac$ "p, 6ii9 Mirroring, 6iii9 =ata D"arding, 6iv9
="ple&ing, 6v9 2artitioning, 6vi9 -l"stering and 6vii9
Replication. In ,72M and %BM environment floppy . dis$ette #ac$ "p system is generally
adopted where two sets of #ac$ "p are generally ta$en each day, while one set is stored
in fire proof ca#inet at the #ranch it)self other is stored off site. %he month end, ("arter
end and half year end #ac$ "p is also ta$en and $ept off site as well as on site in the
same manner. %he #ac$ "p floppies . tape sho"ld #e properly leveled and a record is
maintained in #ac$ "p register mentioning location where these are $ept. %he periodical
testing of the #ac$ "p media sho"ld #e done to chec$ their correctness and relia#ility.
%he floppies . tape sho"ld also #e changed periodically to ta$e care of wear and tear.
%he #an$s with core #an$ing sol"tion $eep #ac$ "p #y mirroring data#ase off)site.
C8Role of Higilance: (
C8? No System is ?@@: Secure) No system is considered 155< foolproof as fra"d"lent
money transfers has occ"rred even in a highly a"tomated and sec"re f"nds transfer
systems. ,s technology is ta$ing rapid strides 6for fra"dsters as well as organi+ations9,
#an$s are discovering that they have to constantly "pgrade and improve their
technological tools. However, these tools can only red"ce the possi#ility of fra"d and not
totally r"le it o"t.
353
DPM. '=,F&?
,&'P()/&): 0,(M
;+)D*). +)/ 0 *
56 35* (ave do$umented
and tested .-P6
36 A* did not (ave any
.-P6
36 34* are develo%in&
%lan6
@6 5C* (ave lo$al or
%artial %lan6
>6 53* do$umented but
untested %lan6
;est ;%P $s oneL
wh$ch $s ne-er
$m"4emented.
C8;.1o0 Risk and High %rofit Business) -omp"ters crimes are considered as low ris$
and high profit #"siness as these can #e committed #y comparatively with m"ch less
investment and high gains 6recovery in many cases is an endless and fr"itless e&ercise9
with lower possi#ility of conviction as co"rts in India ta$es years to decide cases
6average time is 1: to 45 years9 with very low conviction rate 6average > <9. It is,
therefore, pr"dent to follow preventive meas"res to avert potential fra"ds than to face a
comple& process of p"nitive action.
C8A %revention is better than cure) %he sec"rity #"ilt aro"nd technology always comes
at a cost. Hence, while finding technological sol"tions to sec"rity or fra"d control, #an$
cannot ignore the cost of technology and some trade off is always made. S"ch trade off
is tac$led in con0"nction with normal vigilance mechanism partic"larly thro"gh preventive
vigilance. %he comp"ter preventive vigilance shall incl"de meas"res s"ch as)
6a9 Improving employeeAs $nowledge thro"gh 0o# card, comp"ter man"al etc. and
develop innate ha#it of metic"lo"s o#servance of system and proced"res,
6#9 -ond"cting system)a"dit of comp"ter operations at #ranches to detect cases of
non )compliance and ta$ing corrective meas"res,
6c9 Engaging ethical hac$ers to chec$ possi#le sec"rity #reaches in net wor$
environment and to pl"g the loop holes,
6d9 =oing 0o# rotation of comp"ter operators.officers as per e&tant r"les to chec$
growing vested interest,
6e9 -irc"lating case st"dy of comp"ter fra"ds among #ranches. employees to #"ild
foresightedness among employees for close o#servance of s"spicio"s #ehavior.
movement of colleag"es . o"tsiders and reporting the same to higher a"thority
confidentially, and
6f9 -ond"cting seminar . wor$shop. training programs in the area of password
management, software and hardware management, physical and logical access
control, disaster management etc.
C8C Educate 4our Customers(Effective sec"rity management is done thro"gh
com#ination of meas"res and ed"cating c"stomer is one of the $ey components of e)
sec"rity. , #an$ sho"ld advise its c"stomer to 6a9 $eep 2IN or password of ,%M.internet
acco"nt safe.confidential, 6#9 Be wary of "nsolicited email or telephone calls as$ing them
for any personal detail li$e card n"m#er or 2IN, 6c9 ,ccess internet #an$ing acco"nt #y
typing #an$ address instead thro"gh hyper lin$ and never go to a we# site from lin$ in
353
email and enter personal details and 6d9 ,dvise c"stomers to "se "p to date anti vir"s
software, sec"rity patches and personal fire wall.
C8< %reventive vigilance( Monitoring of transactions) Monitoring is essential part of
preventive vigilance. It is essential to do day to day monitoring of 6a9 new acco"nts 6#9
large val"e transactions especially in new acco"nts, 6c9 large val"e collection especially
in new acco"nts, 6d9 transaction in inoperative acco"nt, 6e9 transaction a#ove c"t off limit
in staff or staff related acco"nt, 6f9 e&pendit"re variation and 6g5 concession in interest,
commission etc. In -BS environment #an$ can a"tomatically monitor o"t of profile
transactions thro"gh specially designed software.
C8D $etective and %unitive Higilance ( In a comp"teri+ed environment, #an$s are
increasingly e&posed to operational)ris$ as sco"ndrel #elieve that their action is near
impossi#le to detect, if detected near impossi#le to prove, if proved nearly impossi#le to
convict and if convicted, amo"nts nearly impossi#le to recover. %he pro#lem is
compo"nded in networ$ed #an$s operating in different nations with different laws.
=espite these limitations, fra"ds perpetrated from across the glo#e have #een detected
and amo"nts recovered #y proper com#ination of technology and vigilance s$ills. Hence,
while inspectors.a"ditors contin"ally m"st caref"lly watch incidences and pl"g the holes,
vigilance people sho"ld improve their s$ills and actively follow "p cases) #oth internal
departmental en("iry and co"rt cases) for p"nitive action.
(@(@(@(
35@
%ha"ter-35
S*ort Notes on im+ortant to+ics
&griculture 3isan Credit
Card
%he Jisan credit -ard 6J--9 scheme was
introd"ced in 1!) to ena#le farmers to
p"rchase agric"lt"re inp"t and draw cash for
their prod"ction needs. %ill =ecem#er end
455! #an$s have iss"ed 8:.5! million $isaan
credit cards 6J--9 with sanctioned limit
aggregating to Rs.1??>5? crore.
,ll farmers having agric"lt"ral land whether
irrigated or "n)irrigated are eligi#le. 'i&ation of
loan is done on the #asis of operational land
holding, cropping pattern and scale of finance.
%he validity period of J-- is three years
s"#0ect to ann"al review.
In a st"dy, the RBI has discovered that
farmers are not too $een to have J--, as
some of them are well to do, some held 0o#,
some are c"ltivating land "nder oral lease or
"nder contract #asis, some are not having
land holding certificates and some are share
cropper. %he lac$ of "pgradation of land
record, small land holding and illiteracy of
#orrowers has #een some of the other
pro#lems hindering J--.
%he Iyas -ommittee has recommended ,%M
ena#led cards.
&griculture Rural housing
sche
me
Dolden C"#ilee R"ral Ho"sing 'inance Scheme
6D7RH'S9 has #een designed to address the pro#lem
of r"ral ho"sing)Iillages.town.cantonment.notified
area "pto pop"lation of :5555 as per 11 cens"s is
covered. 7oan for constr"ction "p to :,55,555 and
repair .renovation "pto :5,555 can #e considered.
35>
Schoolteacher, service holders, progressive farmers
and #"sinessmen can #e target gro"p. 7oan period is
1: year and margin is 88<, which can #e rela&ed #y
#an$.
35B
&griculture Service area
appr
oach
Service area approach 6S,,9 was introd"ced in ,pril
1! to #ring a#o"t an orderly and planned
development of r"ral and semi)"r#an areas of the
co"ntry. Fnder the scheme all r"ral and semi)"r#an
#ranches of the #an$s in the co"ntry were allocated
specific villages for over all development and credit
needs. 3ith a view to provide opport"nity to r"ral
#orrower to have wider choice and easy access of
credit facilities, RBI has now decided that allocation of
villages among the r"ral and semi)"r#an #ranches of
#an$s shall not #e applica#le for lending e&cepting
"nder government sponsored scheme. '"rther the
re("irement of no d"es certificate from service area
#ranches of allocated #an$ will also stand dispensed
with.
C&%!-&1
/&R
3E-
!N-ERES-
R&-E SE&%S
It is a financial instr"ment of ris$ hedging. =epending
"pon ris$ perception of interest rates, a person having
fi&ed interest loan may swap with floating interest loan
thro"gh a financial intermediary say a #an$.
Capital /arket Credit
$erivatives
/arket ( C$S
, financial derivative is an instr"ment that allows ris$
to #e transferred from one party to the other. , credit
derivative is a contract that allows the credit ris$ 6or
the ris$ of defa"lt9 of a loan or #ond to #e separated
and transferred to another entity, independent of the
assets. , simplest form of credit derivative is -=S)
-redit =efa"lt Swap in which credit protection #"yer
pays to credit protection seller a periodic fi&ed
payment of fee in ret"rn of protection of defa"lt.
Reserve Ban$ has iss"ed draft g"idelines for -=S
where#y RBI reg"lated gentilities may #"y credit
protection on #onds they hold. %he credit protection
can #e sold #y #an$s and finance companies with net
worth of over Rs.:55 crores and non performing loans
less than 8< with capital ade("acy of 14< for #an$s
and 1:< for non #an$ing companies. Biggest gainers
35C
will #e large corporate partic"larly infrastr"ct"re
companies as #an$ after credit protection cover can
go on ma$ing advance as e&pos"re will #e ta$en
against seller of protection and not against the
#orrower.
3hile the proposal in general has met with positive
response, #"t e&pert say that incl"sion of 'IIs will
provide the depth to the mar$et and two way interest
#oth to sell and #"y protection. ,nother s"ggestion is
that investor in certificate of deposit and commercial
paper sho"ld #e allowed #y #"y protection.
35?
Capital /arket Negotiated
$eali
ng
Settl
emen
t
Syst
em
Negotiated =ealing System 6N=S9 is an electronic
platform for facilitating dealing in Dovernment
Sec"rities and Money Mar$et Instr"ments. N=S
facilitates electronic s"#mission of #ids.application #y
mem#ers for primary iss"ance of Dovernment
Sec"rities #y RBI thro"gh a"ction and floatation. %he
system of s"#mission of physical SD7 transfer form
for deals done #etween mem#ers will, on
implementation of N=S, #e discontin"ed. N=S will
also provide interface to Sec"rities Settlement System
6SSS9 of 2"#lic =e#t Bffice, RBI, and there#y
facilitating settlement of transactions in Dovernment
Sec"rities incl"ding treas"ry #ills, #oth o"tright and
repo.
C&%!-&1
/&R
3E-
.%-!.N
!nstrument of
hedg
ing
of
inter
est
rate
risk8
B"yer of option is given option to #"y assets while
seller of option is given option to sell assets.
-,77 B2%IBN
3hen option holder can e&ercise his right to #"y
assets at pre determined price and period after paying
option fee. It is profita#le in #"llish mar$et.
2F% B2%IBN
3hen option holder can e&ercise his right to sell
assets at pre determined price and period after paying
option fee. It is profita#le in #earish mar$et.
7IMFI=I%1 ,=CFS%MEN% ',-I7I%1 B' RBI
RE2B E REIER RE2B
RBI cond"ct RE2B to s"c$ li("idity #y #"ying sec"rity
with option to seller to #"y them #ac$ at pre
determined price and date. RBI also cond"cts
REIERSE RE2B inf"se li("idity #y selling sec"rity
with option to #"yer to sell #ac$ the sec"rity at pre
determined price and date. Repo and Reverse repo
are considered as #enchmar$ rate for short)term
deposit.
35A
C&%!-&1
/&R
3E-
!NHERSE
1.&-ER
It is an innovative instr"ment. -o"pon rate is
inversely related to the direction of interest rate.
Drasim has iss"ed Rs :5 crores inverse floater
carrying yield #etween 1;< and 1 year gilt yield.
Instr"ment gives investor ;5 #ps mar$er over gilt
yield.
Credit Capital /arket
(E)p
osur
e
Norm
s
1. E&pos"re norms for capital mar$et has #een
fi&ed at :< of o"tstanding advances with a
rider that #an$s having #etter ris$
management practices can #e permitted on
case to case #asis to have more e&pos"re.
4. RBI has recently permitted H='- #an$ to
have capital mar$et e&pos"re "p to 15<.
Credit Credit
coun
sellin
g
8. , credit co"nselor helps the #orrower toL)
6a9 %o eval"ate his.her c"rrent financial stat"s,
6#9 %o ma$e a detailed review of his.her income,
assets and e&penses,
6c9 %o find o"t personali+ed o"tcome to get over the
his.her pro#lem,
6d9 %o draw detailed de#t management plan,
6e9 %o wor$ with lending #an$ on vol"ntary #asis to
waive or red"ce financial charges s"ch as late
fees, penal interest , finance charges etc,
6f9 %o form"late a de#t restr"ct"ring plan m"t"ally
accepta#le to #orrower as well as the #an$.
%he o#0ective is to ma$e the #orrower feel that in his
ho"r of crisis there is someone to help him o"t of the
sit"ation.
Credit actoring 'acility in the area of credit collection and invoice
management.
=isco"nting of #ills.
-redit screening and collection of #ills.
Invoice management.
334
3ith reco"rse and witho"t reco"rse /#oth.
E&port factoring also #y E-D- ) Special
emphasis for SSI.
335
Credit Regulating the
0arehousing
sector
Salient feat"res of 3areho"sing 6=evelopment and
Reg"lation9 ,ct, 455?L)
B#0ect of the act is to ma$e provisions for the
development and reg"lation of wareho"ses,
negotia#ility of wareho"sing receipts and
esta#lishment of a wareho"sing development
and reg"latory a"thority. ,ct will facilitate the
wareho"se receipt as doc"ment to title of
goods and raising finance there against wo"ld
#e easy as it wo"ld #e tantamo"nt to implied
pledge.
Negotia#ility of wareho"se receipt is
esta#lished #y law.
7aw recogni+es the wareho"se receipt in
electronic form.
Registration of wareho"se is now mandatory.
E&isting wareho"se will have to o#tain
registration within 85 days of the act.
%he concept of accreditation agencies for
iss"ance of certificate of accreditation to
wareho"ses iss"ing negotia#le wareho"se
receipt has #een introd"ced.
,ny e&isting or f"t"re wareho"se not intending
to iss"e negotia#le wareho"se receipt will not
#e governed #y the law.
333
Credit .R&!-!N6 Non)reco"rse disco"nt of e&port receiva#le.
ETIM #an$ offers this facility.
Is done for disco"nt of capital goods or contract of
long)term lia#ility.
Bac$ed #y g"arantee of importer #an$ for
payment.
E-D- has offered non)reco"rse forfaiting prod"ct
thro"gh #an$s where E-D- will #ear the credit ris$
for e&porters.
Credit -easer Rates %hese are loans where the interest rate is fi&ed at
an attractive rate for an initial pre determined
period after which it ceases to #e fi&ed and
#ecomes floating rate of interest. Ban$sA recently
la"nched special schemes for home loan offering
teaser rates inviting criticism from different
("arters. It is #eing arg"ed that #an$s are not
ta$ing care of servicea#ility of these loans and
there is li$ely hood of defa"lt when the pre
determined period will #e over and rate will #e
lin$ed to mar$et rates.
%he teaser rates have also raised voice of
discrimination from e&isting #orrowers of the #an$
who is crying fo"l as they are paying at least 155
#ps more than the new #orrowers. Ban$s
arg"ment is that offering same rates to old
#orrowers wo"ld crate assets)lia#ility mismatch
and therefore their ina#ility to agree.
Credit !nfrastructure
finan
cing
%o achieve s"stained D=2 growth of <, DBI has
envisaged investment of aro"nd O:55 #illion in
infrastr"ct"re sector in 11
th
'ive year plan 6455?)
149. It is #elieved that infrastr"ct"re will #e the
ne&t driver of growth and the companies in
infrastr"ct"re co"ld grow the same way the
software companies grew in the last decade.
333
Roads, %ransport, -omm"nication, 2orts, Energy,
Hospital, %elecom, Healthcare, Ed"cational
Instit"tional and storage facility for farm sector
incl"ding cold storage form infrastr"ct"re.
In the past, the government did infrastr"ct"re
financing #"t limited #"dget reso"rces have
opened option for private sector and hence
financing #y #an$s.
DBI is providing incentive #y e&tending ta&
concessions and ta& holiday.
Infrastr"ct"re =evelopment 'inance -ompany)set
"p in 1?) to do infrastr"ct"re financing in #ig
way.
SEN financing has also come "p as opport"nity for
#an$s and financial instit"tions as many as 1:;
special economic +ones have #een approved
which provide opport"nity to fiancP captive power
generation, roads, waste disposal and township
development.
!ssues((
Infrastr"ct"re is capital intensive and high cost
oriented. 3or$ing capital re("irements are
relatively less. Repayment period is long incl"ding
gestation period, which creates pro#lem in &sset
1iability mismatch for the #an$s. RBI vide credit
policy of May 455; has permitted #an$s to raise
long terms f"nds 6 not less than : years9 for
infrastr"ct"re financing thro"gh #onds 6 not in the
nat"re of s"#ordinated de#ts9
Sec"ritisation and ta$e o"t finance are deemed as
most s"ita#le to #an$ for infrastr"ct"re financing
from ,7M angle.
'"nds re("irements are h"ge and small and
33@
medi"m #an$s find it diffic"lt to meet the
re("irement within ET2BSFRE NBRMS. 61:< of
net owned f"nds of #an$s for individ"als and ;5<
of net owned f"nds of #an$s and e&tra 15< for
infrastr"ct"re for gro"p9. RBI vide credit policy of
May 5; has empowered #an$As #oard to e&ceed
limit #y :< of individ"al.gro"p e&pos"re.
%o0er sector problem:
$utstanding de!t o' state po-er uti"ities
)ave gro-n to a staggering 86 "a1) crore
or 6= o' t)e ;:&. 8oug)"* a t)ird o' t)ese
are "oans ta1en to 'und past "osses -)ic)
cannot !e serviced t)roug) tari> )i1es and,
)ence, are !eing considered 'or a !enign
restructuring !* t)e Centre.
0eed"ess to sa*, t)e extree inde!tedness
o' t)ese uti"ities is attri!uta!"e to state
governents t)at don.t "et regu"ators
increase tari>s in tande -it) rising costs,
"eading to a constant"* -idening revenue-
expenditure gap at t)e uti"ities.
#)is underines t)eir a!i"it* to invest and
t)-arts ?ndia.s a!itious p"an to u"tip"*
its po-er generation capacit* and create a
copetitive po-er ar1et.
According to 8eserve 2an1 o' ?ndia data,
outstanding de!t o' po-er uti"ities to !an1s
)as gro-n !* 56= in t)e t-o *ears to @une
2%12 A 'ro 82.1 "a1) crore to 83.3 "a1)
crore.
$ver t)e "ast one *ear, t)e increase in t)is
de!t !urden -as 4%=, suggesting an
acce"eration in t)e addition to t)e
"ia!i"ities, o-ing ain"* to t)e re"ent"ess
rise in 'ue" costs.
;overnents pandering to t)e e"ectorate
)ave eit)er st*ied or staggered t)e pass-
t)roug) o' 'ue" price-driven cost increase,
stiBing t)e uti"ities in t)e process.
C)i"e t)ese are t)e "oans ta1en 'ro
33>
!an1s, t)e uti"ities a"so o-e !ig aounts to
specia"ised agencies 'or po-er sector
fnancing - t)e &o-er +inance Corporation
581.3 "a1) crore6 and 8ura" E"ectrifcation
Corporation 5881,725 crore6. #)at adds up
to soe 85.4 "a1) crore. ?' "ia!i"ities to
ot)er institutions "i1e D?C and ?:+C and t)e
externa" coercia" !orro-ings too are
inc"uded, t)e tota" !urden -ou"d easi"* !e
a!ove 86 "a1) crore.
According to Crisi", un"ess !ig re'ors are
underta1en to ste "osses and spur
revenue streas, t)ese "ia!i"ities -ou"d
gro- 'urt)er to 87.3 "a1) crore !* Earc)
2%13. #)is "oo1s "i1e a reasona!"e estiate,
given t)at annua" "osses 5a'ter receipt o'
su!sid*6 o' discos in t)e countr* -ere
842,415 crore in 2%%9-1%, up 18= over t)e
previous *ear.
Ana"*sts sa* an* states continue to 'o""o-
a cautious and staggered approac) on tari>
)i1es despite t)e )e't* increase in
e"ectricit* purc)ase costs in recent *ears.
According to ?cra, 8a/ast)an needs to )i1e
tari> !* 8%=, Ead)*a &rades) 65=, #ai"
0adu 55= and &un/a! 24= to !ridge t)eir
discos. revenue gaps. (uc) tari> s)oc1s
are, o' course, not po"itica""* 'easi!"e, and
care'u""* ca"i!rated tari> )i1es are
unavoida!"e, ana"*sts sa*.
$' course, soe states )ave o' "ate started
assessing t)eir discos. annua" revenue
re9uireents 5A886 and 'o""o-ed t)ese
-it) soe tari> )i1es, -)ic) are, again, 'ar
!e"o- -)at is re9uired. #)oug) soe
states )ave adopted provisions 'or
autoatic recover* o' increase in 'ue"
costs, ip"eentation reains patc)*.
(u!sidies 5eant to 'aci"itate c)eaper
po-er to 'arers and doestic consuers6
account 'or 2%= o' discos. tota" revenue
and de"a*s in t)eir pa*ent are a"so a
stress on t)eir fnances. #)ere is t)e 'aci"it*
o' regu"ator* assets - uncovered revenue
33B
defcit proposed to !e covered t)roug)
'uture tari> )i1es A -)ic) are aied at
preventing tari> s)oc1s, !ut t)is is not 'u""*
'unctiona" in ost cases.
A recent Crisi" report said t)at t)e s)are o'
!an1 "oans in t)e tota" capita" ep"o*ed !*
state po-er uti"ities rose 'ro 6%= at t)e
end o' 2%%7-2%%8 to 72= in 2%%9-1%. #)is
s)o-s t)e state governents. s)are in
capita" ep"o*ed )as s)run1 to a!*sa""*
"o- "eve"s. #)e agenc* )as recoended
autoatic pass-t)roug) o' 'ue" price-driven
cost increases and said t)at a"" unpaid
uti"it* su!sidies and regu"ator* assets
s)ou"d !e c)arged to t)e state
governent.s account !* t)e 82? !e*ond a
period of si& months. Crisi" a"so said t)at state
governents cou"d ta1e over t)e portion o'
"ia!i"ities incurred to 'und "osses under a
specifc arrangeent supervised !* t)e
82?.
33C
Credit /ortgage
6uar
antee
-om%any
RBI in its recent credit policy anno"nced
setting "p of Mortgage D"arantee -orporation
to g"arantee ho"sing loan granted #y #an$s
and financial instit"tions.
National Ho"sing Ban$ 6NHB9 is in disc"ssion
with -anada Ho"sing and Mortgage
-orporation for sharing $nowledge in the area
of mortgage g"arantee. %his concept is in
depart"re with earlier g"arantee scheme of the
government, which co"ld not find favo"r with
the #an$ and also with the #orrowers.
%he f"nding of India Mortgage D"arantee
-orporation 6IMD-9 was completed on C"ne
4, 4514 with all fo"r ma0or shareholder
contri#"ting their share vi+ Denworth 68><9,
,=B 618<9, I'- 6189 and NHB 68><9. NHB
has now approached RBI for granting
certificate of registration.
33?
Credit S.-E&RE %he ma0or driver of world economic growth today
is I%. I% ena#led service s"ch as -all -enters,
B2B 6B"siness 2rocess B"tso"rcing9 are new
growth areas. India has a good start in software
and has ass"med a leadership role.
2resently I% services and prod"ct contri#"te 1.?<
of D=2 which is li$ely to grow "pto ?.?< #y 455!.
,t present I% e&ports contri#"te 1;< of IndiaAs
e&port which is li$ely to increase to 8:< #y 455!.
N,SS--BM has pro0ected FSO 48 #illion #y
455!.
India spends 1.1< of D=2 on I% whereas FS,
spends :< of D=2 on I%. Even domestic mar$et
has good scope.
I%.I%ES 6I% ena#led services9 emerging growth
areas are)
6a9 2ac$aged software s"pport and installation,
6#9 I% cons"lting, net wor$ infrastr"ct"re
management,
6c9 Hardware s"pport,
6d9 Networ$ cons"lting,
6e9 Integration
Software e&porters can ac("ire sta$e in 'oreign
company they deal with to the e&tent of 4:< of the
e&port. %hey have to see$ RBI approval thro"gh
,=.
SEN has provided new growth opport"nity to the
ind"stry.
Merger, alliances and ta$eover have #ecome $ey
driver of growth in software sector.
inancing soft0are issues(
1. Software and I% is classified in fo"r categories 619
Software services /Staffing services and
33A
programme services at c"stomers location, 649
2ro0ect Services s"ch as c"stomi+ed software
development, systems sol"tion and integration
and maintenance of the software, 689 Software
pro0ects and pac$ages as standard prod"cts, and
6;9 I% related services s"ch as call centers,
mentoring, %ele)conferencing etc.
4. M2B') -ash #"dget system is ideal #"t wor$ing
capital assessment "pto Rs 4 crores can #e done
on t"rnover system i.e. 45< of pro0ected t"rnover
and for a#ove 4 crores cash #"dget system will #e
adopted and M2B' will #e determined #ased on
pea$ deficit in cash #"dget.
8. 'or wor$ing capital limits a#ove Rs. 15 crores,
-ash credit component will #e 45< of the M2B'
after e&cl"ding e&port credit and #alance as
demand loan.
;. %he #an$ has to fi& reasona#le margin e&cl"ding
e&port where margin will #e NI7.
:. Ban$s can also provide E("ity, Seed money and
Ient"re capital on case to case #asis with
pr"dential limit of :< of incremental deposit of the
previo"s year.
>. 2romoterAs #ac$gro"nd, his ("alification and
e&perience in developing software prod"cts is a
cr"cial factor in appraisal. Bther professional
manpower associated with f"ll commitment is also
to #e considered serio"sly. %he s"ccess of the
pro0ect depends "pon s$ills of the professionals.
Hence, #an$ sho"ld critically e&amine this aspect,
also to e&amine mar$eting a#ilities.
?. Monitoring) to o#tain ("arterly act"al cash flow
statement and compare it with pro0ected
statement, s"#mit DR forms and Softte& forms as
334
appropriate.
!. Ris$ factors are) a#sence of tangi#le c"rrent
assets, high o#solescence, fi&ed assets
depreciates rapidly, rate of fail"re is high, high
manpower t"rnover, prod"ct may t"rno"t non
mar$eta#le or overta$en #y the same prod"ct of
the competitors.
335
Credit /edium Scale
Enter
prise
DBI has approved definition of Medi"m Scale
enterprises to cover investments in plant and
machinery in an ind"strial "nderta$ing "pto Rs.
15 crores.
333
Credit Base Rate RBI has decided effective 1C"ly l 4515 to replace
the B27R system with #ase rate and hence the
rate of interest of #orrowers will now #e lin$ed to
#ase rate.
-riteria for determination of #ase rate as
ill"strated is cost of f"nds, cost of compliance of
-RR and S7R, profit margin and mar$ "p for cost
of operation for partic"lar prod"ct and premi"m
for credit ris$ and tenor of loans.
Ban$s will not #e permitted to lend #elow #ase
rate e&ception #eing lending against #an$As own
fi&ed deposit, lending "nder differential rate of
interest and staff loans.
Stip"lation of B27R as the ceiling rate for loans "p
to Rs. 4 la$h stands withdrawn.
Base rate will #e revised #y #an$s every three
months.
E&isting loans #ased on the B27R system may
r"n till their mat"rity. In case e&isting #orrowers
want to switch to the new system, #efore e&piry of
the e&isting contracts, an option may #e given to
them, on m"t"ally agreed terms. Ban$s, however,
sho"ld not charge any fee for s"ch switch)over.
Introd"ction of #ase rate is li$ely to change the
entire dynamics of credit, as short term loans
which are presently #e sanctioned #y #an$s at
s"#stantial disco"nt to 27R will vanish. It is
e&pected that 2SF li$e oil companies, fertili+er
companies etc. were raising short term loans at
:< to >< will have to factor in "p to :< rise in
interest rates.
It is arg"ed that #an$s are presently mispricing
loan and #ase rate system wo"ld p"t a stop to
333
s"ch system. Fnderc"tting of rates to compete
other #an$s will not #e possi#le.
2resently when interest rate increases #an$s
increases the 27R there#y increase the cost of
#orrowing #"t when interest rates falls #an$s do
not red"ce the 27R and d"e to this #enefit of cost
of red"ction is not passed to the #orrowers. Base
rate system will remove this anomaly.
It is also e&pected that interest yield of #an$s
wo"ld rise as #ase rate wo"ld end cross
s"#sidi+ation of interest rates.
Ban$s are in a fi& to decide parameters. 'or
e&ample to arrive at cost of deposit, #an$ can "se
overnight cost of f"nd, average cost of f"nds,
average cost of deposits or marginal cost.
7i$ewise for profit #an$ can "se net profit or
operating profit. RBI has clarified that #an$s are
free to decide methodology say cost of f"nds #"t
wo"ld not #e allowed to change. %hey free till
=ecem#er 4515 to change the methodology.
-ommercial paper all of a s"dden is in demand
from corporate who are seeing opport"nity to
raise money at m"ch cheaper rate than the
#orrowing at #ase rate.
'rom Monetary 2olicy perspective it was
e&perienced that B27R system was rigid and
change in policy rates was not reflected in the
change in interest rates.
RBI is li$ely to introd"ce s"n set cla"se so that all
#orrowers moves to #ase rate system in the
given time frame.
33@
$eposit
!nsur
ance
$eposit
!nsur
ance
=eposit ins"rance scheme is "nder review #y RBI. It
may #e recalled that the Cagdish -apoor committee
recommended to charge premi"m from #an$s as per
ris$ grade i.e. low ris$ #an$ sho"ld pay less premi"m
and high ris$ #an$ to pay high premi"m. Fntil March,
5; #an$s pay "niform premi"m of : paisa < on total
deposit that was raised to 5! paisa from ,pril, 5; and
will again #e raised to 15 paisa from ,pril, 5:. %he
stronger #an$s are raising o#0ection to pay e("al
premi"m as it amo"nts to cross s"#sidi+ation. IB,
also feels that instead of one si+e fit all approach the
premi"m sho"ld #e ris$ related. -ommittee has
recommended having separate f"nd for cooperative
and commercial #an$s and higher capitali+ation of
=I-D- at Rs. :55 croroes to #e f"nded #y RBI, its
promoter.
Credit Negative
amor
tisati
on
In rising interest scenario, when EMI is only a#le to
cover payment of interest, the sit"ation is $nown as
negative amorti+ation. In s"ch sit"ation #orrower is
left with only option of raising the EMI otherwise the
de#t can not #e repaid.
e(banking -he("e
%r"nc
ation
Syste
m
-he("e tr"ncation system is #eing started in the
co"ntry with a pilot pro0ect in the national capital
region. Ban$s glo#ally are loo$ing to ways and means
of red"cing cost in processing the che("es which
paper #ased processing system has. -he("e
tr"ncation system is electronic #ased che("e
presentment thro"gh mirror #ased approach and it
facilitates speedy che("e collection specially
o"tstation che("es. It may #e recalled that
Information %echnology ,ct 4554 co"ple with
amendment in NI ,ct has facilitates image #ased
processing of che("es thro"gh che("e tr"ncation
system.
oreign EU-ERN&1 So"rce of finance of corporate from #an$s,
33>
E)ch
ange
C./
/ER
C!&1
B.R
R.E
!N6
*ECB+
ins"rance f"nd, foreign e("ity holder and
international capital mar$et from a#road.
'ree to raise from any internationally recogni+ed
so"rce s"ch as #an$, e&port credit agencies,
s"pply of e("ipment, foreign colla#orators, foreign
e("ity holders, international capital mar$et etc.
with average mat"rity 8 to ? years.
E-B are s"#0ect to specific ma&im"m spreads
over si& months 7IBBR, for the respective
c"rrency.
E-B prepayment is permitted "p to FS O 455
million, s"#0ect to minim"m average mat"rity of
five years.
E-B can #e assessed "nder two ro"tesL
a"tomatic and approval ro"te.
E-B limit "nder a"tomatic ro"te is :55 O million
with average mat"rity of : years.
E-B limit for infrastr"ct"re companies is O :55
million a year with average mat"rity "p to ? years
for r"pee e&pendit"re "nder the approval r"le.
E-B loans are "tilised for import capital goods
and services. End "se for E-Bs was enlarged to
incl"de overseas direct investment in Coint
Ient"res 6CIs9.3holly Bwned S"#sidiaries 63BS9
in order to facilitate corporate to #ecome glo#al
players.
Ris$ management is done #y c"rrency swap and
interest rate swap
E&porter can raise E-Bs for ten"re of less than
three years in special economic +ones. %his will
provide opport"nities for accessing wor$ing capital
loan for these "nits at internationally competitive
rates.
33B
-orporates have estimated to raise more than FS
O 11.? #illion thro"gh E-B d"ring 455;)5: 6E%
44.;.5:9.
3ith international interest rates on rise, the
interest of corporate to raise E-B is grad"ally
waning. %he anticipation that cost will f"rther rise
is also h"rting E-B.
33C
6overnment
Busi
ness
-urnover
commission
, distinctly "nglamoro"s #"t very l"crative area that
has #een opened for #an$s is government #"siness.
%his range from collection of direct ta&es at #ranches
to dis#"rsing government f"nds and salaries to
handling the acco"nt of the railway. %he #"siness is
h"ge and #an$ing ind"stry p"t the total at aro"nd Rs.
1:,55,555 crores ann"ally on which the government
pays 1.11 paisa per Rs. 1555 . %hat wor$ o"t to Rs.
1?55 crores ann"ally o"t of which half goes to SBI
alone. M"ite nat"rally other #an$s also want to gra# a
#igger pie of this #"siness. 3ith competition coming
from private sector #an$, nationalised #an$s too have
started offering B7%,S.
33?
/iscellaneous RE,7 %IME
DRB
SS
SE%%
7EM
EN%
S1S%
EM
R%DS started since 4>.58.455; and India crossed a
ma0or milestone in development of systemically
important payment system. Salient feat"res of R%DS
are)
6a9 2ayments are settled transaction #y
transaction for high val"e and retail
payment.
6#9 Settlement of f"nds is final and irrevoca#le.
6c9 Settlement is done on real time #asis and
the f"nds remitted can #e f"rther "sed
immediately.
6d9 It is f"lly sec"re system which "ses digital
signat"res, p"#lic $ey infrastr"ct"re #ased
encryption for safe and sec"re
transmission.
6e9 It provide for transfer of f"nds for inter)
#an$ settlements and c"stomer related
f"nds transfer.
2resent R%DS net wor$ is of ::555 #ranches
and it handles on an average !5555
transaction per day with a pea$ of 14!4:
transactions processed as on March 85, 455.
/iscellaneous 6reen Shoots Dreen shoots is "sed to refer to signs which indicate
recovery of the economy. It draws the facts that green
shoots which appears a#ove the earth are first visi#le
sign of growth of plants. 2artic"larly after a recession,
green shoots are welcome as sym#ols of economy
ta$ing treading path "pward. Improvement of
ind"strial prod"ction fig"re, rise in car sales,
development in infrastr"ct"re sector incl"ding
steadying of prices of cement and steel have #een
seen as green shoots in India.
33A
/iscellaneous ake notes %he RBI detected co"nterfeit notes worth Rs.15.:;
crores d"ring 455>)5? against Rs. !.8 crores 455:)
5>. '"rther co"nterfeit notes worth Rs. 4:.? crores
were recovered till Septem#er 455. 7oo$ing to
danger #eing posed to o"r economy, it is decided that
o"tso"rcing of printing of notes will #e stopped
forthwith. It is has also #een s"ggested that RBI
sho"ld introd"ce easily recogni+a#le
antiUco"nterfeiting sec"rity feat"res in the designs.
/iscellaneous $oorstep
Bank
ing
Individ"al c"stomers can now have cash and other
#an$ instr"ments pic$ed "p from their home or office
with #an$ing services now availa#le at door steps.
-orporate c"stomers can additionally have cash
delivered against che("e received at the #an$As
co"nter.
/iscellaneous Juantitative
easin
g
-entral #an$ "s"ally stim"lates an economy #y
red"cing interest rates so that there is less incentive
to save and people #orrow and spend more. B"t in
developed word where interest rates are already near
+ero this option is not availa#le. In s"ch a sit"ation,
central #an$ resorts to p"mping money directly into
the economy which process is $nown as ("antitative
easing. It is done #y #"ying #onds / "s"ally
government paper #"t can also #e private #onds)
from #an$s and financial instit"tions. %he idea is get
more money into the system chasing the same
amo"nt of commodities to drive "p the prices. %he
flood of money may ca"se assets prices to rise i.e.
prices of shares, real estate etc. M"antitative easing
may potentially ward off deflation and $ic$ start the
economy.
3@4
/iscellaneous Head line and
core
inflat
ion
Headline is a#o"t estimate total inflation in an
economy where as core inflation meas"res e&cl"de
food and energy prices. ,s policy some central #an$s
follows headline inflation #oth for framing policy
o#0ectives and also for operational g"idance while
other central #an$s follows core inflation only.
Economist feels that process of sta#ilising core
inflation is seen as more optimal policy.
/iscellaneou
s
-!%S
(:reasury
inflation
%rote$ted
se$urities)
'irst iss"ed in Fnited States, %I2S are special type of
government sec"rities that offers investors protection
from inflation. %his is how %I2S wor$sL %he principal
increases in line with inflation or decreases with fall in
prices. 3hen instr"ments mat"re investor is paid
original principal or inflation ad0"sted principal which
ever is higher. %his "nder %I2S original principal
amo"nt remains protected.
3@5
/iscellaneou
s
/obile
Bank
ing
3ith rapid growth of mo#ile phone s"#scri#ers in
India, #an$s have #een e&ploring the feasi#ility of
"sing mo#ile phones as an alternative channel for
delivering #an$ing services. Some #an$s have started
offering information #ased services li$e #alance
en("iry, transactions en("iry, location of the nearest
,%M.#ranch, acceptance of transfer of f"nds
instr"ctions etc. 7oo$ing to the fact the technology is
new , RBI has iss"ed following set of g"idelines L)
6a9 Bnly #an$s which are licensed and s"pervised
in India and have a physical presence in India
will #e permitted to offer these services.
6#9 %he services shall #e restricted to c"stomers
only.
6c9 Bnly Indian r"pee #ased domestic services
shall #e provided. Mo#ile service for cross
#order transfer of f"nds is prohi#ited.
6d9 Ban$s may "se the services of #"siness
correspondents to e&tending this facility
provided B- g"idelines are followed.
6e9 D"idelines of RBI for Ris$s and -ontrols in
comp"ters and telecomm"nications will #e
followed.
6f9 J1- and ,M7 g"idelines will #e followed.
6g9 Ban$s will have to p"t in place a system of
doc"ment #ased registration with mandatory
physical presence of the c"stomers.
6h9 Information sec"rity aspects have to #e p"t in
place.
6i9 %ransfer of f"nds are s"#0ect to cap of
Rs. :555 per day and Rs. 15555 for
transactions involving p"rchase of
goods.services.
3@3
N%&
/ana
gem
ent
N%& Buyout
norm
s
'oreign investors have #een showing $een interest to
#"y N2,, which has opened mar$et, val"ed a#o"t O
44 #illion. Bverseas investors are c"rrently limited to
p"rchase of Indian stoc$ and #onds. RBI in
cons"ltation with SEBI and finance ministry has p"t
p"#lic domain draft r"les of N2, sec"rtisation. It is
#elieved that N2,s are #ac$ed #y as m"ch as 1;5 <
collateral in many cases and "nits are operating that
provide immense #"siness opport"nity.
3@3
N%&
/ana
gem
ent
Recovery
/anagement
%olicy
Each #an$ is e&pected to have a recovery
management policy d"ly approved #y the #oard
incl"ding policy for compromise settlement.
RB! 6>$E1!NES(
%ast due concept deleted from 81.58.4551.
N%& classification shall #e #ased on act"al
recovery as on #alance sheet date s"#0ect to
followingL)
6a9 Interest . installment for term loan
remaining over d"e for more than 5 days
6#9 -ash credit . over draft acco"nt remaining
o"t of order for more than 5 days.
6c9 Bill p"rchased or disco"nted remaining
over d"e and not paid more than 5 days
6d9 ,cco"nts d"e for review or renewal for
more than 5 days from d"e date.
However acco"nt will #e "pgraded
immediately after review.renewal if it is
otherwise in order.
6e9 Non s"#mission of stoc$ statement for
more than 5 days from d"e date will ma$e
the drawings irreg"lar and s"ch irreg"lar
drawings for period more than 5 days.
However, acco"nt will #e "pgraded
immediately after receipt of stoc$
statement if the acco"nt is otherwise in
order.
N%& identification norms for agricultural
advances(
6a9 Short d"ration crop will #e treated as N2,
if installments of principal or interest
remains "npaid for two crop season
#eyond the d"e dates for e&ample Jharif
crop loan sanctioned in C"ne 455: will d"e
3@@
for repayment in March, 455> and if
remains "npaid two crop seasons #eyond
the d"e dates i.e. 455? and 455!, it will #e
N2, as on March 455!.
6#9 7ong d"ration crops where the harvesting
of the crops are made after a period more
than 14 months. In case of s"garcane the
crop season is more than 14 months. %he
crop loan for s"gar cane given in
Novem#er 455: will fall d"e on March
455? and will #ecome N2, on March 455!.
6c9 %erm loan same norms for short and long
d"ration crops will apply.
.ff balance sheet e)posure deemed as
credit / Interest rate, fore& deals and f"t"re
credit e&pos"re come within the single
#orrower limit of 1: per cent of capital owned
f"nds. '"rther any restr"ct"ring of derivative
deals shall #e carried o"t only on cash
settlement #asis. .verdue receivables
representing positive mark to market
* /-/+ value of a derivatives contract 0ill
be treated as non performing asset# if these
remain unpaid for L@( days or more8 !n case
0here a derivative contract is restructured#
the /-/ value of the contract on the date
of restructuring 0ill be cash settled8 or
this purpose# any change in any of the
parameters of the original contract 0ould
be treated as restructuring8
%rovision 08e8f8 A@8D8?? 6a9 S"#) standard 1:<,
Fnsec"red s"#standard 4:< 6#9 Fnsec"red
portion of do"#tf"l advance 155< , Sec"red
portion of do"#tf"l "p to one year 4:<, a#ove one
3@>
year to 8 year ;5< 6c9 Restr"ct"red Standard 4<
for first two year from the date of restr"ct"ring 6e9
7oss assets 155<. 6d9 Deneral provision of 5.;5<
on o"tstanding standard assets, 1< for
residential ho"sing loan of Rs. 45 la$hs and
a#ove, commercial real estate, capital mar$et
e&pos"re e&pos"re and personal loan and 5.4:<
for direct financing to agric"lt"re and SME.
&sset Classification under doubtful category /
14 months from the date advance t"rned s"#)
standard.
Restructured accounts
(a) Standard &ssets where 2rincipal and
interest 6e&cepting where commercial
prod"ction has started and advance has
#ecome s"# standard9 will contin"e to #e
standard provided interest element in
terms of present val"e terms has #een
provided for 6written off9.
(b) Sub(standard restructured acco"nt will
#e "pgraded only after one year or when
principal or interest has fallen d"e which
ever is earlier after satisfactory
performance.
!nterest application on monthly basis 08e8f
@?8@C8@;8
State government guaranteed advances
wo"ld #e classified as N2, if interest and
installment remain "npaid for 5 days
irrespective whether the g"arantee is invo$ed
or not.
Central government guaranteed advances
3@B
wo"ld #e classified N2, only after 5 days of
rep"diation of the g"arantee #y the
government, when the same is invo$ed.
RBI has advised #an$ that while selling or
ma$ing compromise in N2, #an$s sho"ld wor$
o"t net present val"e of f"t"re cash flows
arising from sec"rity #eing sold. %he sale price
or compromise sho"ld not #e #elow N2I.
%rompt Corrective &ction(Bne of the trigger
points in 2rompt -orrective ,ction mechanism is
level of net N2,. 3hen the trigger point "nder the
mechanism is activated #y the performance of the
#an$, the mandatory actions wo"ld follow #y way
of restriction on e&pansion of ris$ weighted assets,
s"#mission and implementation of capital
restoration plan, prior approval of RBI for opening
new #ranches.new line of #"siness, paying off
costly deposits and special drive for N2, recovery.
3@C
N%& %rovision
Coverage
Ratio
2-R is the ratio of provision to gross non performing
advances and indicates the e&tent of f"nds a lender
6#an$9 $eeps aside to cover loan losses. RBI has
stip"lated that minim"m 2-R of #an$s sho"ld #e
?5<. RBI has clarified that technical write offs wo"ld
#e ta$en into calc"lation while calc"lating 2-R.
%echnical write off or pr"dential write off are the
amo"nt of non performing loans in the #oo$s of the
#ranches and yet to #e written off at head offices.
3@?
N%&
/ana
gem
ent
Eilful
defaulters
redefined
3ilf"l defa"lt wo"ld #e said to have happened if
the #orrowing "nit fails to meet repayment
o#ligations to its lenders even when it has the
capacity to hono"r it commitments to lender or
diverts f"nds for the p"rpose other than they were
availed of. =iversion of f"nds wo"ld #e when short
term wor$ing capital f"nds wo"ld #e for long term
p"rpose, loan f"nds are deployed for p"rpose
other than intended for, or transferring money to
s"#sidiary or gro"p company.
RBI will share the information with SEBI to prevent
them assessing capital mar$et.
3here #an$s have identified diversion of f"nds,
misrepresentation, falsification of acco"nts and
fra"d"lent transactions, promoters will #e
de#arred from accessing finance from all legal
entities and also in floating new entities 6incl"ding
iss"e of share capital9 for : years from the date
their name appear in RBI list.
No additional finance will #e granted to the
#orrower and #an$ will initiate criminal action
whereever possi#le.
Ban$ will have to give ade("ate opport"nity to
#orrowers #efore declaring them wilf"l defa"lters. ,s
per RBI directives #an$ has to form two committees
6I9 -ommittee headed #y E= and two senior
e&ec"tives to approve the #orrower as wilf"l defa"lter
6ii9 -ommittee headed #y -M= to consider o#0ection if
any raised #y the #orrower and then ta$ing final
decision to declare him wilf"l defa"lter.
3@A
N%&
/ana
gem
ent
Credit
!nformation
companies
6,9 -redit Information -ompanies 6reg"lation9 ,ct
455: stip"lates that )
Every e&isting credit instit"tion shall #e a mem#er
of at least one credit information company within
three months of the commencement of the act.
-redit information #"rea"s formed "nder the act
and d"ly registered with the RBI can re("isition
credit information from their mem#ers.
%he share of s"ch information #y a credit
instit"tion with a d"ly constit"ted #"rea" of which
it is a mem#er is mandatory.
6B9 -IBI76 -redit information B"rea" of India 7td9is
first company which has got mandate to act as credit
information company.
-IBI7 now has a data#ase of over 5 million
individ"al #orrowers ta$en from vario"s
#an$s, financial instit"tion and non)#an$ing
finance companies.
-IBI7 has also la"nched the data #ase of
mortgaged properties containing the details
of properties against which owners have
availed loan so as to help the lenders share
and access information so as to avoid
fra"d"lent mortgage of same property to
m"ltiple #an$s.
-IBI7 is sharing more than 4 million credit
informationAs each month.
'I.Ban$s.NB'-.SEBI.IR=, . #ro$er
registered with SEBI.IR=, who is mem#ers
of -IBI7 can determine on line whether a
prospective #orrower is a disciplined
#orrower or a serial defa"lter on payment of
fee of Rs 15 per #orrower.
-IBI7 has also p"t in place data #ase of
3>4
mortgage defa"lt.
-IBI7 has also #een a"thori+ed to maintain
credit history of telecom, ins"rance
c"stomers, NB'- and micro finance
instit"tions .
-IBI7 has close to 1>; mem#ers which "se
its data#ase.
_ RBI has given approval to three more credit
information companies namely E("ifa& -redit
Information Service, E&perian -redit Information
-ompany and High Mar$ -redit Information Services.
(a) RBI has iss"ed registration certificate to
E&perian credit information company as a
credit information company.
Regulatory
Re'uirement
%R./%-
C.RREC-!HE
&C-!.N *%C&+
In the #ac$drop of large)scale crises in #an$s res"lting
into clos"re, insolvency and losses, RBI has proposed
2-,. It is in the form of trigger points as "nderL)
-apital to ris$ ad0"sted assets ratio 6-R,R9 )three
trigger points are proposed 6a9 -R,R less than
< #"t e("al or more than ><, 6#9 -R,R less
than >< #"t e("al or more than 8< and 6c9 -R,R
less than 8<.
N2,)two trigger points have #een proposed 6a9
Net N2, over 15< #"t less than 1:< and 6#9 Net
N2,1:< and a#ove.
Ret"rn on assets 6RB,9 )single trigger point i.e.
RB, #elow 5.4:<
-ompliance of 2-, may res"lt into following actionL)
-rigger point Net N%&:( /andatory action
6a9 Special drive to red"ce the N2, and
contain generation of fresh N2,
6#9 Review of loan policy
6c9 Fpgrade credit appraisal s$ills and
systems
3>5
6d9 Strengthen follow)"p of s"it field and
decreed de#ts
6e9 2"tting in place proper credit ris$
management policies ,process, proced"re,
pr"dential limit
6f9 Red"ce loan concentration)individ"al,
gro"p, sector, ind"stry etc.
-rigger point Net N%&:( $iscretionary action
6a9 Restriction of entry into new lines of
#"siness
6#9 Red"ce.s"spension of dividend payments
6c9 Red"ce sta$e in s"#sidiaries
-rigger point R.&(/andatory action:(
6a9 2ay off costly deposits and -=s
6#9 Increasing fee #ased income
6c9 -ontaining administrative e&penses
6d9 Special drive to red"ce the stoc$ of N2,s
and contain generation of new N2,
6e9 Restriction on entry into new lines of
#"siness
6f9 Red"ction.s"spension of dividend
payments
6g9 Restriction on #orrowing from the inter
#an$ mar$et
-rigger point R.&($iscretionary action:(
6a9 -apital e&pendit"re only for technological
"p gradation and for day to day operations
within #oard approved limits
Staff e&pansion or filling "p of vacancies only
with prior approval of RBI e&cept recr"itment of
specialists
3>3
RE6>1&-.R4
REJ
>!RE
/EN-
B&N3 R&-E
B;,C
> < w.e.f. 4.5;.58
In 455; the RBI completely delin$ed the standing
li("idity facilities to #an$ from the BR and repo
rate emerged as the lending rate of the RBI for all
practical p"rposes. ,s a res"lt, the importance of
the BR as the monetary policy instr"ment waned.
, wor$ing gro"p headed #y Mr. =eepa$ Mohanty,
E&ec"tive =irector, RBI has recommended for
reactivating BR #y providing #an$ li("idity "nder a
new collaterali+ed E)ceptional Standing acility
*ES+ at this rate.
Dro"p also recommended that BR #e pegged at
:5#ps a#ove the repo)rate which will also #e
"pper #and to the policy rate corridor.
RE6>1&-.R4
REJ
>!RE
/EN-
$. N.- C&11
RE6!
S-R
R4
%he Indian Ban$ ,ssociation and Indian -ard
-o"ncil have 0oined hand to set "p a data of
telephone n"m#ers whose owners do not wish to
receive telephone call for #an$ing telemar$eting.
%his will #e one stop center for @do)not call
registryA for c"stomers of all the #an$s.
RE6>1&-.R4
&>-
.N.
/4
&>-.N./4
'inancial mar$et reg"lators li$e the Reserve Ban$
of India, SEBI, and IR=, etc. have their
0"risdiction over different segment of the mar$et.
%heir activities are overseen #y the government,
tho"gh they are s"ppose to #e a"tonomo"s /
meaning that government will not interfere with
their day to day f"nctioning or in the r"le and
g"idelines they ma$e for mar$et participants.
However they are s"ppose to interact with the
government reg"larly s"ch as RBI is reg"larly
intereact with the government in three areas /
matters of appointment, matters of monetary
policy ma$ing and matter of finance of p"#lic de#t.
%here have #een instances of #etween the RBI
3>3
and government for e&ample d"ring five year
plans in 1:5 RBI did not approve financial
planning s"#stit"ted #y physical planning and this
led to resignation of then RBI Dovernor Rama
Ra".
3>@
RE6>1&-.R4
REJ
>!RE
/EN-
C&%!-&1
&$E
J>&
C4
R&-!
.

,s #an$ e&pands its #"siness it needs more
capital to acco"nt far additional ris$.
MINIMFM ! < R,ISE= %B < w.e.f. 81.8.4555
Bench mar$ of eval"ation of so"ndness and
sta#ility of #an$
-apital to Ris$ 3eighted ,ssets Ratio V-apital
f"nds Q155.Ris$ 3eighted ,ssets
%ier I -apital to incl"de 6a9 paid "p capital less
investment in s"#sidiary, intangi#le assets and
losses 6#9 reserve and s"rpl"s 6c9 capital reserves
regarding sale proceeds of assets.
%ier II -apital to incl"de 6a9 Reval"ation Reserve
6at disco"nt of ::<9, 6#9 Fndisclosed Reserve 6c9
Deneral 2rovision and 7oss Reserve incl"ding I'R
6d9 s"#ordinated de#t.
%ier I can not #e less than ;. :< or :5< of
re("ired ratio
Ris$ 3eighted ,ssets )
6a9 -ash.Balance with RBI . advance to government
and #an$s own staff covered #y s"peran"ation
#enefits and mortgage of ho"se and Investment
in Dovernment g"aranteed sec"rity) 5<
6#9 -laims with #an$s 45<
6c9 Bther investments 155<
6d9 7oan and advances incl"ding #ill p"rchased .
disco"nted and other credit facilities 155<
6e9 'i&ed and other assets 155<
NoteL )
1. ,dvances collaterali+ed #y cash margin and
provisions, #an$ deposits, gold and loans
granted to staff "p to !5< are e&cl"ded while
comp"ting the total advances.
4. Ho"sing loan collaterali+ed #y commercial
3>>
properties, e&pos"re to capital mar$et,
personal loan, capital mar$et e&pos"re etc.
ris$ weight is 1:5<.
8. ,n additional ris$ weight of 4.:< on the total
investment is also provided.
-redit -onversion 'actor
6a9 'inancial D"arantee 155<
6#9 2erformance D"arantee
:5<
6c9 7etter of -redit 6doc"mentary9 45<
6d9 -o"nter party Dovernment 5<
6e9 -o"nter party Ban$ 45<
6f9 -o"nter party others 155<
6g9 'orward e&change contracts for less than one
year 4<
6h9 'orward e&change contracts for each
additional year 8<
6i9 'ore&)open position / Fncovered
overnight position
155<
3>B
RE6>1&-.R4
REJ
>!RE
/EN-
Basel !!! R"le written #y the Ban$ of international
settlementAs committee on Ban$ing s"pervision
whose mandate is to define agenda for glo#al
#an$ing comm"nity as a whole.
Main component is capital is common e("ity and
retained earnings. %he new restricts incl"sion of
items s"ch as deferred ta& assets, mortgage
servicing rights and investment in financial
instit"tions to no more than 1:< of the common
e("ity components.
3hile the $ey capital ratio has #een raised to ?<
ris$y assets, accordingly to the new norms. %ier I
capital that incl"des common e("ity and perpet"al
deferred stoc$ will #e raised from 4< to ;.:<
starting in phases from Can"ary 4518 to #e
completed #y Can"ary 451:. In addition #an$ will
#e re("ired to set aside 4.:< as contingency for
f"t"re stress #ringing the common e("ity to ?<.
,ccording to RBI, #an$s in India are not li$e to #e
m"ch impacted #y Basel III. ,s at the end of C"ne
4515, Indian #an$s are already reached capital
ade("acy of 18.;< of which the tier I is .8<. ,s
s"ch Indian #an$s wo"ld not #e considera#ly
stretched #y new norms. , f"rther co"nter cyclical
#"ffer in the range of 5< to 4.:< of common
e("ity is to #e imposed 6depending "pon national
circ"mstances9 to protect #an$ing sector from
periods of e&cess aggregate credit growth. %hese
capital re("irements will #e s"pplemented #y a
non)ris$ #ased leverage ratio that will serve to
#ac$stop the ris$ #ased meas"res and higher
capital norms for systemically important #an$s.
E"rope will #e most li$ely region for #an$s to need
to raise f"nds nota#ly in Dermany, 'rance and
3>C
Spain.
It is arg"ed that whatever capital ade("acy
meas"res are ta$en, #an$ing system will only
remain foolproof if #an$ing s"pervision is
proactive and competent. Fnfort"nately it has not
#een so in FS and FJ in partic"lar.
3>?
RE6>1&-.R4
REJ
>!RE
/EN-
CRR (ection 42 516 o' 8eserve 2an1 o' ?ndia
Act provide 'or aintenance o' C88.
&ar"iaent )as passed t)e !i"" on 17
t)
Ea*
2%%6 to reove t)e "egis"ative cap o'
iniu C88. 0o- t)ere is no iniu
andator* "iit and 82? is 'ree to fx "iit is
-ants.
4.5%= o' 0:#D 'ro 22.%9.12
?nter !an1 ter "ia!i"it* as ter !orro-ing
'or period 15 da*s to 1 *ear is exepted
'ro C88 re9uireent.
+o""o-ing reova" o' iniu cap o' 3=,
82? )as decided not to pa* interest on C88
!a"ance 1ept !* !an1s -it) it. 82? ear"ier
used to pa* interest F3.5= over and a!ove
t)e iniu 3= andator* C88.
C88 is used !* 82? 5a6 investent -it) 82?
is ris1 'ree 5!6 82? contro"s t)e "i9uidit* and
5c6 restricts capacit* o' t)e !an1 to "end.

RE6>1&-.R4
REJ
>!RE
/EN-
S1R Section 4; 6a9 of Ban$ing Reg"lation ,ct
provide for maintenance of S7R #y every
#an$ing company.
48< of N=%7 vide 1
st
("arterly review of
monetary policy effective ,"g"st 11, 4514.
2arliament has passed the #ill on 1?
th
May
455> to remove the legislative cap of
minim"m. ma&im"m S7R.
Restrict the capacity of #an$ of credit
e&pansion. It is tool of li("idity management in
the hand of RBI.
R!S3
/&N
&6E
&ssets and
1iabil
,7M is systematic approach that attempt to provide
degree of protection to the #an$ #y meas"ring,
3>A
/EN- ity
/ana
geme
nt
*&1/+
managing, monitoring and modifying interest rest rate
ris$.
D,2 MB=E7(=ifference #etween ris$ sensitive
assets and ris$ sensitive lia#ility 6RS,)RS79 )ris$
is managed #y $eeping gap to +ero or near +ero)
RS7 and RS, are p"t to time #"c$et #ased on
resid"al mat"rity.
SIMF7,%IBN MB=E7(3hat if analysis of impact
of interest rate changes)forecasting different
scenario)depends on acc"racy of forecast.
=FR,%IBN MB=E7(="ration is calc"lated at
weighted average mat"rity of res"ltant cash flows)
e&pressed as less or e("al to mat"rity period of
#onds)greater the gap higher is ris$.
EaR 6Earning at ris$9 ,pproved ( #ased on #an$As
perception of movement of interest rate.
2r"dential limit is decided #y ,7-B BR BB,R=
#ased on D,2 model 6RBI advised #an$As to
maintain on the #asis of Simple Dap Statement
and switch over to more technical model in d"e
co"rse when #an$s develop e&pertise.9
,lso a tool of 2ricing of 7oan, decide NIM, fi& 27R
etc.
IN%RB=F-E= w.e.f. 1.;.
Main challenge is non)comp"teri+ed environment,
which create pro#lem in data creation.
Ban$ has to cover 155< #"siness.
2r"dential norms prescri#ed only for 1)1; days
and 1:)4 days #"c$et as 45< of mismatch.
RBI in report of %rend E 2rogress of Ban$ing 455;
has reported that 2SBs are having assets lia#ility
mismatch as ma0ority of #an$s are having
investment in the mat"rity #rac$et of : years and
3B4
a#ove.
3B5
R!S3
/&N
&6E
/EN-
Stress -esting It is a ris$ meas"rement tool. It meas"res the $ey
movement in mar$et varia#les that lie #eyond the day
to day monitoring #"t that co"ld potentially occ"r.
Stress testing eval"ates the short)term impact on a
given portfolio of a series of predefined moves, in
partic"lar mar$et varia#les. It is also $nown as
creation of @worst case scenarioA.
In present scenario of financial insta#ility, stress
testing is one tool which can give insight to the #an$
to $now its v"lnera#le areas and address the iss"es
proactively.
, stress test of F S financial ind"stry fo"nd that 15 o"t
of 1 largest #an$s need a com#ined O?: #illion to
weather the contin"ing recession. 6 BS .:.4559

3B3
R!S3
/&N
&6E
/EN-
Credit Rating
&gencies
*CR&s+
-RISI7 )2romoted #y I-I-I, F%I, H='- and
n"m#er of #an$s. N"m#er one in rating #"siness.
Bther in the line are I-R, /Investment Information
and -redit Rating ,gency 6149, -,RE)-redit
,nalysis and Research 7td. 61;9
%here are three segments which "se credit rating.
%hese are retail investors, financial instit"tions and
reg"lators.
Reg"latory s"pport li$e credit rating of -2 6RBI9 or
Bonds 6SEBI9 made rating mandatory.
New Basel II g"idelines re("ire mandated rating
6IRB9 of #orrowers for ris$)#ased assessment for
capital ade("acy.
-R,s have #een e&tensively "sed #y the
investing comm"nity in their investment
decisions. B"t tr"th is that these agencies co"ld
never predict a financial crisis may #e Me&ican
crisis, So"th East ,sian crisis, or S"#)prime crisis.
%his has p"t a ("estion mar$ on their credi#ility.
SEBI has directed that all -R,s 6credit rating
agencies9 will have to maintain records of the
important factors "nderlying the credit rating, a
s"mmary of disc"ssions with all sta$e holders
involved as well as decisions of the rating
committee, incl"ding voting details and notes of
dissent, and also if there was any divergence
#etween the rating assigned #y the analytical
model and the act"al rating assigned to the
company. %he move is e&pected to #ring more
transparency and acco"nta#ility thro"gh "niform
disclos"re.
-oncerned over companies $eeping "nder wraps
their #ad credit ratings and p"#lishing only
3B3
favora#le ones, SEBI is m"lling ways to prevent
rating shopping system. It is considering ma$ing it
mandatory to p"#lish even those rating which are
not accepta#le to companies and rating agencies
will #e responsi#le to p"t in place clear and
effective @-hinese wallsA #etween their analytical
and #"siness development teams.
In ins"rance and #an$s internal model are gaining
prominence and emerging view is that #an$s
sho"ld rely more on their internal models than to
e&ternal ratings.
Reg"latorsA are "sing the ratings for prescri#ing
pr"dential re("irements for the 'I and also for
pr"dential investments prescriptions. %he
s"ggestions for improving effectiveness for this
p"rpose areL
a. Enhance the transparency of the rating process.
#. Rating decisions sho"ld #e #ased on professional
standards.
c. Improve acco"nta#ility so that -R,s s"ita#ly
rewarded and p"nished for their decisions.
d. -R,s sho"ld also #e rated and those who have
poor capa#ilities #e weeded o"t.
e. Reg"lators to prescri#e standards for the -R,s.
3B@

)5)5)5)
3B>
3BB
%ha"ter @36
S*ort Notes on CommitteesFStud" grou+s
&gricultural
inan
cing
R H 6>%-&
-omm
ittee /
on
agric"l
t"re
Recommendations)
,de("ate powers to #ranch managers.
-hairman and Managing =irector to visit r"ral
#ranches.
%o have fle&i#ility in "nit cost and scale of
finance.
,gric"lt"ral loan on cash #asis only.
B#taining no d"es certificates to #e left at
discretion of the #an$.
Introd"ce pass#oo$ with a"thentic record of
land holding /accepted as title deed for
e("ita#le mortgage.
D"arantee where land is availa#le as collateral
is disco"raged.
-omp"lsory r"ral posting sho"ld #e done away
with.
'inancing thro"gh self)help gro"p 6SHD9.
Interest to #e dereg"lated for small loans.
Rationalise ret"rns / management information
system to #e comp"ter #ased.
Ins"rance is #"rden)allow discretion to #an$s.
%o open high)tech agric"lt"re #ranches.
Modification in Service ,rea ,pproach )
#orrower sho"ld #e free to approach any #an$.
S7B- to thin$ on greater agenda than distri#"tion
of ,22 target li$e area development,
Implementation of new schemes, Impact of
technology a#sorption, Identification of fresh
schemes.
3BC
&griculture RB! panel for
/!
RBI has sent "p a s"#)committee of -entral Board
of directors to address L)
Iss"e and concerns of M'I and
%o decide ways and means to ma$e interest
rate reasona#le.
It may #e noted that RBI reg"late only those M'I
which are registered with it as NB'-. It however
does not prescri#e any lending rates for these
instit"tions.
&griculture Sarangi
Com
mittee
> C Sarangi
Chair
man
N&B&
R$
How small and marginal farmers, tenant
farmers, share croppers etc. can #e #ro"ght
within the am#it of instit"tional finance.
Recommendations:
Dovernment to give 0oint and individ"al loan
to small farmers incl"ding tenant farmers,
share croppers c"rrently o"tside the am#it
of instit"tional finance via 0ointly lia#ility
gro"p and thrift and cooperative society.
Intervention solely on farmerAs de#ts may
not #e ade("ate. DBI need to incentives to
those choosing to engage in more
s"staina#le farming.
State ineffective money lending act to #e
overha"led.
Identified wea$ness in newer model of
credit delivery li$e J--, micro)finance.
Rigid system of commercial #an$s ca"sed
prevention of small and marginal farmers
from #an$ credit.
&griculture H8 S8 Hyas
Com
mittee
,n ,dvisory -ommittee on 'low of -redit to
,gric"lt"re and Related ,ctivities from the Ban$ing
System 6-hairmanL 2rof.I.S. Iyas9 was
constit"ted #y RBI.
Recommendations(
3B?
'i&ation of target to 2riority Sector incl"ding
,gric"lt"re needs comprehensive review. Fntil
review is done present target of 1!< for
agric"lt"re may contin"e. -ommittee has also
identified demand side constraints and cap on
indirect agric"lt"re to achieve agric"lt"re target.
Sec"ritiised agric"lt"ral loan sho"ld #e treated
as direct agric"lt"ral loan.
E&panding o"treach of #an$s in r"ral areas
need change in mind set of #an$ers as all over
the world retail lending is treated as most
l"crative. In Indian conte&t, hardly there is a
#etter aven"e other than agric"lt"re.
'ranchising village post office for dispensation
of credit in r"ral areas is also an innovative idea
mooted in #"dget of 4558)5;, commercial
#an$s sho"ld e&plore this model.
Red"cing cost of credit to agric"lt"ral
#orrowers) J-- sho"ld #e made ,%M ena#led.
Non)performing asset 6N2,9 norms in
agric"lt"ral finance #e revised as defa"lt of two
crop season and setting "p of an ,gri )ris$ f"nd
to mitigate ris$ of lending in case of gen"ine
defa"lt.
2ilot pro0ect of m"lti)commodity e&change)
#an$ #e e&empted from sections > and ! of BR
,ct.
Micro)finance instit"tions 6M'Is9 wo"ld not #e
permitted to accept p"#lic deposits "nless they
comply with the e&tant reg"latory framewor$ of
the Reserve Ban$.
3BA
&griculture Rao Committee
on
RRB
Recommendations(
2ossi#le reorgani+ation of Regional R"ral
Ban$s 6RRBs9.
-entre to #ring its sta$e to 88< from :5<.
,malgamation of contig"o"s RRBs.
Iesting more s"pervising and reg"latory
powers to N,B,R=.
RRB staff can pic$ "p State Dovernment sta$e
if they are interested and after that it sho"ld #e
divested to private sector.
Capital /arket BH&6E&-!
C.//!--EE
.N -&3E .HER
SEBI -ommittee on ta$eover "nder chairmanship
of Shri 2.N.Bhagwati
Recommendations(
Ban$s sho"ld finance ta$e over.
RBI and SEBI to set terms to finance s"ch ta$e)
over.
%he ac("irer sho"ld not strip s"#stantial assets
of the ac("ired company witho"t permission of
shareholders. 6%he iss"e involved in case of
ISN7 where %,%,s are in disp"te with the
government9.
Bpen offer sho"ld always #e 45< and a#ove
#"t may #e s"#0ect to acceptance level of less
than 45<.
Corporate
6over
nance
RB!
Co
ns
ult
ati
ve
6r
ou
p
on
Recommendations(
,ppointment of one more whole)time director
on the #oards of large)si+ed nationalised
#an$s.
Esta#lishment of appropriate d"e diligence
proced"res for appointment of directors on the
#oards of private sector #an$s.
Setting "p of nomination committees of #oards
of #an$s to recommend appointment of
3C4
Ba
nk
Bo
ard
s
(#an&uli
-ommittee)
independent.non)e&ec"tive directors.
B"ilding and creation of a pool of professional
and talented people for #oard level
appointments in #an$s and also maintenance of
the data for the p"rpose #y the Reserve Ban$
of India, etc.
3C5
Credit CH.RE
-BMMI%%EE
Shri J.B -hore
of =BB= of RBI
Recommendations((
,nn"al review for limit of Rs 4 crores and
a#ove.
MIS I to III.
1< penal interest for defa"lt.
'i& operating limit on the #asis of MIS I .
2ea$ and non)pea$ limit.
,dhoc)sanction e&tra interest 1<.
4
nd
method only.
Credit G!1&N!
-BM
MI%%E
E II
Mr. Rashid
Dillani -hairman
2NB
Recommendations(
Shift from cash credit to demand loan.
Bif"rcation of cash credit into cash credit and
demand loan.
Borrowers of Rs. 15 crores and a#ove )!5<
3-=7 and no slip #ac$ permitted.
Ban$ can fi& separate rate of interest for
demand loan.
Credit RBI -ommittee
to Review the
System of
7ending Fnder
-onsorti"m
,rrangements
G8H8 Shetty# EU(
C/$# Canara
Bank
2"rpose to review the system of 7ending Fnder
consorti"m arrangements and to s"ggest
improvement therein.
Recommendations(
Recommended vario"s alternatives incl"ding
inter #an$ participation certificates, commercial
papers, de#ent"res, sec"ritisation of loans and
syndication of credit.
S"ggested s"#stantial modifications in the
system of consorti"m lending to ma$e it simpler
and more fle&i#le to meet credit needs of trade
and ind"stry ("ic$ly.
Recommended enhancement of the threshold
limit for mandatory formation of consorti"m
from Rs. : crores to Rs. 45 crores with
immediate effect and to Rs. 4: crores or a#ove
3C3
#y March 1>.
Introd"ction of syndication for #orrowers
en0oying f"nd #ased wor$ing capital limits of
Rs. 4: crores or a#ove from the #an$ing
system.
3C3
Credit Shanker
&char
ya
Com
mittee
Based on the recommendations made #y this
committee on 2rimary Mar$et, RBI iss"ed
g"idelines "nder which #an$s can provide f"nds to
meet gen"ine re("irement of approved mar$et
ma$ers. ,dvances shall #e p"rely commercial
terms and #an$s will have to lay down norms for
financing them incl"ding e&pos"re limits and
method of val"ation. %hese advances are freed
from the Rs. 15)45)la$h ceiling applica#le to
individ"als against shares.de#ent"res.
Credit -&N$.N
C.//!--EE
Guly 9C
Sri %1 -andon
Chairman of
%NB
Recommendations(
Inventory norm for 1: ind"stries
,pproach to lending /1
st
and 4
nd
method of
lending
No slip #ac$ of c"rrent ratio
-lassification g"idelines for c"rrent assets and
c"rrent lia#ilities
Bif"rcation of demand and loan component
Credit Eorking 6roup
on lo0 of
Credit to SS!
Sector
*Chairman: $r8
&8S8 6anguly
'ollowing the anno"ncement in the mid)term
Review of Novem#er 4558, a 3or$ing Dro"p on
'low of -redit to SSI Sector 6-hairmanL =r.,.S.
Dang"ly9 was constit"ted. .
In order to ena#le the #an$s to determine
appropriate pricing of loans to small and medi"m
enterprises, development of a system of proper
credit records is "sef"l. 'or this p"rpose, -redit
Information B"rea" of India 7td. 6-IBI79 wo"ld wor$
o"t a mechanism, in cons"ltation with RBI, SI=BI
and IB,. '"rther, a mechanism for de#t
restr"ct"ring on the lines of the -orporate =e#t
Restr"ct"ring 6-=R9 has #een proposed for
medi"m enterprises.
Credit H&6H>1 Recommendations(
3C@
C.//!--EE(
actoring
%o solve pro#lem of SSI #y disco"nting
invoice .#ills
%o offer
6a9 Sales 7edger Management services.
6#9 2"rchase and collection of de#t and
credit protection services.
6c9 ,dvisory services.
3C>
Customer
Servic
e
6.!%.R!&
C.//!--EE
Recommendations(
Bpening of #ranch #efore 1: min"tes.
May I help yo" co"nter to #e opened.
-hange of soiled and m"tilated notes)#inding of
note pac$et #y r"##er #and.
Nomination facility.
Iss"e of fi&ed deposit 6'=9 pass #oo$ and
o#taining renewal instr"ctions while accepting
fi&ed deposit or iss"e reminder for over d"e
fi&ed deposit.
Notification re. Interest change in news paper.
Iss"ance of draft at one co"nter /pre signed
draft "p to Rs.:555.) .
Ret"rn dishonored che("ed within 4; ho"rs.
Remittance #eyond two days)remitting #an$ to
compensate.
Instant credit "pto Rs. :555.)6Since raised to
Rs.1:,555.)9 .
Interest on delayed collection at SB rate pl"s
4<.
E&tended non)cash #"siness ho"rs #y 4 ho"rs.
Fse of cash co"nting machine.
Bpening of special #ranches for c"stomer
service.
Customer
Servic
e
%rocedure and
performance
audit of public
services:
Banking
.perations(
S8S8 -arapore
Recommendations(
%o help small depositors, the RBI has as$ed all
the #an$s to p"t in place policy on depositorAs
right.
%he policy will encompass all aspects of
deposit operation of all acco"nts, charges that
can #e levied and other related iss"es.
IB, has #een as$ed to prepare a model code to
3CB
help the #an$ to adopt their own policy.
RBI has also p"t in place system of imposing
penalty on #an$s for infringement of c"stomer
right.
3CC
inancial
Secto
r
Refor
ms
N&RS!/H&N
C./
/!--E
E !
Recommendations(
No f"rther nationalisation of #an$s8
No #ar on private sector #an$s.
Enhancement of share capital of 2SB, #y
offering to M"t"al '"nds, Deneral p"#lic and
government "nderta$ing.
7i#eral policy for foreign #an$ and opening of
#ranches
; tier #an$ing 6a9 8 to ; large #an$s 6#9 ! to 15
national #an$s 6c9 local #an$s 6d9 r"ral #an$s
,#olition of d"al control of government and RBI
7owering of S7R to 4:<
2hasing o"t commercial interest rate.
Special %ri#"nal for recovery
%ransparency of #alance sheet of #an$s /
disclos"re mandatory
inancial
Secto
r
Refor
ms
N,RSIMH,N
-BMMI%%EE /II
Recommendations(
Entire portfolio of government sec"rity to
mar$ed to mar$et. Dovernment sec"rity to carry
:< ris$ weight 6present 4.:<9.
-,R / reach to !< #y 4555 and < #y 4554.
Recapitalisation is not s"staina#le option ))no
f"rther recapitalisation from government
#"dget.
B#0ect to red"ce net N2, to :< #y 4555 and
8< #y 4554.for large N2, acco"nts) constit"te
,M-.
N2,)now move to 5 days defa"lt
Deneral provision on standard assets) 1<.
15< 2S to wea$er section, interest s"#sidy
element in directed credit #e eliminated.
Dreater attention to ,7 management
3C?
3ea$ Ban$) where acc"m"lated losses and net
N2, e&ceeds it net worth or where operating
profit less income on recapitalisation #ond is
negative in consec"tive 8 years. =o st"dy of
wea$ #an$s, which are potentially via#le, #y
financial and operational restr"ct"ring.
Dreater a"tonomy to #an$s #y amending RBI
,ct, BR ,ct, Nationalisation ,ct etc.
,lso s"ggested meas"res for legal and
legislative frame wor$ li$e amendment of
transfer of 2roperty act 1!!4, e&tension of
special stat"e li$e S'- for recovery ,
rationalisation of stamps d"ty etc.
3CA
oreign
E)cha
nge
Capital
&ccounts
Convertibility
-&R&%.RE
C.//!--EE
India adopted c"rrent acco"nt converti#ility in
1;.
-,- recommended a time #o"nd programme
to ma$e Indian R"pee '"lly -onverti#le #y
March 4555.
-,- already done for foreign Instit"tional
Investors #oth direct and portfolio
-ontrol still e&ists for Individ"al and corporate
to remit capital a#road and inflow and o"tflow of
capital thro"gh #an$ and NB'-
%re(condition for C&C
6a9 'iscal deficit as < of D=2 from ;.:< to
8.:< #y 4555.
6#9 Mandated inflation rate /8 to :<.
6c9 -RR) red"ced to 8<.
6d9 N2,) red"ced to :<.
6e9 =ereg"lation of interest rates 6still
Saving Ban$ deposit rate is reg"lated9.
6f9 E&change rate movement /REER 6Real
Effective E&change Rates9 to #e
declared, p"#lished and made p"#lic)
#and of 6S9. 6 )9 :< of REER , RBI
intervention if REER is o"tside #and.
6g9 'T Reserve sho"ld not #e less than >
months of imports.
6h9 'T reserves sho"ld #e at least ?5< of
the c"rrency and in no case less than
;5< of the c"rrency in circ"lation.
!mplications
6a9 %ime is too short) high ris$ of o"t flow of
capital /pre conditions co"ld not #e
achieved within target date i.e. March,
4555
6#9 Need of e&pertise for #an$s d"e to
3?4
mar$et ris$ e&pos"re
6c9 3ith 'T a#ove 181 BN FS= and Net
N2, aro"nd :< pre conditions are met
partially. 7imiting factors are high 'iscal
=eficit. Dovernment is ca"tio"sly
moving towards -,-.
6d9 Recently individ"al persons allowed
investing "pto FS= 4:,555.
6e9 ,s per latest credit policy #an$s can
#orrow overseas "p to 4:< of their %ier
I -apital.
6f9 .Residents have #een allowed to invest
overseas "p to O 4:,555. RBI panel has
recommended allowing resident Indians
to open acco"nt overseas and remit O
4:,555 ann"ally. RBI has permitted to
remit other amo"nt li$e O15,555 for
private visit, O:,555 for gift, O:,555 for
donation etc. thro"gh the same acco"nt.
6g9 RBI has anno"nced on 45.8.5> for
setting "p of %arapore -ommittee II to
s"ggest comprehensive medi"m term
frame wor$ with se("encing and timing
to move to capital acco"nt converti#ility.
3?5
oreign
E)cha
nge
Capital
&ccounts
Convertibility
-&R&%.RE
C.//!--EE !!
4
nd
%arapore -ommittee was appointed in
March 455> at the #ehest of the 2rime Minister
=r. Man Mohan Singh to draw a road map of
f"ll converti#ility, as conditions now are more
#enign.
4
nd
%arapore -ommittee has s"#mitted its report
to the Reserve Ban$ of India.
It is e&pected that f"ll converti#ility will #e a
#oon for companies loo$ing for ac("isitions
overseas.
%he committee is e&pected to loo$ into the
iss"es of fiscal deficit, impact of immediately
and s"dden converti#ility of fore& reserves etc.
oreign
E)cha
nge
S.$H&N!
C.//!--EE
1!BER&1!SE U
R>1ES
Recommendations(
Ban$ to fi& of its own open position of 'T
Interest rate of '-NR to #e decided #y #an$
-"stomers to have option.hedge facility
Ban$ to have their own gap limit #ased on
ris$.e&pos"re
Human
Resou
rce
/ana
geme
nt
3anan
Committee
on Ban$ing
Ed"cation
-hairman
Jannan, -M=,
Ban$ of Baroda
%o loo$ into revision of the e&amination system for
the #an$s which is administered #y the
Indian Instit"te Ban$ersA 6IIB9, M"m#ai.
Recommendations (
%he present system of cond"ction e&aminations
#y the Indian Instit"te of Ban$ersA, 6IIB9 for
#an$ing professionals needs some changes.
%he s"ggested changes incl"de 6a9 introd"ction
of C"nior ,ssociate =iploma e&aminations and
-ertificate ,ssociate E&amination wo"ld* 6#9 the
committee highlighted the need for increasing
level of speciali+ation at senior level. It has
s"ggested a Specialised MB, co"rse in
Ban$ing and 'inance* 6c9 the committee also
s"ggested that employees of finance
3?3
companies sho"ld also #e covered #y the IIB
e&aminations.
3?3
Human
Resou
rce
/ana
geme
nt
3.H1!
-BM
MI%%E
E BN
HRM
Sri SS Johili,
-M= 2NB
Recommendations(
Recommended downsi+ing of manpower in
2SBs.
%o draw manpower plan #efore implementing
IRS.
S"ggested norms for compensation.
Removal of -entrali+ed Recr"itment System.
Introd"ction of ESB2 in #an$s.
Reorienting the transfer placement policy.
-hanging performance appraisal norms.
,lterations in the norms of wor$ allocation.
Improving the 0o# profile of employees8

Human
Resou
rce
/ana
geme
nt
3handel0al
comm
ittee
%he Jhandelwal committee has proposed changes
in the way 2SBs recr"its, compensate, provide
incentives and plan for s"ccession of employees
"nder their fold.
Recommendations:
Ban$ sho"ld do away with the system of
ind"stry wise settlement of wage revision
instead it sho"ld #e at #an$ level depending
"pon its capacity and profita#ility.
It o#served that salary level "p to Scale II is
competitive #"t senior level salary is not at
per mar$et rates.
Ban$ can have either varia#le pay or
incentive scheme to compensate the senior
level e&ec"tive.
Recr"itment, promotion and training are
other iss"es that need to #e addressed.
Ban$ are li$ely to face a severe crisis with
almost all senior level e&ec"tive retiring in
ne&t co"ple of years with no alternative plan
3?@
at place.
,warding ESB2 "p to 1:< to top performer
is other $ey recommendation of the
committee.
3?>
!nspection G!1&N!
C.//!--EE
.N !N-ERN&1
C.N-R.1
S4S-E/ !N
B&N3S /
R,SHI= CI7,NI
-M= 2NB
%o e&amine the efficacy and ade("acy of the
internal control systems in #an$s and to s"ggest
improvements in them.
Recommendations(
%o #eef)"p Internal Inspection and a"dit
system.
-omp"ter a"dit)relia#le software, confidentiality
of data is maintained.
Rating of #ranches /inspection of poor rated
#ranches within 14 months.
Inspector to chec$ N2,.
,cco"nta#ility of a"ditors also.
Efficiency ratio of #ranches / on floppy to
ascertain ris$s and "pdated.
,"dit committee of #oard ) scope to #e
increased to incl"de fra"d, RBI inspection etc.

!nspection %&$/&N&BH&
N E.R3!N6
6R.>% .N
B&N3
S>%ERH!S!.N
*%E6+ ?LL?
Recommendations(
Shift from c"rrent system of periodical
inspection to ongoing s"pervision.
Bn site Monitoring)target specific critical areas
S"pervision #ased on -,ME7S
6a9 -apital ,de("acy
6#9 ,ssets M"ality
6c9 Managerial
6d9 Earning
6e9 7i("idity
6f9 System and -ontrol
'oc"s on 6a9 'inancial -onditions 6#9
Bperating -onditions and 6c9 Reg"latory
-ompliance.
/oney /arket 18C8 6upta
-ommittee on
=erivatives are financial instr"ments that derive
their val"e from the "nderlying financial assets.
3?B
=erivatives Recommendations:
M"t"al f"nds sho"ld #e allowed to trade in
derivatives for hedging #"t not for spec"lation.
Stoc$ e&changes sho"ld inspect the #oo$s of
all its mem#ers participating in the derivative
segment at least once a year.
E&isting stoc$ e&changes sho"ld #e allowed to
set "p a derivative segment.
3?C
N%&
/ana
geme
nt
%annir Selvam
-omm
ittee
on
N2,
1?
Recommendations(
Enlarge the definition of de#ts to incl"de de#t
d"e to #an$s and mortgage de#t. %his will
help avoiding reference to High -o"rt when
the mortgage s"its come "p #efore the =R%.
=R%s sho"ld have power to appoint receivers
and iss"e attachments d"ring the pendency
of s"its. Dovernment sho"ld specify
remedies for contempt of =R%s in case of
diso#edience or #reach of orders of the
=R%s.
N%&
/ana
geme
nt
S R !H4ER
6R.>% .N
CRE$!-
!N.R/&-!.N
B>RE&> .
!N$!&
Recommendations(
=issemination of information relating to s"it
filed acco"nts regardless of the amo"nt claimed
or s"ch other acco"nts where #orrower has
given consent for disclos"re.
2revent ta$ing advantage of lac$ of information
#y "nscr"p"lo"s #orrower.
N%&
/ana
geme
nt
SS 3.H1!
RE%.R- on
0illful
defaulters8
Recommendations(
S"ggested amendment in #an$ing law to
ena#le #an$s to ma$e p"#lic the name of willf"l
defa"lters.
,s vario"s acts for#ids #an$ers to disclose
identity of the c"stomers "nless it is s"it filed
hence s"ggested amendment in vario"s act
s"ch as SBI ,ct .BR ,ct . I=BI act.
2anel has defined willf"l defa"lter as one who
=oes not repay despite cash.
=oes not p"rchase assets for which it has
#orrowed.
Misrepresents or falsifies records.
=isposes of sec"red assets witho"t
informing the #an$.
Bperates an acco"nt o"tside the
3??
consorti"m of lenders.
Name of willf"l defa"lters incl"ding f"ll time
e&ec"tive sho"ld #e circ"lated among #an$s .
p"#lic and SEBI.
3?A
Regulatory
Re'ui
remen
t
6anguly
Com
mittee
Report of the -ons"ltative Dro"p of =irectors of
Ban$s . 'inancial Instit"tions 6=r. Dang"ly
Dro"p9.
Recommendations(
6a9 Responsi#ilities of the Board of
=irectors.
6#9 Role and responsi#ility of independent
and non)e&ec"tive directors.
6c9 %raining facilities for directors.
6d9 ,genda and min"tes of the #oard
meeting.
(e) -ommittees of the Board
6a9 ShareholdersZ Redressal -ommittee
6#9 Ris$ Management -ommittee
6c9 S"pervisory -ommittee,
6f9 =isclos"re and transparency.
Regulatory
!ssue
s
/alegam
comm
ittee
S"#)committee will review the definition of
@microfinanceA and @microfinance instit"tionsA for
the p"rpose of reg"lation , e&amine conditions
"nder which loan to M'I can #e classified as
priority sector, recommend for money lending
legislation of the states for M'I, recommend for
M'I association and their role in increasing
transparency of operation, and grievance
handling mechanism for adherence to
reg"lations.
Recommendations
-reation of separate category of NB'-) M'Is
, cap on 14< and 4;< on margin and interest,
separately.
-reation of one or more social capital f"nds.
7ending #y not more than two M'Is to
individ"al #orrowers.
-reation of one or more credit #"rea"s
3A4
Reaffirmed priority sector stat"s
%otal permitted o"tstanding to Rs. :5,555 and
increase in ann"al income limit to Rs. >5555 for
r"ral and Rs. 145555 for other areas.
3A5
RE6>1&-.R4
REJ>!
RE/E
N-S
B,SE7 II Increased transparency re. Ban$As act"al ris$
Better monitoring #y private investors
Better ris$ management and capital allocation
%hree pillars of accord are )
!RS- %!11&R)Minim"m capital re("ired
6a9 Minim"m !< re("irement.
6#9 Meas"re operational and credit ris$.
6c9 Incl"sion of capital for operational ris$
also.
6d9 %wo approach)Standardi+ed and
Internal Rating Based.
6e9 IRB #ased on internal estimate of
#orrowers credit worthiness to assess
credit ris$ #y rating agency.
SEC.N$ %!11&R /Role of reg"lator
6a9 ,pproval of IRB #y reg"lator
6#9 Ban$ management to #ear responsi#ility
to for $eeping ade("ate capital in
s"pport of ris$ #eyond core capital
-H!R$ %!11&R / Mar$et =iscipline
6a9 New disclos"re re("irement in several
cases
6#9 M"antitative.("alitative dimension of
capital str"ct"re
%hree layered str"ct"res have #ecome matter
of de#ate. IRB approach re("ire several core
inp"t s"ch as 2= 62ro#a#ility of defa"lt9, 7D=
6e&pected loss rate given a defa"lt9 and E,=
6e&pected amo"nt of e&pos"re at defa"lt9. S"ch
sophisticated process re("ires lot of e&pertise,
technology and reso"rces for #an$s and
reg"lators. It is arg"ed that #asing capital
re("irement on very fine discrimination of credit
3A3
ris$ is not practical.
In line with Basel 2act, the RBI has as$ed all
#an$s to draw a road map to comply B,SE7 II.
%o #egin with all #an$s in India will adopt
Standardi+ed approach for credit ris$ and Basic
Indicator ,pproach for operational ris$. Bnce
#asic s$ill is developed and RBI is satisfied
#an$ can l switch over to Internal Rating Model.
,ll sched"led commercial #an$s will #e
re("ired to follow B,SE7 II w.e.f. March 5!.
RBI after cond"cting a sim"lation st"dy on :5
p"#lic and private sector #an$ has assessment
additional capital re("irement of tier I capital of
Rs. :1, 4:: crore within March 455.
,s on 85
th
C"ne 4515, -R,R of commercial
#an$ was 18.;< of which tier I was .8<.
,ltho"gh Basel !!! norms are yet to #e
cali#rated yet RBI is confident that they will not
impact the Indian #an$ing system significantly.
3A3
Credit !e%ort of t(e
-ommittee on
$om%re(ensive
!e&ulation of
-redit ratin&
a&en$ies r6
N6P6 Nris(nan)
%he -ommittee was constit"ted #y the Ministry of
'inance at the instance of the High 7evel
-oordination -ommittee on 'inancial Mar$ets
6H7--'M9 to revisit the legal and policy framewor$
for reg"lating the activities of -redit Rating
,gencies 6-R,s9 in order to ta$e a larger view of
the entire policy with respect to #an$ing, ins"rance
and sec"rities mar$et. %he -ommittee s"#mitted its
report to the H7--'M on =ecem#er 41, 455.
%he -ommittee has o#served that altho"gh, prima
facie there is no immediate concern a#o"t the
operations and activities of -R,s in India even in
the conte&t of the recent financial crisis, there is a
need to strengthen the e&isting reg"lations #y
learning the appropriate lessons from the c"rrent
crisis. %he -ommittee has ta$en note of
international action in this regard and, inter alia,
has recommended that there is a need for
enhanced disclos"re, contin"ation of the iss"er)
pays model, strengthened process and compliance
a"dit, reporting of ownership changes, disclos"re
of defa"lt and transition statistics and strengthening
of the reg"lation of the -R,s in t"ne with these
s"ggestions.
%riority sector M M /air
-ommittee
:o re0e,amine t(e e,istin& $lassifi$ation and
su&&est revised &uidelines 'it( re&ard to
%riority se$tor lendin& and related issues6
Major ,ecommendat$ons of the %omm$ttee are<
56 :(e tar&et of domesti$ s$(eduled
$ommer$ial ban8s for lendin& to %riority
se$tor may be retained at @4 %er $ent of
ad;usted net ban8 $redit ()/.-) or $redit
e=uivalent of off0balan$e s(eet e,%osure
(-+O.+)7 '(i$(ever is (i&(er6
36 :(e se$tor Pa&ri$ulture and allied a$tivities9
may be a $om%osite se$tor 'it(in %riority
se$tor7 by doin& a'ay 'it( distin$tion
bet'een dire$t and indire$t a&ri$ulture6 :(e
tar&ets for a&ri$ulture and allied a$tivities
may be 5? %er $ent of )/.- or -+O.+7
'(i$(ever is (i&(er6
36 ) sub tar&et for small and mar&inal farmers
'it(in a&ri$ulture and allied a$tivities is
re$ommended7 e=uivalent to A %er $ent of
)/.- or -+O.+7 '(i$(ever is (i&(er to
3A@
be a$(ieved in sta&es by 345>05B6
@6 :(e MS+ se$tor may $ontinue to be under
%riority se$tor6 Wit(in MS+ se$tor7 a sub
tar&et for mi$ro enter%rises is re$ommended
e=uivalent to C %er $ent of )/.- or
-+O.+7 '(i$(ever is (i&(er7 to be a$(ieved
in sta&es by 345305@6
>6 .an8s may be en$oura&ed to ensure t(at t(e
number of outstandin& benefi$iary a$$ounts
under Psmall and mar&inal farmers9 and
mi$ro enter%rises9 ea$( re&ister a minimum
annual &ro't( rate of 5> %er $ent6
B6 :(e loans to (ousin& and edu$ation may
$ontinue to be under %riority se$tor6 Joans
for $onstru$tionL%ur$(ase of one d'ellin&
unit %er individual u% to !s63> la8(K loans
u% to !s63 la8( in rural and semi urban areas
and u% to !s6> la8( in ot(er $entres for
re%air of dama&ed d'ellin& units may be
&ranted under %riority se$tor6
C6 In order to en$oura&e $onstru$tion of
d'ellin& units for +$onomi$ally Wea8er
Se$tions (+WS) and Jo' In$ome #rou%s
(JI#)7 (ousin& loans &ranted to t(ese
individuals may be in$luded in Wea8er
Se$tions -ate&ory6
?6 )ll loans to 'omen under %riority se$tor
may also be $ounted under loans to 'ea8er
se$tions6
A6 Jimit under %riority se$tor for loans for
studies in India may be in$reased to !s6 5>
la8( and !s6 3> la8( in $ase of studies
abroad7 from e,istin& limit of !s 54 la8(
and !s 34 la8(7 res%e$tively6
546 :(e %riority se$tor tar&et for forei&n ban8s
may be in$reased to @4 %er $ent of )/.- or
-+O.+7 '(i$(ever is (i&(er 'it( sub0
tar&ets of 5> %er $ent for e,%orts and 5> %er
$ent for MS+ se$tor7 'it(in '(i$( C %er $ent
may be earmar8ed for mi$ro enter%rises6
556 :(e $ommittee re$ommends allo'in& non0
tradable %riority se$tor lendin& $ertifi$ates
(PSJ-s) on %ilot basis 'it( domesti$
s$(eduled $ommer$ial ban8s7 forei&n ban8s
and re&ional rural ban8s as mar8et %layers6
536 .an8 loans to non0ban8 finan$ial
3A>
intermediaries for on0lendin& to s%e$ified
se&ments may be allo'ed to be re$8oned for
$lassifi$ation under %riority se$tor7 u% to a
ma,imum of > %er $ent of )/.- or
-+O.+7 '(i$(ever is (i&(er7 sub;e$t to
$ertain due dili&en$e and do$umentation
standards6
536 :(e %resent system of re%ort0based
re%ortin& (as $ertain limitations and it may
be im%roved t(rou&( data0based re%ortin&6
:(ere is a need to address t(e issues in data
re%ortin& li8e %re0defined %arameters7
referen$e date7 %eriodi$ity7 unit of re%ortin&7
et$6
3AB
Customer
servic
e
RBI +ane$
on
customer
ser8ice
C*airman
Mr1
Damodaran
E, C*ief of
SEBI
RecommendationsG
De+osit insurance co8er to
increase to Rs1 3 $ak*s
No e,or0itant rate for forec$osure
of *ousing $oans
#rescri+tion on ser8ice c*arges
for 0asic ser8ices $ike remittances
Com+ensation on de$a"ed returns
of instruments and $oss of tit$e
deeds
Increasing ca+ of +re!+aid
instrument to Rs1 3&-&&&
Intimating customer for 0reac*ing
minimum 0a$ance and c*arges for
t*e same
In case of fai$ure of ATM or net
customer 2i$$ not 0e reHuired to
0ear $oss1
Re+$acement of ATM card or de0it
card 2it* C*i+ 0ased card 2it* a
+*otogra+* of card *o$der
Small Scale
!ndust
ries
3&%>R
C./
/!--E
E(SS!
7B,N)-omposite 7oan "p to Rs. : lacs, 7oan
#y S'-.Ban$s "p to Rs. 4: lacs and a#ove 4:
lacs #y S'-.B,NJS any one
Sectoral allocation) ;5< "p to Rs.: lacs, 45<
from Rs.: to 4: lacs and ;5< a#ove Rs. 4:
lacs.
Interest Rate /27R or cost of f"nds
=I-D-)scrap and #an$s to set "p their own
sin$ing f"nds.
,dhoc "pto 45< #y BM.
2hasing o"t collateral sec"rity.
-hange in definition of Sic$ "nit.
-ommittee approach for appraisal.
MBF with S'- in each state #y lending #y
#an$ to sanction 0oint loan)3- #y #an$s only.
2S f"nds sho"ld not #e diverted for N,B,R=,
SI=BI, S'-, SI=-, NSI-, NBH, and HF=-B
3AC
BBN=S.
3A?
Small Scale
!ndust
ries
N&4&3
C./
/!--E
E
% R N&4&3
$4 6.HERN.R
RB!
Recommendations(
M2B' 45< of sales)ma&im"m Rs. : crores
Both term loan and cash credit loan "p to
pro0ect of Rs. 45 lacs 6wor$ing capital Rs. 15
lacs 9
2reference to village, tiny and other small
ind"stries
1
st
method of lending for instit"tion mar$eting
goods of village, tiny and other small ind"stries.
/S/E Eorking group
to
revie
0 the
0orki
ng of
C6S-
/S/E
Having regard to the imperative of accelerating
the flow of credit to the Micro and Small
Enterprises 6MSEs9 sector, which is very
critical for incl"sive and e("ita#le growth and
larger economic empowerment, it was
anno"nced in the 6paragraph 11;9 ,nn"al
2olicy statement for 455)15 Yto as$ the
Standing ,dvisory -ommittee on MSEs to
review the -redit D"arantee Scheme so as to
ma$e it more effective.H 'ollowing this
anno"ncement, a wor$ing gro"p was
constit"ted "nder the -hairmanship of Shri
I.J. Sharma, E&ec"tive =irector, Reserve
Ban$ of India. %he terms of reference of the
Dro"p wereL i9 to review the wor$ing of the
-redit D"arantee Scheme and to s"ggest
meas"res to enhance its "sage and facilitate
increased flow of collateral free loans to MSEs*
ii9 to ma$e s"ggestions to simplify the e&isting
proced"res and re("irements for o#taining
cover and invo$ing g"arantee claims "nder
-D%MSE Scheme* iii9 to e&amine the
feasi#ility of a whole t"rnover g"arantee for the
MSE portfolio* and iv9 any other iss"es.
%he gro"p has recommendedL
%he main recommendations of the Dro"p areL
?8 Collateral free loans
%he limit for collateral free loans to the MSE sector
to #e increased from the present level of Rs. : la$h
to Rs.15 la$h and it #e made mandatory for #an$s.
;8 6uarantee ee
3AA
a9 %he g"arantee fee for collateral free loans "pto
Rs.15 la$h to Micro Enterprises to #e #orne.
a#sor#ed #y the -D%MSE s"#0ect to the proviso
that the %r"st #e free to ad0"st the g"arantee fee
#oth downwards and "pwards #ased on the
modelling of the dynamically evolving distri#"tion of
claims. %his will ens"re that the -D%MSE remains
self)financing and self)s"staining in the long)term.
#9 -D%MSE may charge composite, all)in
g"arantee fee of 1< p.a. and appropriately realign
downwards the g"arantee fees chargea#le to
women entreprene"rs, Micro enterprises and "nits
located in North)Eastern Region incl"ding Si$$im.
%he %r"st may also ann"ally review the D"arantee
'ee to #e charged on the #asis of the
pricing.val"ation model s"ggested #y the Dro"p.
c9 %he Dovernment of India to consider e&empting
#oth g"arantee fee and the income on investments
of the %r"st from Income %a&, as is the practice
internationally for s"ch non)profit credit g"arantee
organisations.
A8 E)tent of the 6uarantee Cover
-onsistent with the recommendation for
enhancement of the collateral free loan limit from
Rs. : la$h to Rs. 15 la$h, the g"arantee cover "pto
!:< of the amo"nt in defa"lt to #e made applica#le
to credit facilities to Micro Enterprises "pto Rs 15
la$h. However, the e&tent of g"arantee cover for
credit facilities a#ove Rs.15 la$h "pto Rs.:5 la$h
will #e ?:< and for credit facilities in e&cess of
Rs.:5 la$h "pto Rs.1 crore will #e ?:< "pto Rs. :5
la$h and :5< of the amo"nt in e&cess of Rs. :5
la$h, as per the e&tant provisions of the Scheme.

@44
-echnology Committee .n
-echnological
!ssues E S
Saraf ( $ec
?LLC
Recommendations(
,n electronic f"nds transfer system is set "p /
B,NJNE% comm"nication networ$ may #e
"sed for the p"rpose.
Steps are ta$en #y RBI to enact a s"ita#le
legislation on the lines of Electronic '"nds
%ransfer ,ct 1?! in FS, and =ata 2rotection
,ct 1!; in FJ.
RBI may e&plore the feasi#ility of "sing
NI-NE% for electronic reporting of c"rrency
chest transactions
'"nds settlement in respect of Dovt.
transactions may #e delin$ed from s"#mission
of scrolls and doc"ments to 2,B of Dovt. dept.
'"nds settlement to ta$e place in a prescri#ed
frame ens"ring at % S system
Electronic clearing service is introd"ced to
effect repetitive low val"e transactions li$e
interest, dividend, ref"nd orders, salary,
pension etc.
Bills payment system to introd"ce to ena#le
c"stomers of "tility services to pay #ills #y de#t
to their acco"nts in #an$s.
-he("e transaction system sho"ld introd"ced
initially for Intra)#an$ che("es of val"e "p to
Rs. :555. In d"e co"rse, it may #e e&tended to
Inter)#an$ instr"ments. S"ita#le changes to #e
initiated in NI ,ct.
>niversal
Banki
ng
3H&N
C./
/!--E
E
*Harm
oni,in
Fniversal #an$ing /doing all #an$ing activity
#oth commercial and developmental "nder one
roof.
-RR to #e red"ced to 8< and S7R to #e
phased o"t
@45
g the
role
of $!
and
banks
for
movin
g
to0ar
ds
univer
sal
banki
ng+
'II to #e allowed to accept short)term deposit.
='I has no f"t"re /allow converting to #an$ or
NB'-.
%ransfer of RBI holding of e("ity in ='I to
Dovernment)RBI can not #e owner as well as
s"pervisor at the same time.
=oing away with concessional lending.
RBI approach / allow : years to ='I to convert into
#an$s.
@43
Higilance E)pert
Committee on
Bank rauds
(ChairmanL
N. 7. Mitra
Recommendations(
S"ggested #oth ) preventive and c"rative
aspects of #an$ fra"ds.
Recommended for incl"ding financial fra"d as a
criminal offence.
S"ggested for amendments to the 6,9 Indian
2enal -ode #y incl"ding a new chapter on
financial fra"d* 6B9 Indian Evidence ,ct to shift
the #"rden of proof on the acc"sed person and
6-9 special provision in the -ode of -riminal
2roced"re for transferring the properties
involved in the financial fra"d and confiscating
"nlawf"l gains.
2reventive meas"res incl"ding the
development of Best -ode 2roced"res #y
#an$s.
Higilance 6H.SE
C.//!--EE
(High level
committee on
fraud and
malpractice
Recommendations(
Introd"ce -onc"rrent ,"dit )s"#stantive
chec$ing)special report to #an$.
2hotograph of the depositors.
=es$ card to employees.
-ash and val"a#le in 0oint c"stody.
-ash sho"ld not #e deposited other than cash
department.
,dvance not to e&ceed delegated a"thority.
)5)5)5)
@43
%ha"ter- 37
Becoming an e?ecti8e trainer
5.true illiterates of the future will be those who do not relearn and retrain.
555#non
(1 Trainer as a sa$es +erson
1.1#)ere is a "itt"e !it o' se""ing t)at eac) one o' us does a"" t)e tie. #)e
priest at t)e tep"e is se""ing t)e service )e 1no-s !est. #)e *oung an
@4@
appearing 'or t)e intervie- is se""ing )is candidature to t)e !oard. A
po"icean is se""ing )is s1i"" to contro" "a- and order. #)e teac)er se""s )is
-isdo and 1no-"edge to students. #)e trainer is to do t)e sae /o!. #)e
se""ing is, t)ere'ore, essentia" o' "i'e.
1.2#)e trainer as a sa"es person )as to understand )is custoers 5trainees6,
t)eir -ants 5training needs6, )o- to ap t)ese -ants 5training need
ana"*sis6, )o- to satis'* t)ese needs 5training e>ectiveness6, )o- to
easure needs satis'action 5training eva"uation6 and to ta1e 'eed !ac1 to
ensure t)at training serve its purpose 5return on training investent6.
1.3#)e 1e* to t)e success o' an* organiGation "ies in )o- eHcient"* t)e
organiGation anages its )uan resources. #)e princip"e app"ies ore
apt"* to service institutions "i1e !an1s. #)e issue is sti"" ore re"evant to
pu!"ic sector !an1s as t)e* are striving )ard to 1eep pace -it) t)e
tec)no"ogica" c)anges and c)a""enges o' copetition. A"" t)is re9uires
creation o' ne- copetencies and capa!i"ities in oHcersIep"o*ees on
an on-going !asis 'or -)ic) a good training s*ste is a ust. #raining is
not one-o> JrepairK to eet an iediate need !ut a too" o' continuous
deve"opent. #raining not on"* a1es t)e angersK eHcient !ut a"so
a1es t)e e>ective.
%1 Making of a trainer
2.1 $ne a* !ecoe a trainer !* c)oice 5a core 'acu"t* or 'acu"t* se"ected
t)roug) intervie- process6 or !* de'au"t 5pic1ed up !* t)e anageent
and posted6. 2ut once )e is in t)e s*ste, )e ust conscious"* tr* to
deve"op )i-se"'. Le )as to !e a 'riend, p)i"osop)er and guide o' trainees.
Le )as to !e +it, +ast and (art "i1e a sa"es-an.
2.2 A trainer s)ou"d not on"* !e ft to !e a teac)er !ut a"so continue to !e ft
'or teac)ing. Le s)ou"d )ave p"easing persona"it*, attractive anneris,
positive attitude and good counication s1i"". Le s)ou"d deve"op trust,
c"oseness and rapport -it) )is trainees. Le s)ou"d spea1 convincing"* and
"isten non-de'ensive"*. Le s)ou"d express c"ear"* and "ogica""*. Le s)ou"d
!e read* to guide, )e"p and direct. Le s)ou"d !e )uge"* counicative
and aintain a persona" touc) -it) trainees -)i"e giving t)e enoug)
space to counicate -it) )i. Le s)ou"d 1no- art o' ans-ering
9uestions o' t)e trainees "ogica""* and convincing"*. Le s)ou"d !e
@4>
conversant -it) a"" training et)odo"ogies and tec)ni9ues to de"iver -)at
trainee needs and not -)at trainer )as. Le s)ou"d !e coputer savv*.
Le s)ou"d a"so !e a good "earner. A!ove a"" )e s)ou"d a1e continuous
e>orts to 1eep )ise"' up to date so t)at )e continues to !e a ft teac)er.
2.3 ?t is said t)at reading a1es a read* an. 8eading is !asic re9uireent o'
a trainer. ?n 'act trainer ust deve"op )a!it o' rapid reading. As per
surve*, average reading speed o' executives in ?ndia is 25% -ords per
inute -)en in 'act it s)ou"d !e 5%%. &resident Menned* is !e"ieved to
)ave )ad a p)enoena" speed o' 15%% -ords per inute. Le -as not !orn
-it) t)is capacit*< )e cu"tivated t)is. &oor reading erodes 5%= o' oneKs
tie. +astness is t)us a specia" virtue o' a trainer.
2.4 +astness re9uires setting t)e priorities rig)t. Le s)ou"d introduce trainees
-it) 'acu"ties as -e"" as -it)in group as ear"* as possi!"e. (a""
anecdotes, /o1es, stories etc. create )uor and iprove invo"veent. Le
s)ou"d !e articu"ate enoug) to use t)ese too"s to !rea1 t)e ice. Le s)ou"d
)ave a!i"it* to p"ace frst t)ings frst suc) as c"ass- roo setting, address
s*ste, u"ti-edia, air-conditioning and "ig)ting. Le s)ou"d !e 'ast to
pic1- signa"s o' passive "istening "i1e no 9uestions, !"an1 'aces etc. and
s)ou"d encourage t)e to coe out o' t)e s)e"" !* putting 9uestions and
stiu"ating interaction. Le s)ou"d !e sensitive enoug) to o!serve
)appenings !ot) inside and outside t)e c"ass and propt"* ta1e proactive
easures to 1eep t)e "earning atosp)ere in its rig)t earnestness.
2.5 (artness deands t)at trainer is not on"* sart"* dressed !ut a"so
passionate a!out )is pro'ession. A sart trainer is one -)o c)ec1s and
a1es )is training st*"e and "anguage a per'ect ft. Le s)ou"d )ave )ig)
"eve" o' energ* and a!ounding se"'-confdence to coand respect 'ro
t)e trainees. Le s)ou"d dress appropriate"*. #)e dress a1es a stateent
a!out trainerKs persona"it*.
2.6 E>ectiveness o' t)e trainer is "i1e deve"oping a !rand. Di1e a success'u"
!rand, a trainer s)ou"d !e custoer 5trainee6 driven. Le )as to de"iver
-)at trainee needs. Le )as to de"iver -)at can !e put into practice.
4 E?ecti8eness $adder
3.1 Di1e advertising, a trainer -i"" 'ai" to de"iver i' )e "ac1s to connect -it) t)e
peop"e 5trainees6. As "earning process o' adu"ts is entire"* di>erent 'ro
@4B
t)at o' sc)oo"c)i"dren, a trainer )as to !e conscious o' connecting -it)
trainees to a1e t)e active "earner.
3.2 #)e training is 1no-n as "ong-ter intangi!"e investent. An e>ective
trainer )as to tangi!i"ise t)e intangi!"es. Le )as to a1e t)e resu"ts
visi!"e !* c)ange o' attitude, iproveent o' s1i"" and !etterent o'
1no-"edge o' t)e trainees. Le )as to 9uanti'* t)e iproveent !*
easuring resu"ts.
3.3 E>ectiveness "adder starts -it) identifcation o' training needs. ?nspection
reports, annua" per'orance appraisa" o' ep"o*ees, custoer
cop"aints, revie- eetings, intervie- 'or prootions, ne-
productI!usiness "ine, ne- recruits, ne- prootion etc. are events t)at
trigger training needs. (tructured pre training surve* is t)e ot)er too" to
identi'* c)anging training needs o' t)e ep"o*ees. ?n addition, t)ere are
s1i""-oriented /o!s "i1e coputer operations t)at re9uire regu"ar s1i"" up
gradation.
3.4 $nce training needs are identifed, next step is to ana"*Ge t)ese needs
and trans"ate into specifc topics and odu"es. ?n order to eva"uate t)e
resu"ts, training o!/ectives are siu"taneous"* deterined so t)at
aggregate "earning outcoe is 9uantifed t)roug) eva"uation process. ?t is
essentia" t)at prograe o!/ectives are set out 'ro "earnerKs
perspective and s)ou"d a"so 9uanti'* !enefts t)at are expected o' t)e
trainees.
3.5 0ext step is to identi'* prograe contents. #)is is a"so 1no-n as topic
p"anning. A trainer s)ou"d ree!er t)at prograe contents are
contained in t)e o!/ectives and converse"* prograe contents dovetai"
into prograe o!/ectives. Lence contents s)ou"d atc) training needs.
+"exi!i"it* is a 1e* to t)is process. At t)e start o' t)e progre, t)e
contents s)ou"d !e revie-ed -it) t)e target trainees and depending upon
t)eir 'eed!ac1, a 9uic1 ad/ustent s)ou"d !e done so as to eet
expressed need. ?' necessar*, additiona" sessions can !e p"anned. #)is
process o' consu"tation )as one ore advantage. ?t creates coitent
and o-ners)ip o' t)e participants.
3.6 #)e su!/ect se9uencing, tie a""ocation, training et)odo"og* etc. are
ver* crucia" 'or ip"eentation perspective. A"" t)ese )ave to !e p"anned
@4C
in "ogica" and integrated anner. &rograe s)ou"d start 'ro sip"e,
eas* to understand and uncop"icated su!/ects and gradua""* rise to
diHcu"t, )ard and cop"icated su!/ects. #)e e>orts s)ou"d !e to deve"op
confdence and create interest o' trainees and aintain oentu o' t)e
prograe. (upport ateria" "i1e )andout, case studies, exercises etc.
s)ou"d !e provided to supp"eent t)e training e>orts or to give
groupItea assignents.
3.7 #)e trainer s)ou"d in !et-een t)e prograe do recap o' t)e training
events and s)ou"d a"so do id-ter revie- -it) a vie- to do id-ter
correction. Experience s)o-s t)at trainees ver* o'ten are not a!"e to
express t)eir re9uireent in ear"* stage o' t)e prograe and it is on"*
-)en t)e* are exposed to t)e su!/ect, t)e* are a!"e to give eaning'u"
suggestions.
3.8 #)e trainees are ot)er iportant e"eent o' t)is va"ue c)ain. A trainer
s)ou"d constant"* strive to epo-er )is trainees. Le s)ou"d
&roote se"'-a-areness and se"'-e>ectiveness aong trainees.
?nitiate t)e process to !ring do-n !arriers !et-een t)e participants
and reove in)i!itions.
+aci"itates t)e process o' exp"oring, 1no-ing and deve"oping )ea"t)*
re"ations)ip aong participants.
Eotivate t)e participants 'or eaning'u" and productive
participation.
&roote 'ree and open exc)ange o' experiences and ideas.
Ac9uaint t)e -it) t)e d*naics o' a training group and group
process. :eve"op respect 'or group procedures and nors.
3.9 #raining e>ectiveness can !e !etter easured t)roug) standards o'
per'orance t)at participants are re9uired to attain during t)e process o'
training. #)ese per'orances can !e easured t)roug) entr* and exit
test. #)e test process -i"" not on"* spea1 a!out 1no-"edge addition o' t)e
participants in genera" !ut -i"" a"so )e"p t)e trainer to identi'* t)e
1no-"edge gaps t)at )e )as to f"" up. ?ncentiveIpriGes are ot)er eans to
iprove en)anceent o' per'orance 'or )ig) B*ers. #o encourage
@4?
participation, t)e trainer s)ou"d a"-a*s give appreciation and
ac1no-"edgeent o' good -or1 to trainees.
3.1% E>ectiveness "adder re9uires strategic integration o' training s*ste,
trainers and t)e trainees. #rainerKs coitent and passion soot)en
t)e integration process.
)1 De8e$o+ "our 0rand! standard setting
4.1(etting standards are "i1e !ui"ding t)e !rands. And "i1e a !rand, a trainer
ust !e va"ue driven. +irst"* )e s)ou"d )ave 'ait) in training as a too" 'or
gro-t) and deve"opent. Le s)ou"d )ave fr !e"ie' in )uanistic
approac) in training. Le s)ou"d )ave coitent to t)e prograe and
its o!/ectives. Le s)ou"d )ave pro'essiona" coitent to exce". And
a!ove a"", )e s)ou"d )ave 'ait) in participator* training.
4.3(ession 'eed !ac1 is an iportant too" t)at ena!"es t)e trainer to eva"uate
)is per'orance. A trainer s)ou"d not !e )esitant to use t)is too". Le
s)ou"d use t)is as o'ten as necessar*. ?n order to encourage )onest
'eed!ac1, a trainer s)ou"d not on"* guarantee anon*it* !ut a"so ta1e t)e
'eed !ac1 in sporting sprit. Le s)ou"d eva"uate )i-se"' over a tie span.
Le s)ou"d constant"* ai at iproving )is per'orance. Le s)ou"d consu"t
)is peers and se"ected trainees to identi'* )is -ea1nesses and a1e
conscious e>orts to iprove upon t)e.
31 7and$ing +ro0$em situations
5.1A trainer a* coe across a situation -)en trainees di>er 'ro )is point
o' vie-. #)e* a* a"so express t)eir dissent voca""*. C)atever !e t)e
reasons, suc) situations re9uire )ig) degree o' patience and copetenc*
'ro t)e trainer to )and"e suc) a-1-ard situations. Le s)ou"d !e tact'u"
as -e"" as strategist.
5.2A trainer * coe across a situation -)en a participant put repeated
9uestions or a1e unnecessar*Iun-arranted suggestions. A trainer
s)ou"d never get provo1ed on suc) events. Le a* tact'u""* as1 t)e
participant to !rieB* indicate in -)at -a*s )is contri!ution is )e"ping t)e
discussion and a* invo"ve ot)er participants to !ring )oe t)e point
t)at 9uestions are unnecessar* and are not re"evant.
5.3 A situation a* arise -)en participants a* invo"ves t)ese"ves in
counter arguents. (uc) situations a* create un)ea"t)* environent in
@4A
t)e c"assroo and a* u"tiate"* a>ect "earning atosp)ere. A trainer
s)ou"d tact'u""* intervene on !e)a"' o' t)e group and state t)at suc)
discussion is not contri!uting to t)e 1no-"edge o' t)e group -it)out
ascri!ing otive even i' )e is sure -)at "ies !e)ind t)e con'rontation.
5.4A participant a* !e 'ound una!"e to a1e a su!stantive point due to
counication pro!"e or "ac1 o' understanding o' t)e su!/ect. ?n suc) a
situation t)e trainer s)ou"d give patient and genuine "istening and
understand t)e pro!"e. ?n case it is o!served t)at pro!"e is due to
copre)ension o' t)e su!/ect, t)en t)e trainer s)ou"d again exp"ain t)e
su!/ect. ?' pro!"e is in counication, t)e trainer s)ou"d parap)rase t)e
su!/ect to c"ari'* t)e dou!ts. #)e participants can a"so !e encouraged to
spea1 in t)eir regiona" "anguage so as to ena!"e t)e to counicate
c"ear"*I'ree"*.
5.5&rivate or cross conversation is a pro!"e ver* o'ten 'aced !* t)e trainers.
#rainer s)ou"d dra- t)e attention o' t)e -)o"e group and encourage
participants to s)are t)eir vie-s -it) t)e group so t)at ever* !od* is
!enefted. $r, )e can use non-ver!a" counication to s)o- t)at
!e)avior )as !een noticed. Le a* ignore t)e !e)avior as tactica"
easure a"so.
5.6A participant a* go to an extent -)ere )e c)a""enges t)e trainer.
0ot-it)standing t)e otive o' t)e participant, a trainer s)ou"d not "ose )is
coposure. Le s)ou"d not get provo1ed. Le a* state is disagreeent
!ut ac1no-"edge t)e contri!ution o' t)e trainee.
5.7Dac1 o' participation or response is ot)er coon pro!"e. #)is can !e
overcoe !* encouraging participation t)roug) 9uestions and ans-ers.
#eac)ing t)roug) a case stud* can !e o' great )e"p in suc) situations.
5.8:istraction t)roug) oveent o' t)e participants or "ate arriva" o'
participants is ot)er a/or pro!"e, -)ic) is o'ten con'ronted !* t)e
trainer. A trainer s)ou"d te"" to participants a!out t)e expected !e)avior
at t)e start o' t)e course. ?' !od* "anguage o' t)e participants sa*s t)at
t)e* are not interested in t)e session, t)en t)e trainer )as to c)ange )is
training st*"e as -e"" as et)odo"og*. Le a* in exceptiona" cases use
adinistrative easures to c)ec1 de"in9uenc*.
@54
5.9$ccasiona""* one or t-o participants a* tr* to onopo"iGe t)e
discussion. $ne reason a* !e t)at t)e trainees )ave ver* )ig) "eve" o'
se"'-estee and 'ee" t)at t)e* are entit"ed 'or suc) doination in t)e
group. #)e ot)er reason a* !e to secure "eaders)ip aong t)e group. A
trainer s)ou"d 1eep )is coo" and s)ou"d never !e)ave out o' eotion. Lis
strateg* s)ou"d !e to )and"e t)e situation -it)out getting into a direct
con'rontation -it) t)e participants.
5.1% A trainer )as cited an incident -)en )e fnd t)at )is ex-!oss is )is
trainee in a training prograe. #)ere a* not !e an* pro!"e -it) t)e
!oss !ut t)e trainer a* !e -orried )o- to teac) )i. (uc) a
ps*c)o"ogica" !arrier a* coe ver* o'ten. Lere )e is 'acing t)e !oss<
ot)ers a* )ave a senior co""eague. A trainer s)ou"d understand t)at )e
is not teac)ing to a !oss or su!ordinate. Le is not teac)ing to a /unior or
senior. As one can "earn 'ro )is su!ordinate, )e can "earn 'ro )is
seniors a"so. A trainer s)ou"d )ave confdence 5and not 'ear6 to )and"e
suc) situations in a stress-'ree anner.
5.11 A trainer -as once as1ed !* one o' )is trainees a!out ista1e )e )ise"'
coitted -)en )e -as in fe"d. Le cou"d sense t)at purpose -as to
distract t)e trainees 'ro "earning pat) and to e!arrass t)e trainer. A
trainer ust !e read* to 'ace suc) pecu"iar situations -it)out "osing
)eart. Le s)ou"d !e !rave to ac1no-"edge )is s)ortcoings. Le s)ou"d
te"" t)e trainees t)at t)is is -)at t)e training is eant to !e -)ere
s)ortcoing o' not on"* )is !ut o' ot)ers a"so -i"" !e discussed so t)at
ista1es are not repeated.
5.12 A trainer a* con'ront -it) ep"o*ees -)o are not rea""* interested to
"earn. Le a* a"so fnd ep"o*ees not interested in training at a"". A
trainer is "i1e a gardener. Le p"ants t)e Bo-ers, create a context, provide
support, and is t)ere to )e"p t)e trainee in )is deve"opent. Lo-ever
)aving done t)at )e does not a"-a*s expect ever* e>ort to !ear 'ruit. Le
s)ou"d accept t)at soe peop"ed do not -ant to !e trained and )e a*
not !e a!"e to a1e a di>erence in )is deve"opent. An e>ective trainer
s)ou"d s)o- epat)* in dea"ing -it) suc) peop"e and instead o' /udging
t)e individua" !* sur'ace !e)aviour< t)e trainer s)ou"d serious"* create
conditions, -)ic) otivate t)e peop"e to -or1. #)e* s)ou"d !e open to
@55
persona" "earning, to receive 'eed!ac1 and read* to "earn even 'ro t)e
ep"o*ees.
5.13 A trainer a* con'ront a situation -)en )e does not 1no- t)e ans-er to
a pro!"e. ?n suc) situation, )e a* coit to )is trainees to coe !ac1
a'ter-ards. Le s)ou"d )onest"* )onour t)is coitent. #)is is )is
pro'essiona" o!"igation.
/1 Summing u+! +$a"ing t*e 8a$ue game
6.1?' *ou scan t)e career )istor* o' ost adired !an1ers, *ou -i"" fnd t)at
ost o' t)e -ere trainer at "east once in t)eir service career. And, t)e*
!ecae success'u" !an1er, great spea1er and visionar* "eader !ecause o'
t)is. (o i' *ou )ave opted *ourse"' as trainer !* c)oice, *ou per)aps
1no- t)e va"ue o' t)is opportunit*, or i' *ou are in t)e training s*ste !*
c)ance, it is a ;odsend opportunit* 'or *ou. ?t is a ver* good !rea1 in
*our service career. Nou -i"" not on"* get "ove, respect and regard !ut a"so
experience deep sense o' satis'action !* contri!uting soe t)ing o' great
va"ue to *ou and to *our organiGation. ?n se""ing perspective, t)is can !e
tered as va"ue addition in *our persona"it* and va"ue creation in
deve"oping )uan resource.
6.2?t is said t)at an* !od* can !e student !ut a 'e- can !e teac)er. O2udding
trainers,P it is a "i'etie opportunit* 'or *ou. Nou )ave great career a)ead.
Nou are in va"ue creation ode. Nou are in t)e pro'ession o' rendering t)e
greatest service o' an1ind. :eve"op *our se"'-'u"f""ing prop)ec* and
en/o*.
IT*ere are no 0oring su0Jects and t*ere are no 0oring trainees1K
IOn$" t*ere are 0oring trainers1K
04440
@53
%ha"ter - 38
Trainers:! as c*ange Managers

It is not the strongest of the species that survive, nor the most intelligent but the one
most responsive to change#$
4harles %arwin
Introduction-,aradigm shift in Indian !an'ing
#)e c)anges a'ter "i!era"isation, privatisation and g"o!a"isation in ?ndia
since "991 )as a signifcant ipact on t)e !an1ing s*ste t)at )as exposed
t)e pu!"ic sector !an1s 5&(2s6 to de-regu"ated and copetitive environent.
#)ese c)anges )ave !roug)t pressure on !usiness s)are, pressure on interest
spread 50?E6 and pressure on fnancia" )ea"t) o' &(2s. #)e custoers
expectations and deands )ave a"so under gone radica" c)ange due to entr*
o' private !an1s -)o )ave started o>ering variet* o' va"ue added services
-it) 'ocus on door step de"iver* and t)at too round t)e c"oc1. #)e c)a""enge
and pressure o' t)is ne- environent )as resu"ted into a sea c)ange in
!an1ing !usiness process. 2an1Ks are innovating ne- products, o>ering
7da*s a -ee1 to 24 L8( !an1ing, introducing ne- de"iver* c)anne"s and
devising ne- -a*s and eans to cut cost, to overcoe de"a*s, and to o>er
services at copetitive rates. #)e* are !ecoing ore and ore pro'essiona"
in t)eir approac) !* cop"*ing -it) internationa" !an1ing standards in t)e
area o' ris1 anageent, capita" ade9uac*, "oan "oss-provisioning, assets
9ua"it* and corporate governance. #)e erger, ac9uisition and !usiness
a""iances )ave !ecoe ne- antra o' surviva" and !usiness gro-t) 'or
!an1s. ?ntensive use o' in'oration tec)no"og* is anot)er conse9uence o'
t)is !usiness process re-engineering -)ic) )as opened ne- de"iver* c)anne"s
@53
t)roug) A#E, #e"e-!an1ing, e-!an1ing etc. -)ere a custoer can do !an1ing
to )is convenience an* tie an* -)ere and t)at too -it)out p)*sica""*
visiting t)e !an1. #)e pressure to cut cost and over coe de"a*s in decision
a1ing )as given -a* to structura" c)anges as !an1s )ave started
trans'oring t)e-se"ves into a "ean and t)in organisation !* oving to
t)ree tier structure 'ro 'our tier and rig)t siGing anpo-er t)roug)
Qo"untar* 8etireent (c)ee and (a!!atica" "eave sc)ee and ta1ing
easures 'or iproving productivit* !* re-dep"o*ing and re-"ocating
anpo-er as per !usiness need 'ro surp"us to defcit poc1ets and 'ro
contro""ing oHces to !ranc)es. ?n preparing 'or t)ese c)anges 'ocus is no-
on adopting a )o"istic approac) to Luan 8esource :eve"opent !* training
and retraining existing -or1'orce to ena!"e t)e to cope -it) t)e ne-
environent ore eHcient"* and ore e>ective"*.
-R&!N!N6 as Human Resource $evelopment process
#)is paradig s)i't is a"" pervasive and )as necessitated 'or t)e !an1s to
respond 'ast, fr"*, decisive"* and innovative"*. ?n order to ena!"e t)e
ep"o*ees to cope -it) t)ese c)anges ore eHcient"* and pro'essiona""*,
!an1s )ave to devise appropriate Luan 8esource Eeasures to deve"op
A##?#7:E, (M?DD and M0$CDE:;E o' t)eir ep"o*ees t)roug) appropriate
training input -it) 'ocus on3 -
1. #o c)ange Attitude 5indset6 o' t)e ep"o*ees in tune -it) c)anging
ties and re9uireents.
2. #o deve"op (1i""s in t)e ep"o*ees in operationa" areas suc) as
&roduct deve"opent and ar1eting s1i"".
Credit anageent inc"uding credit onitoring.
+orex anageent and internationa" trade.
0&A anageent inc"uding recover* o' pro!"e "oan.
Ear1eting 'ee !ased product and services.
0e- ris1 anageent practices.
(1i"" to operate e"ectronic environentItec)no"og* driven !an1ing.
0e- interna" contro" and audit s1i"" in t)e area o' e- !an1ing.
0e- 'ocus in custoerKs de"ig)t.
@5@
3. #o )ave 'aster disseination o' Mno-"edge aong t)e ep"o*ees in
t)e area o'
0e- concepts "i1e ris1 anageent, derivative trading, ADE etc.
0e- products "i1e insurance, cas) anageent, e-"oan etc.
4. #o identi'* )idden ta"ents -)o can !e !etter uti"iGed in t)e area o' t)eir
copetence 'or t)e gro-t) o' t)e organisation.
Lo-ever to a1e t)e training resu"t oriented, it is re9uired to e>ective"*
address certain isconception o' training suc) as training is a paid )o"ida*
'or t)e ep"o*ees or a -aste o' scarce organisationa" resources !* creating
necessar* a-areness a!out its use'u"ness as a too" o' organisationa" and
individua" gro-t).
-raining needs and employees (
$ne paraeter !* -)ic) ep"o*ees rate t)eir organiGation is training. As
per 2E( %4, a!out 4%= respondentsK 'e"t t)at training is one need, -)ic) is
not !eing ade9uate"* addressed. #)e* 'e"t t)at organiGation t)at is giving
training is en)ancing t)eir s1i""s and productivit*. And ost iportant"* t)e*
!e"ieve t)at raining -i"" )e"p t)e gro-- eit)er -it)in t)e organiGation or
outside- !ot) in ters o' /o! ro"e as -e"" as sa"ar*. 0atura""*, a"" t)ese t)ings
-i"" a1e t)e ep"o*ee to respect t)e ep"o*er t)e* -or1 'or ore.
%reparing for the changes(Convergence of training 0ith Human Resource
$evelopment %lan
?n order to )ave convergence o' training strategies -it) Luan 8esources
:eve"opent &"an, t)e trainer )as to address t)e 'o""o-ing issues3
#o deve"op an integrated approac) to "earning -participants exp"ores in
training situation -)at interests t)e ost and t)e /o! o' t)e trainer is
to provide t)at opportunit*.
#o deve"op an appropriate training et)od and tec)ni9ue as e>ective
de"iver* ec)anis.
#o act as 'aci"itator -to serve as resource 'or guidance and in'oration
and converting participants 'ro passive "istener to active "earner.
#o give strategic t)rust to ne- diension o' !an1ing !usiness in order
to a1e t)e training s*ste re"evant and participant oriented.
#o easure e>ectiveness o' t)e training. #)is can !e easured !*
greater organisationa" e>ectiveness and iproved participants
@5>
!e)avior t)roug) a -e""-designed and tested 'eed!ac1 cu eva"uation
s*ste.
#o do training audit- are -e doing it rig)tR S #o esta!"is) standards 'or
training and eva"uating it continuous"* to c)ec1 i' t)e o!/ectives are
ac)ieved. As t)e training prograe !* nature are s)ort-ter -)ere
ipact is invisi!"e, eva"uation is diHcu"t and resu"ts are intangi!"e, ro"e
o' t)e trainer is not on"* to understand t)ese "iitations !ut a"so to
a1e continuous and concerted e>orts to e>ective"* 'ocus to iprove
training de"iver* ec)anis !ased on 'eed!ac1 'ro training audit.
-raining effectiveness 3ey drivers
#)e #rainers, t)e &articipants and t)e $rganiGation are a"" partners in
training e>orts. #)is re9uires co""a!oration at a"" "eve"s starting 'ro
identi'*ing training needs, designing courses, and noinating trainees and up
to 'o""o--up 'or post training supportIp"aceent 'or easuring resu"ts. #)e
o!/ective is ac)ieved i' t)e training is vie-ed in t)e organiGation on
continuous !asis as a c)ange agent o' ep"o*eeKs deve"opent and
organiGationa" gro-t). #)e 1e* drivers to t)ese c)anges are3 -
Ae" Dri8ers Measured 0"
Attitudina" c)ange ;reater acceptance o' t)e ro"e and
responsi!i"it*, -i""ingness to accept
c)ange !* -a* o' prootionI /o!-
rotationItrans'ers, reova" o' 'ear
s*ndroe etc. a"" reBected !*
c)ange in -or1 cu"ture.
@o! (atis'action 2* increased invo"veent o'
ep"o*ees and order"* cop"iance o'
s*ste and procedure.
@o! Enric)ent 2* )ig)er output, iproved s1i"" in
tec)no"og*, ar1eting, and recover*
and in 'unctiona" areas suc) as credit
appraisa", ris1 anageent etc.
2oosting ep"o*ee ora"
and !ui"ding coitent.
2* iproved productivit* and
confdence in decision-a1ing.
Eotivation #o get t)e !est out o' ever* individua"
in t)e organiGation easured !*
iproved !usiness per ep"o*eeIproft
per ep"o*eeI)ig)er !usiness s)are,
and iproveent in custoer !ase
etc.
7n9ua"ifed support to
!usiness goa"
#o )ave a passion 'or exce""ence S
reBected !* !usiness resu"ts.
@5B
%.S- HRS(Challenges and .pportunity
#)e post Q8( situation in t)e !an1ing industr* )as !roug)t !ot)
c)a""enges and opportunities to t)e trainers. #)e !ranc) -)ere anpo-er is
in s)ort supp"* )as to !e provided anpo-er !* redep"o*ent. Attitudina"
s)i't is re9uired in t)e indset o' ep"o*ees to accept t)is c)ange, -)ic) can
!e done t)roug) L8 intervention via training. (ii"ar"*, vacuu caused !*
exit o' senior "eve" oHcia"s )as created s)ortage o' s1i""ed oHcia"s in t)e area
o' treasur* anageent, 'orex anageent, credit anageent, ar1eting
o' retai" products etc. #)is re9uires training o' t)e oHcers, !ot) existing and
prooted, to s)arpen t)eir s1i"" in t)e area -)ere t)ese oHcers are proposed
to !e engaged. #o tap ne- !usiness in t)e area o' retai" !an1ing, )ousing
fnance, cas) anageent, insurance and ot)er va"ue added products, t)ere
is need to train t)e identifed oHcers so t)at t)e* are -e"" e9uipped !ot) in
1no-"edge and s1i"" to se"" t)ese products !* proactive"* contacting t)e
existing and potentia" custoers. ?n custoer centric environent, t)e
attitude and approac) o' t)e ep"o*ees )ave to !e c)anged t)roug) training
so t)at t)ere is ne- organiGation -or1 cu"ture o' custoerKs concern and
organiGationa" prosperit*. Cit) increased 'ocus on e !an1ing and ot)er e-
!ased va"ue added products "i1e E+#, EC( etc. #)ere is need to deve"op s1i""
o' t)e ep"o*ees to a1e t)e 'u""* conversant -it) its app"ication. $ver a""
in t)e copetitive scenario -)ere t)ere is continuous pressure on spread and
profta!i"it*, eac) training prograe s)ou"d 'ocus on t)e ep"o*ees to !ui"d
a ne- -or1 cu"ture o' un9ua"ifed support to !usiness goa" and ep"o*eesK
exce""ence.
Summing up
As stated ear"ier t)e trainer is a 'aci"itator o' t)e "earning process in
t)is va"ue c)ain and )is e>ectiveness is easured !* )arnessing o' untapped
potentia" o' its ep"o*ees. Le )as to identi'* training needs and p"an t)e
prograe. Le is a su!/ect specia"ist so t)at )e can respond to t)e dou!t
and 9ueries o' t)e participants in c"ear and convincing anner. Le is a ro"e
ode" o' experienced !an1er to o>er re"evance o' t)eor* -it) practice. Le is
a counse"or, a 'riend, a p)i"osop)er and a guide to t)e participants. Le is a
"eader )aving responsi!i"it* to e>ective"* conduct t)e prograe, ac)ieve its
o!/ectives, and give direction and support and to !ring re9uired c)anges in
@5C
Attitude, (1i"" and Mno-"edge o' t)e participants. (uc) a "earning process can
tru"* trans'or an organiGation into a "earning organiGation i.e. an
organiGation, -)ic) can actua""* deve"op ep"o*eeKs coitent 'or
organiGationa" gro-t).
Trainer is t*us a c*ange Manager1 To make t*ese c*anges
*a++en is *is Jo01
-%%%-
%ha"ter - 39
*nno-ate or /$e
)ew Mantra of modern da9 !an6$ng

Knowledge innovation has come to mean the
systematic application of new ideas into the
marketable goods and services, for the
success of enterprise, economic vitality and
the speedy advancement of society.
1. 2*nno-ate or /$eK - )ew mantra of modern da9 !an6$ng -
@5?
565 Innovation is a%%li$ation of ideas 2 ne' or e,istin& 0 in ne' 'ays or in
ne' fields or in ne' %rodu$ts6 It (el%s an or&aniFation to $ut $ost7 to
im%rove %rofit and also to im%rove mar8et s(are6
563 Or&aniFations often asso$iate innovation 'it( a %rodu$t or %ro$ess6 In
fast movin& time t(at 'e live in7 t(is is not enou&(6 :oday innovation
means $(an&e in business model it0self6
563 Innovation (a%%ened '(en :-S be&an to offs(ore information
te$(nolo&y7 or '(en (irub(ai )mbani told (is son 7 Mu8es(7 t(at only
if (e $an %ri$e a $all less t(an t(e $ost of %ost $ard 'ill (is mobile
business (as future7 or '(en Ga$8 Wel$( set u% a $all $entre at
#ur&aon to ans'er =ueries raised by #eneral ele$tri$ $ustomers in US7
or '(en Jalit Modi introdu$ed : 34 format in Indian Premier Jea&ue6
56@ Winnin& $om%anies re$o&niFe t(e need of Pout of bo, t(in8in&9 and are7
t(erefore7 $reatin& $ulture '(ere ideas 8ee% flo'in& $ontinuously6
:(ose '(o do not innovate7 ;oin t(e list or&aniFations t(at drive
t(emselves to oblivion6 PInnovation9 is Pin9 'ord in $or%orate
%(iloso%(y no'6
56> -om%etition7 $onver&en$e and $onsolidation are 8ey drivers of ban8in&
t(ese days6 -om%etition breeds innovation and innovation breed9s
$om%etitive advanta&e6 :o stay a(ead of t(eir $om%etitors7 ban8s are
tryin& ne' ideas (innovations) and reinventin& e,istin& %rodu$ts
(renovationsC. 2*nno-ate or d$e3 $s new mantra of modern da9
!an6$ng.
2. %#stomer $s dr$-$ng $nno-at$on @
365 -ustomers buy not be$ause t(ey understand t(e %rodu$t or servi$e
but be$ause t(ey feel t(at t(e ban8 understand t(eir needs and 'ants6
-ustomer $entri$ innovation fli%s traditional 2des$gn @ "rod#ce - se443
model into 2des$gn @ redes$gn @ $nno-ate @ "rod#ce - mar6et K model6
In fa$t it is t(e $(an&in& needs of t(e $ustomers t(at drive innovation6
@5A
OLig) )ea"ed s)oes
-ere deve"oped 'or
s)ort -oen -)o
-ere tired o' !eing
1issed on 'ore-
)ead.P
3636 Innovations $ome in t'o forms 0 t(e =uantum lea% ty%e innovation
and in$remental innovation6 Euantum
lea% ty%e innovation in t(e finan$ial
servi$es industry may not $ome very
often but in$remental innovation is no'
order of t(e day6 +n&a&in& 'it( t(e
$ustomer is first ste% in t(e innovation
%ro$ess7 '(i$( %rovides stron& insi&(ts for value addition Bsee !o1C.
363 2Aa46$ng w$th the c#stomer3 is a strate&i$ tool of innovation as
strate&i$ally $om%anies are no' not &eneratin& ideas internally or (avin&
! O de%artments to innovate but are o%en to ideas from $ustomers and
allian$e %artners6 )s one 'al8 'it( t(e $ustomer and is 'it( (im ri&(t
t(rou&( '(ile sele$tin&7 buyin& and usin& a %rodu$t7 one $an identify &reat
deal of (a%%enin& t(at $an be used for $reatin& (innovation) ne' %rodu$ts
or modifyin& t(e e,istin& %rodu$ts (renovation)6 Wal8in& 'it( t(e
$ustomer is a strate&i$ tool of (a) ma%%in& t(e $ustomer9s need by
analyFin& a$tivities t(at $ustomer %erforms '(ile sele$tin&7
%ur$(asin& or usin& a %rodu$t7 (b) lo$atin& the gap based on unfulfilled
or e!pected needs and wants and /c0 $losin& t(e &a% by introdu$in& ne'
%rodu$ts (innovation) or modifyin& e,istin& %rodu$ts (renovation) as
%er identified needs and 'ants6 -ustomer t(us tea$(es everyt(in&
in$ludin& '(at you s(ould innovate6
3. *nno-ate to sta9 ahead @ + new !an6$ng "arad$gm 0 Sin$e
ea$( %rodu$t (as its life $y$le7 ban8s are re=uired to $ontinuously innovate and
renovate %rodu$ts so t(at ne'Lrenovated %rodu$t $an re%la$e t(e e,istin& %rodu$t by
t(e time its life $y$le is over or ne' %rodu$t is laun$(ed by its $om%etitors6 -reationL
modifi$ation of %rodu$ts are done eit(er t(rou&( value $reation (ne' %rodu$ts) or
value addition (ne' features) or value affordability (less %ri$e or no frill %rodu$ts)6
)fter liberaliFation7 %rivatiFation and &lobaliFation of ban8in& in India7 t(ere is a
%aradi&m s(ift in %rodu$t develo%ment 'it( re&ards to %ro$ess7 %ri$in&7 %la$e
(delivery $(annel)7 %a$8a&in&7 %eo%le and %artnerin&6 (Follo'in& %ara&ra%( 'ill
@34
enli&(ten t(e readers 'it( %aradi&m s(ift ta8in& %la$e in %rodu$t develo%ment6 Jist is
only illustrative not e,(austive)6
.1 /e"os$t "rod#cts @ )$$e%tin& de%osit is basi$ fun$tion of ban8s6 From
$ore de%osit %rodu$ts li8e savin&s a$$ount7 $urrent a$$ount and fi,ed de%osit7 ban8s
(ave &one a lon& 'ay in offerin& au&mented de%osit %rodu$ts li8e mont(ly in$ome
%lan7 reinvestment %lan et$6 Some emer&in& innovations areD 0
365656 O%enin& of no0frill savin&s a$$ounts 'it( Fero balan$e is re$ent
innovation7 '(i$( (as been introdu$ed at t(e instan$e of !eserve .an8 of
India for finan$ial in$lusion of %oorer se$tion of t(e so$iety6 It is built on t(e
$on$e%t of value affordability so t(at $ustomer $an enter t(e mar8et 'it(
$(ea% entry0level %rodu$t and t(ereafter use t(e %rodu$t as %er (is $a%a$ity6
365636 :a,0in$entive on term de%osit is anot(er re$ent develo%ment6 .an8s 'ill
(ave to stru$ture de%osit %rodu$ts of s%e$ified maturity to attra$t investors
'(o 'ere (it(erto %ar8in& t(eir funds in small savin&s s$(emes of %ost
offi$e7 life insuran$e et$6 for ta, savin&s6
365636 Floatin& rate of de%osit %rodu$ts '(ere interest rate is lin8ed to some
ben$(mar8 rates li8e inter0ban8 $all money rate are also enterin& in t(e
mar8et6 :(ese %rodu$ts assure mar8et related return to de%ositors6 :(ey
also (el% t(e ban8 in miti&atin& interest rate ris8 and over$omin& )JM
%roblem6
3656@6 Fle,i0fi, de%osit 'it( s'ee% and reverse s'ee% fa$ility to a de%osit
a$$ount (Savin&sL-urrent) (as also be$ome very %o%ular '(ere sum
e,$eedin& minimum balan$e is auto0s'ee% to fi,ed de%osit a$$ount6 :o
fa$ilitate 'it(dra'al money is reverse0s'ee% to savin&sL$urrent de%osit
a$$ount as and '(en re=uired6 :(e balan$e lyin& in t(e fle,0fi, de%osit earns
interest as %er fi,ed de%osit rate6
3656>6 /e' de%osit %rodu$ts 'it( auto investment fa$ility in mutual funds (debt
funds or e=uity funds) are also evolvin& 'it( ob;e$tive of ma,imiFin& return
to t(e de%ositors6 Sin$e dividend in$ome (in t(e (and of investors) and
$a%ital &ain (lon& term) is e,em%ted from ta,7 t(ese %rodu$ts (ave be$ome
very attra$tive6
@35
3656B6 O%enin& of a$$ounts 'it( Fero balan$e for /!I and salaried $lass is ot(er
innovation7 '(i$( t(e ban8s (ave su$$essfully used in mobiliFin& a$$ount of
salaried and /!I $ustomers6
.2 ,eta$4 %red$t Prod#cts- #iven t(e mi$roe$onomi$ s$enario7 it is e,%e$ted t(at retail
loan se&ment 'ill &ro' at 3>* -)#!6 Seein& bi& o%%ortunity a(ead7 ban8s (ave
be$ome a&&ressive in retail loans and attra$tin& $ustomers 'it( innovative offerin&s6
Some emer&in& innovations in retail $redit %rodu$ts are0
@6365 Pre a%%roved (ousin& loan so t(at $ustomer $an sele$t t(e %ro%erty of
(isL(er $(oi$e as %er (isL(er finan$ial resour$es6
@6363 Pre a%%roved %ersonal loan so t(at $ustomer $an dra' t(e amount as %er (is
$onvenien$e as and '(en (e needs money6
@6363 Pre a%%roved (ousin& %ro%erties t(at save t(e borro'ers from (assles of
&oin& t(rou&( formalities of title e,amination and valuation6
@636@ .rid&e loan a&ainst mort&a&e of e,istin& (ouse to enable t(e borro'er to
buy a bi&&er (ouse and loan 'ill be re%aid from sale %ro$eeds of old (ouse6
@636> Overdrafts a&ainst se$urity of (ouse %ro%erty7 '(i$( (ouse o'ner &enerally7
feel as un%rodu$tive6
@636B Mariants of %ersonal loan li8e loan for %ur$(ase of ;e'ellery7 loan to meet
ta, liability7 loan to meet festival e,%enses7 loan to meet $riti$al si$8ness et$6
@636C <ome loan 'it( Pre%ayment (oliday90 to enable t(e borro'er to tide over
une,%e$ted finan$ial needs li8e ta, liability7 edu$ational e,%enses of $(ildren or
e,%enses of $riti$al illness6
@636? /e' (ome loan %rodu$t laun$(ed is 554* (ome loan re=uirement6 +,tra
54* is for furnis(in& t(e (ouse7 '(i$( $omes alon& 'it( t(e (ome loan6
@636A Overdraft t(rou&( ):M to %rivile&e $ustomers to meet emer&en$y
re=uirements is ot(er innovation6
.3 0$nanc$a4 'er-$ces
@6365 e0-ommer$e is o%enin& u% o%%ortunities for ban8 to a$t as intermediaries
for aut(enti$atin& transa$tion bet'een retailer and $onsumer t(rou&( di&ital
si&natures6 So far ban8s are issuin& &uarantee and letter of $redit by &ivin&
assuran$e to seller t(at (e 'ill &et t(e %ayment of &oodsLservi$es sold and
@33
aut(enti$ation of e0transa$tion is a lo&i$al e,tension of ban8 &uarantee and letter
of $redit business6
@63636 Inte&rated finan$ial servi$es %rovided by finan$ial advisers '(o assist
$ustomer in e,e$utin& lon& term savin& and investment %lan to a$(ieve individual
finan$ial &oals6
@6363 Mobile ban8in& is ot(er innovation '(i$( is brea8in& t(e barrier of bran$(
ban8in&7 P- based ban8in& and ):M6
@. ,$s6 free $ncome0 .an8s are innovatin& by levera&in& on t(eir $redit
dis%ensation stren&t( to au&ment ris8 free in$ome t(rou&( variety of 'ays li8e0
..1 (r$g$nator of 4oan0 .an8s 'ill mobiliFe loan but 'ill not $arry in t(eir
boo8s6 +arn in$ome as ori&inator6 JI- (as (u&e $or%us of funds but $annot
dire$tly lend6 <ere ori&inator (as o%%ortunity6
..2 Mon$tor$ng fee- :ransfer loan to SPM or ot(er ban8s t(rou&(
se$uritiFation %ro$ess but $ontinue to earn fee0based in$ome for monitorin& of
loan6 +ven in $ase of sale of distressed assets to )!-7 ban8 (as o%%ortunity
to earn monitorin& fee7 as t(ey 8no' t(e assets better t(an t(e buyer6
..3 :a6e o#t f$nance- Jar&ely resorted to for infrastru$ture %ro;e$ts '(ere
t(e loan is ta8en u% by ot(er institution after a s%e$ified %eriod to over$ome
%roblem of assets liability mismat$(6
... Mone9 transfer !#s$ness- Money transfer is business is &ro'in& 'it(
t(e &ro't( of remittan$e in India '(i$( is estimated at $33 billion annually6
)nd ban8s are tyin& u% 'it( money transfer $om%anies li8e Western Union
Money :ransfer to offer t(is servi$e to t(eir $ustomers6
..5. 0$nanc$a4 ad-$sors0 from relations(i% mana&er to finan$ial advisor to
%rivate ban8er0 all servi$es are for fee6 .an8s are no' offerin& dis$retionary
%ortfolio mana&ement servi$es0 investment in art7 %(ilant(ro%y7 real estate7
funds 'it(in $ountry and in offs(ore funds 0 for its affluent $ustomers all
under one roof6 Pro%erty advisors &uide $ustomers about entire %ro$ess of
sele$tin& and buyin& a (ouse and (andle t(e $umbersome do$umentation
formalities and t(e re&istration on (is be(alf6
@33
..6 .o4d hedg$ng ser-$ces0 Most Indian &old ;e'ellery manufa$turers are
no' (ed&in& t(eir &old %ur$(ases in ubai -ommodity e,$(an&e in absen$e
of su$( fa$ilities in India6 ) fe' %rivate se$tor ban8s (ave seen business
o%%ortunity (ere and are offerin& &old0(ed&in& %rodu$ts6 :(e &old traders and
;e'ellery e,%orters are e,%e$ted to avail &old (ed&in& servi$e7 '(i$( (as very
lu$rative mar8et6
.5. 'e44$ng of th$rd "art9 "rod#cts-
@6>65 Startin& from sellin& free %ersonal a$$ident to (olders of $redit $ard7
):M $ard and Nisaan -redit $ards7 ban8s (ave &one a lon& 'ay of $ross
sellin& various insuran$e %rodu$ts li8e life insuran$e to savin&s ban8s
a$$ount (older7 $redit %rote$tion bundled 'it( edu$ation loan7 (ousin&
loan and ot(er loan7 loss of ba&&a&e and ot(er insuran$e bundled 'it( /!I
a$$ounts6 :(ese innovations are offerin& business avenues of earnin& fee
based in$ome by sellin& %rodu$ts on be(alf of t(ird %arty '(ere ban8s
(ave no e,%ertise or %rodu$t offerin& is not %ossible due to re&ulatory
$onstraints6
@6>63 )%art from sellin& insuran$e and mutual funds7 ban8s no' see
o%%ortunity in sellin& &old $oins and bars to earn e,tra fee based in$ome6
.uyers find investment in &old as attra$tive o%tion sin$e interest in$ome in
fi,ed de%osit is $om%aratively lo' to in$rease in t(e %ri$e of &old in t(e
re$ent %ast6 Sin$e &old $oins and bars are (allmar8ed7 buyers feel se$ured6
@6>63 Sellin& of stam% %a%ers7 $olle$tion of utility bills li8e ele$tri$ity7
tele%(one and s$(ool fees7 $olle$tion of ta,es for t(e state and $entral
&overnment7 %ayment of %ension of &overnment7 rail'ay and defense
%ensioners7 safe 8ee%in& of e,amination %a%ers7 $reditLdebit $ards in
allian$e 'it( ot(er ban8s et$67 are fast e,%andin& fee based servi$es6
@6>6@6 Pre%aid &ift $ard is re$ent innovation7 '(i$( is substitution of &ift
vou$(erL &ift $(e=ues6 :(ese $ards a$t li8e a debit $ard7 '(i$( $an be used
by t(e re$i%ient of t(e &ift for %ur$(asin& any arti$leL&ood from a%%roved
mer$(ants u% to t(e value of t(e $ard6 .an8 $an earn e,tra fee based
@3@
in$ome by sellin& su$( $ards by 'ay of u%front fee7 reload or reassuran$e
$(ar&e7 refund $(ar&e et$6
.6 'econdar9 mar6et for !ad 4oans
!.I (as made t(e be&innin& by %uttin& in %la$e t(e %oli$y of buyin& and sellin&
distressed assets in %oli$y announ$ement of 344>6Indian bad loan mar8et is siFeable
and %rovides immense business o%%ortunity6 )nd t(e driver of t(e mar8et is %otential
%rofit6
.7 )ew cred$t "rod#cts
.7.1 %ommod$t9 0$nance ;#s$ness0 -ommodity finan$in& business (as
brou&(t ne' revolution in $redit business6 .an8s are innovatin& %rodu$ts to lend
to farmers and traders in $ollaboration 'it( $ommodity e,$(an&es a&ainst demat
'are(ouse re$ei%ts of &old7 silver and ot(er $ommodities6 -ollateral mana&ers are
also desi&nin& ne' %rodu$ts to assist ban8s in underta8in& due dili&en$e ($redit
ris8)7 &uaranteein& =uality and safety of t(e $ommodity (o%erational and
%erforman$e ris8)7 do$umentation (le&al ris8) and insuran$e (default ris8)6 India9s
$ommodity tradin& is estimated to !s6 @447444 $rores annually and offers &ood
business o%%ortunity6
.7.2 +sset !ased f$nanc$ng B+;0C - )sset base finan$in& started from
trans%ortation se&ment (%referably tru$8 finan$in&) and is &radually s%readin&
into finan$in& of bul8 ma$(inery li8e %rintin& ma$(inery7 road buildin&
e=ui%ments7 medi$al e=ui%ments et$6 :o mobiliFe business ban8s are enterin& into
business allian$es 'it( t(e manufa$turers and offerin& $redit to buyers ba$8ed by
se$urity of assets $rated out of t(e ban8 loan6
.7.3 %hanne4 f$nanc$ng - -(annel finan$in& is an innovative finan$e me$(anism
by '(i$( ban8s meets t(e various funds re=uirements alon& 'it( su%%ly $(ain at
t(e su%%lier9s ends itself7 t(us (el%in& (im in seamless $as( flo' alon& t(e
arteries of t(e enter%rise6 -(annel finan$e ensures t(e immediate realiFation of
sales %ro$eeds for t(e $lient9s su%%lier7 ma8in& %ra$ti$ally a $as( sale6 Under
$(annel finan$in&7 t(e dealer $an levera&e on t(e relations(i% 'it( re%uted
$om%anies in sour$in& lo' $ost $redit 'it( su%%ort from t(eir $ounter%arts6 Under
$(annel finan$in& follo'in& $redit fa$ilities are available0
@3>
o is$ountin& of trade bills a$$e%ted by t(e dealerLdistributor6
o Jimited overdraft fa$ility to dealerLdistributor for (is business dealin&
'it( lar&e $or%orates6
.7. M$cro-cred$t thro#gh on 4$ne ro#te- Ins%ired by &lobal efforts7 some
'ebsites are %rovidin& %latform to </Is and %rofessionals '(o 'ant to e,tend
$redit to rural entre%reneurs and 'ants to ma8e differen$e in t(e life of rural %oor6
:(ese 'ebsites em%loy $ro'd0fundin& te$(ni=ues7 informin& and en$oura&e
$ommon %eo%le online to a$t as investors in mi$rofinan$e s%a$e aimed at t(e small
borro'ers and tries to see8 investment from t(em '(ere business %lan ins%ire and
suits t(em6 For e,am%le -(ennai based !an&de lends mainly to 'omen and
.an&alore based (ana, rea$(es out to self (el% &rou% in urban area6 :(ey also
en$oura&e %eo%le to $ontribute beyond investin&7 volunteerin& time and efforts
'it( t(em for t(e so$ial develo%ment6
.8. /e4$-er9 channe4s
.an8s no' (ave multi $(annel a%%roa$(7 '(i$( add $onvenien$e to
$ustomers on one (and and $ost effe$tiveness to ban8s on t(e ot(er (and6 ):Ms
are no' &radually be$omin& more %o%ular and offerin& 3@XC fa$ilities to
$ustomers6 W(ile mobile ):Ms are brin&in& servi$e to $ustomer doorste%7 t(ere
are s%e$ialiFed ):M for blind7 solar %o'ered ):Ms for rural areas7 .ar$ode
enabled ):M for %ayment of bills and so on6 Sunday ban8in& and ? )M to ?
PM ban8in& is ot(er innovation7 '(i$( (as totally transformed t(e delivery
$(annel6
5. %a"t$-at$ng the c#stomer thro#gh $nno-at$on @ + new 4earn$ng c#r-e
Wal8 in business is t(e t(in& of %ast6 :(e $ustomers are no' not only demandin&
on %ri$e (interest rates7 servi$e $(ar&es et$6)7 t(ey are also demandin& on %rodu$t
(=uality)7 %la$e ((ome delivery7 internet ban8in&)7 %a$8a&in& (brand affinity)7 %eo%le
($ustomer servi$e)7 %artnerin& (business allian$es7 dire$t sellin& a&ents)7 and
%romotion (dis$ount7 freebies et$6)6 ue to t(is old business model of P$a%turin&
$ustomer t(rou&( a&&ressive sellin&9 (as &iven 'ay to ne' business model of
P$a%tivatin& t(e $ustomer t(rou&( innovation9.
)ew 4earn$ng c#r-e $s-
@3B
'h$ft foc#s from "rod#ct to c#stomer @ You need to a%%re$iate t(at
t(e -ustomer is Nin&6
)nti$i%ate and ada%t as %er $ustomer9s $(an&in& need and demand 2
?o# need to cont$n#o#s49 $nno-ate or reno-ate 9o#r "rod#ct to
sta9 ahead of 9o#r com"et$tors.
:a8e s%eedy a$tion and de$ision to ha-e f$rst mo-er ad-antage.
Ma8e effe$tive im%lementation0 *dea a4one cannot de4$-er.
5. 7oo6$ng ahead -
Indians are 8no'n to (ave &ood $ulture of innovation but bad for e,e$ution6
<en$e7 ban8 %eo%le s(ould learn not only to innovate but also to im%lement
innovative ideas into %ra$ti$e6 /e,t bi& t(in& is learnin& to a$$e%t $(an&e6 :(e
%erson 'it( t(e best idea may not 'in but a %erson '(o learns t(e fastest 'in6 :(e
lesson is learnin& t(e $(an&e is as essential as innovation6 /e,t im%ortant t(in& for
innovation is s%eed6 :(e su$$ess of innovation lies in s%eedy im%lementation of t(e
ne' ideas before t(e $om%etitors are able to $o%y t(em6 Jastly dere&ulation and
liberaliFation %lays a ma;or role in indu$in& ban8s to innovate as it in$reases
$om%etition and allo's ne$essary freedom to %ra$ti$e ne' ideas6 )lt(ou&(
si&nifi$ant %ro&ress (as been made in India in %ast 54 years in t(is re&ard7 yet t(ere is
&ood s$o%e of furt(er liberaliFation and dere&ulation so t(at ban8s (ave full liberty to
offer %rodu$ts and servi$es at %ar 'it( international standards6 :(e Indian ban8in&
industry is (u&ely under0%enetrated industry and it is e,%e$ted t(at 'it( innovation7
ban8s 'ill be able to ma8e inroads in t(e ne' mar8ets by %uttin& t(e $ustomers at t(e
$entre of everyt(in& t(ey do6
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