Dr.

Joseph Anbarasu

2010
Dr. D. Joseph Anbarasu Bishop Heber College 3/4/2010

Banking in India

Dr. Joseph Anbarasu

Chapter 1 BANKING IN INDIA Objectives of the Unit
After completing the unit, the student should be able to a. Describe the features of Banking Regulation Acts b. Make an account of Indian Banking: the History and Development c. List out the various functions rendered by the commercial banks d. Manage the various deposits and advances e. Describes the steps in fair lending to the clients

Definition of Banking The Banking Regulation Act, 1949 is the basis for regulation of banking in India.

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Section 5(b) of the Act defines banking as “banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Forms of Business in which Banking Companies may Engage Section 6(1) specified additional forms business in which banking companies may engage in. Section 6 (1) In additional to the business of banking, a banking company may engage in any one or more of the following forms of business, namely:Banking Business a) the borrowing, raising, or taking up of money; b) lending or advancing money either upon or without security; c) the drawing, making, accepting; discounting, buying, selling collecting and dealing in bills of exchange, hoodies, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrip and other instruments, and securities whether transferable or negotiable or not; d) granting and issuing of letters of credit, traveller’s cheques and circular notes; e) buying, selling and dealing in bullion and specie;

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f) buying and selling of foreign exchange including foreign bank notes; g) the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds; h) purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, i) the negotiating of loans and advances; j) receiving of all kinds of bonds, scrips or other forms of securities on deposits or for safe custody or otherwise; k) providing of safe deposit vaults; l) the collecting and transmitting of money and securities; Agency Business m) acting as agents for Government or local authority or any other person or persons; n) carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a [managing agent or secretary and treasurer] of a company; o) contracting for public and private loans and negotiating and issuing the same;

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p) effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, of State, municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue; q) carrying on and transacting every kind of guarantee and indemnity business; r) acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security; s) undertaking and executing trusts; t) undertaking the administration of estates as executor- trustee or otherwise; u) establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit employees or exemployees of the company or the dependents or connections of such persons; granting pensions and allowances and making payments towards insurance; subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any public, general or useful object;

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v) acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company; w) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company; x) acquiring and undertaking the whole or any part of the business of any person or company, when such business is of a nature enumerated or described in this sub- section; y) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; z) Any other form of business which the Central Government may, by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage. (2) No banking company shall engage in any form of business other than those referred to in subsection (1). India has a financial system that is regulated by independent regulators in the sectors of banking, insurance, capital markets, competition and various services sectors. In a number of sectors Government plays the role of regulator. Ministry of Finance, Government of India looks after financial sector in India. Finance Ministry

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every year presents annual budget on February 28 in the Parliament. The annual budget proposes changes in taxes, changes in government policy in almost all the sectors and budgetary and other allocations for all the Ministries of Government of India. The annual budget is passed by the Parliament after debate and takes the shape of law. Reserve bank of India (RBI) established in 1935 is the Central bank. RBI is regulator for financial and banking system, formulates monetary policy and prescribes exchange control norms. The Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934 authorize the RBI to regulate the banking sector in India. India has commercial banks, co-operative banks and regional rural banks. The commercial banking sector comprises of public sector banks, private banks and foreign banks. The public sector banks comprise the ‘State Bank of India’ and its seven associate banks and nineteen other banks owned by the government and account for almost three fourth of the banking sector. The Government of India has majority shares in these public sector banks. India has a two-tier structure of financial institutions with thirteen all India financial institutions and forty-six institutions at the state level. All India financial institutions comprise termlending institutions, specialized institutions and investment institutions, including in insurance. State level institutions comprise of State Financial Institutions and State Industrial Development

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Corporations providing project finance, equipment leasing, corporate loans, short-term loans and bill discounting facilities to corporate. Government holds majority shares in these financial institutions. Non-banking Financial Institutions provide loans and hire-purchase finance, mostly for retail assets and are regulated by RBI. Insurance sector in India has been traditionally dominated by state owned Life Insurance Corporation and General Insurance Corporation and its four subsidiaries. Government of India has now allowed FDI in insurance sector up to 26%. Since then, a number of new joint venture private companies have entered into life and general insurance sectors and their share in the insurance market in rising. Insurance Development and Regulatory Authority (IRDA) is the regulatory authority in the insurance sector under the Insurance Development and Regulatory Authority Act, 1999. RBI also regulates foreign exchange under the Foreign Exchange Management Act (FERA). India has liberalized its foreign exchange controls. Rupee is freely convertible on current account. Rupee is also almost fully convertible on capital account for non-residents. Profits earned, dividends and proceeds out of the sale of investments are fully repatriable for FDI. There are restrictions on capital account for resident Indians for incomes earned in India.

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Securities and Exchange Board of India (SEBI) established under the Securities and Exchange aboard of India Act, 1992 is the regulatory authority for capital markets in India. India has 23 recognized stock exchanges that operate under government approved rules, bylaws and regulations. These exchanges constitute an organized market for securities issued by the central and state governments, public sector companies and public limited companies. The Stock Exchange, Mumbai and National Stock Exchange are the premier stock exchanges. Under the process of de-mutualization, these stock exchanges have been converted into companies now, in which brokers only hold minority share holding. In addition to the SEBI Act, the Securities Contracts (Regulation) Act, 1956 and the Companies Act, 1956 regulates the stock markets. Amendments were made in the banking regulations act now and then. Important amendments are given below:

Banking Regulation (Amendment) Bill, 2005
• The Banking Regulation (Amendment) Bill, 2005 was introduced in the Lok Sabha on May 13, 2005. The Standing Committee on Finance submitted its report to Parliament on December 13, 2005. This Bill has been listed for consideration and passage during the current session (budget session 2006) of Parliament. The Bill seeks to amend the Banking Regulation Act, 1949 (the Principal Act). It has eight main

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objectives: (a) regulating acquisition of shares in banking companies, (b) Increasing the flexibility on the Statutory Liquidity • Requirement (SLR), (c) Including preference shares as capital, (d) Allowing banks to lend to companies in which their directors are engaged, (e) Monitoring the activities of associate enterprises of banks, (f) vesting RBI with powers to supersede the board of directors of a bank, (g) disallowing primary credit societies from banking activities, and (h) changing the definition of “approved securities”. Acquisition of banking shares. Anyone desiring to acquire more than 5% shareholding of a bank needs to obtain prior approval of RBI. RBI may impose certain conditions such as a minimum amount of shareholding to be acquired or requiring specific approvals for any further increase in shareholding. RBI is required to communicate its approval or rejection of any such application within 90 days, failing which the application is deemed to be approved. The restriction of 10% voting rights on any shareholder under the Principal Act is also being revoked. SLR. RBI can notify SLR between zero and 40% (currently the range is 25% to 40%) of a bank’s liabilities. SLR specifies the proportion of a bank’s deposits that it must hold in government and other approved securities. A

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higher SLR increases the safety of a bank but pre-empts the funds available to extend as loans. • • Preference Shares may be included in addition to equity shares while computing a bank’s capital. Banks may, with prior permission of RBI, grant loans or advances to companies in which any of its directors is engaged as a director, manager or employee. This was earlier prohibited. RBI can ask for details of the business of any associate enterprise of a bank. It will also have the powers to inspect any such enterprise. RBI may supersede the board of directors of a bank in public interest or in the interest of the bank or its depositors. RBI may appoint an administrator to take charge of the bank. Any supersession shall not be for a period exceeding six months. A primary credit society cannot carry on banking business. This will be applicable one year after this Amendment Bill is notified and could be extended up to three years. Among co-operative societies, only a co-operative bank holding a licence from RBI may carry on banking business. RBI has been granted powers to order a special audit of a cooperative bank in public interest or in the interest of the bank or its depositors.

• • • • •

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The definition of approved securities has been modified to specify that these are securities issued by the central or state governments or any such other securities as specified by RBI from time to time. The definition in the Principal Act defined approved securities as those in which a trustee may invest under the Indian Trusts Act, 1882.

Functions of Commercial Banks
The functions of commercial banks are divided into two categories: i) ii) i) Primary functions, and Secondary functions including agency functions. Primary functions:

The primary functions of a commercial bank include: a) accepting deposits; and b) granting loans and advances; a) Accepting deposits The most important activity of a commercial bank is to mobilize deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit

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more funds with the bank. There is also safety of funds deposited with the bank. b) Grant of loans and advances The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies depending upon the purpose, period and the mode of repayment. The difference between the rate of interest allowed on deposits and the rate charged on the Loans is the main source of a bank’s income. i) Loans A loan is granted for a specific time period. Generally, commercial banks grant short-term loans. But term loans, that is, loan for more than a year, may also be granted. The borrower may withdraw the entire amount in lump sum or in instalments. However, interest is charged on the full amount of loan. Loans are generally granted against the security of certain assets. A loan may be repaid either in lump sum or in instalments. ii) Advances An advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to

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meet the day to day requirements of business. The rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount. Modes of short-term financial assistance Banks grant short-term financial assistance by way of cash credit, overdraft and bill discounting. a) Cash Credit Cash credit is an arrangement whereby the bank allows the borrower to draw amounts upto a specified limit. The amount is credited to the account of the customer. The customer can withdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per agreed terms and conditions with the customers. b) Overdraft Overdraft is also a credit facility granted by bank. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. It is a temporary arrangement. Overdraft facility with a specified limit is allowed either on the security of assets, or on personal security, or both. c) Discounting of Bills Banks provide short-term finance by discounting bills, which is, making payment of the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds

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without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer. i) Secondary functions Besides the primary functions of accepting deposits and lending money, banks perform a number of other functions which are called secondary functions. These are as follows a) Issuing letters of credit, traveller’s cheques, circular notes etc. b) Undertaking safe custody of valuables, important documents, and securities by providing safe deposit vaults or lockers; c) Providing customers with facilities foreign exchange. of

d) Transferring money from one place to another; and from one branch to another branch of the bank. e) Standing guarantee on behalf of its customers, for making payments for purchase of goods, machinery, vehicles etc. f) Collecting and information; supplying business

g) Issuing demand drafts and pay orders; and, h) Providing reports on the credit worthiness of customers. Difference between Primary and Secondary Functions of Commercial Banks

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Primary Functions

Secondary Functions

1. These are the main These are the secondary activities of the bank activities of the bank. 2. These are the main These are not the main sources of the income of sources of income of the the banks bank. 3. These are obligatory These are not obligatory on the part of bank to on the part of bank to perform perform. Generally all the commercial banks perform these functions

Different modes of Acceptance of Deposits
Banks receive money from the public by way of deposits. The following types of deposits are usually received by banks: 1) Current deposit 2) Saving deposit 3) Fixed deposit 4) Recurring deposit 5) Miscellaneous deposits 1) Current Deposit

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Banks play the role of financial intermediary. They are permitted to accept demand deposits. The depositor can withdraw the money at any time of his or her will and choice. Since these deposits are repayable on demand, they are generally called demand deposits. These are either savings or current deposits. Demand deposits are withdrawn by the depositor by issuing a cheque. Cheque is an order or written instruction to the bankers to pay the amount to a person, whose name is found in the face of the cheque. Businessmen generally open current accounts with banks. Current accounts do not carry any interest as the amount deposited in these accounts is repayable on demand without any restriction. The Reserve bank of India prohibits payment of interest on current accounts or on deposits up to 14 Days or less except where prior sanction has been obtained. Banks usually charge a small amount known as incidental charges on current deposit accounts depending on the number of transaction. 2) Savings deposit/Savings Bank Accounts Savings deposit account is meant for individuals who wish to deposit small amounts out of their current income. It helps in safe guarding their future and also earning interest on the savings. A saving account can be opened with or without cheque book facility. There are restrictions on the withdrawals from this account. Savings account holders are also allowed to deposit cheques, drafts, dividend

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warrants, etc. drawn in their favour for collection by the bank. To open a savings account, it is necessary for the depositor to be introduced by a person having a current or savings account with the same bank. 3) Fixed deposit The term ‘Fixed deposit’ means deposit repayable after the expiry of a specified period. Since it is repayable only after a fixed period of time, which is to be determined at the time of opening of the account, it is also known as time deposit. Fixed deposits are most useful for a commercial bank. Since they are repayable only after a fixed period, the bank may invest these funds more profitably by lending at higher rates of interest and for relatively longer periods. The rate of interest on fixed deposits depends upon the period of deposits. The longer the period, the higher is the rate of interest offered. The rate of interest to be allowed on fixed deposits is governed by rules laid down by the Reserve Bank of India. 4) Recurring Deposits Recurring Deposits are gaining wide popularity these days. Under this type of deposit, the depositor is required to deposit a fixed amount of money every month for a specific period of time. Each instalment may vary from Rs.5/- to Rs.500/- or more per month and the period of account may vary from 12 months to 10 years. After the completion of the specified period, the customer gets back all his

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deposits along with the cumulative interest accrued on the deposits. 5) Miscellaneous Deposits Banks have introduced several deposit schemes to attract deposits from different types of people, like Home Construction deposit scheme, Sickness Benefit deposit scheme, Children Gift plan, Old age pension scheme, Mini deposit scheme, etc. Different methods of Granting Loans by Bank The basic function of a commercial bank is to make loans and advances out of the money which is received from the public by way of deposits. The loans are particularly granted to businessmen and members of the public against personal security, gold and silver and other movable and immovable assets. Commercial bank generally lends money in the following form: i) ii) iii) iv) Cash credit Loans Bank overdraft, and Discounting of Bills a) Cash Credit: A cash credit is an understanding on the part of the bank to advance to an individual such sums of money as he may from time to time require. It is not exceeding in the whole a certain definite amount. The individual, to whom the credit is given, is entering into a bond, with securities, generally two

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in number. One is for the repayment, on demand, of the sums actually advanced, with interest upon each issue from the day upon which it is made. A cash credit is, in fact, the same thing as an overdrawn current account, except that in a current account the party overdraws on his own individual security, and in the cash credit he finds two securities that are responsible for him. Another difference is, that a person cannot overdraw his current account without asking permission each time from the bank, whereas the overdrawing of a cash credit account is a regular matter of business; it is, in fact, the purpose for which the cash credit has been granted. The following considerations will show that a person who has occasion for temporary advances of money will find it more advantageous to raise these sums by a cash credit than by having bills discounted: ○ In a cash credit the party pays interest only for the money he actually employs. If a person wants to make use of Rs.100, and has a bill for Rs.150, he will get the bill discounted, and thus pays interest for Rs.50 for which he has no use. But if he has a cash credit he draws only Rs.100, and pays interest for that amount. ○ In a cash credit he can repay any part of the sum drawn whenever he pleases. If a trader has a bill for Rs.150 discounted to-day, and should unexpectedly receive Rs.150 to-morrow, he

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cannot re-discount the bill, but has actually paid interest for money he does not want. But if he draws Rs.150 upon his cash credit account today, and to-morrow receives Rs.150, he takes this money to the bank, and will have to pay the Interest upon Rs.150 for only one day. ○ In a cash credit he has the Dower of drawing whenever he pleases, to the full amount of his credit; but in the case of discounting bills, he must make a fresh application to the bank to discount each bill, and if the bank have at any time more profitable ways of employing their money, or if they suspect the credit of the applicant, they may refuse to discount, but this would not be the case if he had a cash credit. ○ In a cash credit the party does not pay the interest until the end of the year; whereas, in the other case, he pays the interest at the time the bill is discounted. Cash credits are granted not only upon personal security, but also upon the security of the Public Funds. This furnishes great facilities for raising money to those who possess property which they are not disposed to sell A person who is a holder of government stock may sell out a portion to supply his temporary necessities; and when he wishes to replace it he finds the price of stock has risen, and it will cost him more money to repurchase than he received when he sold. But if he transfers the stock

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to a bank as a security for a cash credit, he may repay the money whenever he pleases; and if, in the meantime, the value of the security should have raised all the advantage will be his own. i) Loans : A specified amount sanctioned by a bank to the customer is called a ‘loan’. It is granted for a fixed period, say six months, or a year. The specified amount is put on the credit of the borrower’s account. He can withdraw this amount in lump sum or can draw cheques against this sum for any amount. Interest is charged on the full amount even if the borrower does not utilise it. The rate of interest is lower on loans in comparison to cash credit. A loan is generally granted against the security of property or personal security. The loan may be repaid in lump sum or in instalments. Every bank has its own procedure of granting loans. Hence a bank is at liberty to grant loan depending on its own resources. The loan can be granted as: a) Demand loan, or b) Term loan a) Demand loan Demand loan is repayable on demand. In other words it is repayable at short notice. The entire amount of demand loan is disbursed at one time and the borrower has to pay interest on it. The borrower can repay the loan either in lumpsum (one time) or

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as agreed with the bank. Loans are normally granted by the bank against tangible securities including securities like N.S.C., Kisan Vikas Patra, Life Insurance policies and U.T.I. certificates. b) Term loans Medium and long term loans are called ‘Term loans’. Term loans are granted for more than one year and repayment of such loans is spread over a longer period. The repayment is generally made in suitable instalments of fixed amount. These loans are repayable over a period of 5 years and maximum upto 15 years. Term loan is required for the purpose of setting up of new business activity, renovation, modernisation, expansion/extension of existing units, purchase of plant and machinery, vehicles, land for setting up a factory, construction of factory building or purchase of other immovable assets. These loans are generally secured against the mortgage of land, plant and machinery, building and other securities. The normal rate of interest charged for such loans is generally quite high. i) Bank Overdraft Overdraft facility is more or less similar to cash credit facility. Overdraft facility is the result of an agreement with the bank by which a current account holder is allowed to withdraw a specified amount over and above the credit balance in his/her account. It is a short term facility. This facility is made available to current account holders who

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operate their account through cheques. The customer is permitted to withdraw the amount as and when he/she needs it and to repay it through deposits in his account as and when it is convenient to him/her. Overdraft facility is generally granted by bank on the basis of a written request by the customer. Some times, banks also insist on either a promissory note from the borrower or personal security to ensure safety of funds. Interest is charged on actual amount withdrawn by the customer. The interest rate on overdraft is higher than that of the rate on loan. ii) Discounting of Bills Apart from granting cash credit, loans and overdraft, banks also grant financial assistance to customers by discounting bills of exchange. Banks purchase the bills at face value minus interest at current rate of interest for the period of the bill. This is known as ‘discounting of bills’. Bills of exchange are negotiable instruments and enable the debtors to discharge their obligations towards their creditors. Such bills of exchange arise out of commercial transactions both in internal trade and external trade. By discounting these bills before they are due for a nominal amount, the banks help the business community. Of course, the banks recover the full amount of these bills from the persons liable to make payment. Agency and General Utility Services provided by Modern Commercial Banks

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You have already learnt that the primary activities of commercial banks include acceptance of deposits from the public and lending money to businessmen and other members of society. Besides these two main activities, commercial banks also render a number of ancillary services. These services supplement the main activities of the banks. They are essentially non-banking in nature and broadly fall under two categories: i) ii) Agency services, and General utility services.

a) Agency Services Agency services are those services which are rendered by commercial banks as agents of their customers. They include: a) Collection and payment of cheques and bills on behalf of the customers; b) Collection of dividends, interest and rent, etc. on behalf of customers, if so instructed by them; c) Purchase and sale of shares and securities on behalf of customers; d) Payment of rent, interest, insurance premium, subscriptions etc. on behalf of customers, if so instructed; e) Acting as a trustee or executor; f) Acting as agents or correspondents on behalf of customers for other banks and financial institutions at home and abroad.

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ii) General utility services General utility services are those services which are rendered by commercial banks not only to the customers but also to the general public. These are available to the public on payment of a fee or charge. They include: a) Issuing letters of credit and travellers’ cheques; b) Underwriting of shares, debentures, etc.; c) Safe-keeping of valuables in safe deposit locker; d) Underwriting loans floated by government and public bodies. e) Supplying trade information and statistical data useful to customers; f) Acting as a referee regarding the financial status of customers; g) Undertaking foreign exchange business. UNIVERSAL BANKING Introduction The concept of Universal Banking Universal Banking, means the financial entities – the commercial banks, DFIs, NBFCs, - undertake multiple financial activities under one roof, thereby creating a financial supermarket. The entities focus on leveraging their large branch network and offer wide range of services under single brand name.

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Universal banking generally takes one of the three forms: a. In-house Universal banking. Eg. Germany b. Through separately capitalized subsidiaries. Eg. England. c. Operations carried through a holding company. Eg. USA. (Nair, 1998) Universal Banking includes not only services related to savings and loans but also investments. However in practice the term 'universal banks' refers to those banks that offer a wide range of financial services, beyond commercial banking and investment banking, insurance etc. It is a combination of commercial banking, investment banking and various other activities including insurance. If specialised banking is the one end universal banking is the other. This is most common in European countries. A narrow view of Universal banking could be activities pertaining to lending plus investments in bonds and debentures. A broader view could include a basket of all the financial activities including insurance. Though the concept is prevalent in countries like France, Germany and USA but is yet to take-off, officially in India. International Scenario Federal Republic of Germany, Switzerland are generally known to be the home of universal banking. Factors like technological up gradation,

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wide spread of applications, increasing competition in financial sector etc., are the driving forces in these nations. In few other European countries, almost all other banking and non-banking services are carried out by financial institutions. For instances, in Germany, commercial and investment banking activities are performed by a single entity, but separate subsidiaries are required for other activities. In UK a separate subsidiaries of commercial banks involve in providing wide range of activities. What the USA follows is an extreme model, where the commercial banks are prevented legally from combining their normal lending functions with investment operations, where they are separated by several legislative acts, including the Glass-Steagall Act of 1933 and the bank Holding company Act of 1956. However, at present USA is having a re-look at the position. Much of the international debate on universal banking has been centered around the restriction on diversification of the type. Indian Scenario 1. Commercial banks In early 90's the financial sector in India was crying out for reforms. Ever since the process of liberalization hit the Indian shores, the banking sector saw the emergence of new-generation private sector banks. Public sector banks which played a useful role earlier on are now facing deterioration in their performance. For very long, the banks in India

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were not allowed to have access to stock markets. So their dealing in other securities were minimal. But the financial sector reforms changed it all, Indian banks started to deal on the stock market but their bitter experience with scams, they became averse to deal in equities and debentures. Off late, commercial banks in India have been permitted to undertake a range of in-house financial services. Some banks have even setup their own subsidiaries for their investment activities. Subsidiaries include in the area of merchant banking, factoring, credit cards, housing finance etc. 2. Financial Institutions DFIs were traditionally engaged in long term financing, as their main objective was to take care of the investment needs of industries and to contribute to a better industrial climate. They had, over the time, built up expertise in merchant banking, project evaluation and also started giving working capital finance. Recently, they were allowed to accept medium-term deposits within the specified limits. Lots of changes have taken place in DFIs in the recent past. Most of DFIs have floated banks, institutions and mutual fund subsidiaries. Ownership changes took place, several institutions went public, organization structure itself got transformed. Indian Perspective on Universal Banking Some argue that the approach is very slow, while some call for steady approach. The debate of

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universal banking is very much on. Should India have universal banking and if so when? Much has been written about it domestically, however the following are the issues which are key in Indian context. i. Regulatory burden ii. Regulatory requirements iii. Distinction between maturity and duration iv. Optimum Transition path i. Regulatory burden: One of the major problems associated with universal banking is the issue of regulation. DFIs in India are governed by separate Acts and banks are regulated by RBI and Banking Regulation Act. DFIs in India have commercial banks as their subsidiaries, but due to the separation of regulation, the DFIs cannot have direct access to the resource base of its subsidiary bank. Without any doubt, the net regulatory burden for all participants in the entire financial system should be equalized in order to ensure that no participant might end up having a disadvantage relative to any other. The importance of this point can be highlighted by citing the example of USA, Japan, West Germany and Britain where there was a tremendous decline in the share of banks in composition of household financial assets and its movement to mutual funds and insurance. The study reveled that the decline has been due to very high net regulatory burden being imposed upon the entire banking system relative to

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that on the mutual funds and insurance companies. In India there is an urgent need to reduce the regulatory burden, particularly for banks vis-à-vis mutual funds and insurance companies, if the banks are expected to compete in free market place. (Mor, 1999) ii. Regulatory requirements The reference of regulatory requirements here are on the following issues – a. Cash Reserve Ratio (CRR): From early 90's the monitory policy in India has been focusing on review of CRR. Off late RBI is concentrating more so on indirect instruments like Bank Rate and Open Market Operations, and felt that the CRR must be brought down to its minimum level of 3 percent at the earliest. It is also argued by some experts that instead of the complete Net Demand and Time Liabilities (NDTL) of banks, its application if restricted only to cash and cash like instruments, it would be more effective as an instrument of monetary policy and by applying the ratio, for the senior bonds that may be issued by banks to industry, is not in the interests of Monetary policy and this would further increase the cost of funds to the industry by almost at 1 percent. b. Statutory Liquid Ratio (SLR): Though, the SLR has already reached its statutory minimum of 25 percent, some experts feel there is need to reexamine the present minimum limit, which is very high as per the international practices and could be brought down further by amending the Banking

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Regulation Act. Few banking experts extended to specific infrastructure projects as a part of SLR, since these facilities have directly replaced similar financing by Government of India. c. Priority Sector: The whole issue of priority sector needs a closer look. The S.H Khan panel called for modifications in defining the priority sector by excluding all infrastructure loans from the net bank credit for the priority sector. It has also suggested the creation of an alternative mechanism to finance the priority sector. Even the international experience of banks in AsiaPacific region had a 'must serve' obligation towards priority sector and the result was discriminatory and inefficient performance without the support of commercial mindset. iii. Distinction between Maturity and Duration This is the another issue of debate between long term and short term. Somehow DFIs are the suppliers of term finance, where the maturity is clearly specified which could be between 3 years to 7 years, where as banks are providers of short-term finance where in reality bank finance in a way amounts to financing in perpetuity since there are in general no definite maturity dates. Usually the deposit base of the banks have are short duration but with a variably high interest rates but its not the case with DFIs. Their funds have a longer duration with less interest rates. (Mor, 1999) The interim report of S H Khan committee has argued that the distinction between commercial and

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investment banking have become increasingly blurred with banks providing both working capital and term loans to corporates but DFIs can provide only term loans as they cannot accept short term deposits. The committee further argued that DFIs should be given banking licenses eventually and until then they should be allowed to establish 100 percent banking subsidiaries while they continue to play their present role. iv. Optimal Transition path Viable transition path is one of the major areas of concern for institutions which are desirous of moving in the direction of universal banking. The transition path contains several operational and regulatory issues for information and guidance of DFIs. The S H Khan working group and the discussion paper on the subject prepared by RBI eventually felt that DFIs should transform themselves into commercial banks but in a phased manner. The committee also recommended that DFIs can have 100 percent owned banking subsidiaries which would be extremely beneficial to them. If this happens, then it would allow DFIs to gain expertise in the area of commercial banking which would in turn help the DFIs if they are seriously looking at the prospect of converting into a commercial bank. Also the 100 percent subsidarisation allows banks to have a full access to capital base of DFIs and gain substantial knowledge in the area of project financing.

Dr. Joseph Anbarasu

The RBI has asked FIs, which are interested to convert itself into a universal bank, to submit their plans for transition to a universal bank for consideration and further discussions. FIs need to formulate a road map for the transition path and strategy for smooth conversion into a universal bank over a specified time frame. The plan should specifically provide for full compliance with prudential norms as applicable to banks over the proposed period. Considerations Caution must be applied on Universal banking because of the following considerations: 1. Disintermediation (i.e. replacement of traditional bank intermediation between savers and borrowers by a capital market process) is only a decade old in India and has badly slowed down due to loss of investors' confidence. 2. There is an ample room for financial deepening (by banks & DFIs) since loan market will continue to grow. 3. DFIs as a folder of equity in most of the projects promoted in the past have never used the tool advantageously. 4. DFIs are now only moving into working capital finance, an area in which they need to gain lot of expertise and this involves creation of network of services (including branches) in all fields like remittances, collections etc.

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5. Reforms in the Indian capital market is still in the half way stage. The priority will be to ensure branch expansions, financial deepening of credit markets, and creation of an efficient credit delivery mechanism that can compete with the capital market. Salient operational and regulatory issues to be addressed by the FIs for conversion into a Universal Bank [RBI circular] a) Reserve requirements Compliance with the cash reserve ratio and statutory liquidity ratio requirements (under Section 42 of RBI Act, 1934, and Section 24 of the Banking Regulation Act, 1949, respectively) would be mandatory for an FI after its conversion into a universal bank. b) Permissible activities Any activity of an FI currently undertaken but not permissible for a bank under Section 6(1) of the B. R. Act, 1949, may have to be stopped or divested after its conversion into a universal bank. c) Disposal of non-banking assets Any immovable property, howsoever acquired by an FI, would, after its conversion into a universal bank, be required to be disposed of within the maximum period of 7 years from the date of acquisition, in terms of Section 9 of the Banking Regulation Act. d) Composition of the Board

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Changing the composition of the Board of Directors might become necessary for some of the FIs after their conversion into a universal bank, to ensure compliance with the provisions of Section 10(A) of the B. R. Act, which requires at least 51% of the total number of directors to have special knowledge and experience. e) Prohibition on floating charge of assets The floating charge, if created by an FI, over its assets, would require, after its conversion into a universal bank, ratification by the Reserve Bank of India under Section 14(A) of the Banking Regulation Act, since a banking company is not allowed to create a floating charge on the undertaking or any property of the company unless duly certified by RBI as required under the Section. f) Nature of subsidiaries If any of the existing subsidiaries of an FI is engaged in an activity not permitted under Section 6(1) of the B R Act, then on conversion of the FI into a universal bank, delinking of such subsidiary / activity from the operations of the universal bank would become necessary since Section 19 of the Act permits a bank to have subsidiaries only for one or more of the activities permitted under Section 6(1) of Banking Regulation Act. g) Restriction on investments An FI with equity investment in companies in excess of 30 per cent of the paid up share capital of that company or 30 per cent of its own paid-up

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share capital and reserves, whichever is less, on its conversion into a universal bank, would need to divest such excess holdings to secure compliance with the provisions of Section 19(2) of the Banking Regulation Act, which prohibits a bank from holding shares in a company in excess of these limits. h) Connected lending Section 20 of the Banking Regulation Act prohibits grant of loans and advances by a bank on security of its own shares or grant of loans or advances on behalf of any of its directors or to any firm in which its director/manager or employee or guarantor is interested. The compliance with these provisions would be mandatory after conversion of an FI to a universal bank. i) Licensing An FI converting into a universal bank would be required to obtain a banking license from RBI under Section 22 of the Banking Regulation Act, for carrying on banking business in India, after complying with the applicable conditions. j) Branch network An FI, after its conversion into a bank, would also be required to comply with extant branch licensing policy of RBI under which the new banks are required to allot at east 25 per cent of their total number of branches in semi-urban and rural areas. k) Assets in India

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An FI after its conversion into a universal bank, will be required to ensure that at the close of business on the last Friday of every quarter, its total assets held in India are not less than 75 per cent of its total demand and time liabilities in India, as required of a bank under Section 25 of the Banking Regulation Act. l) Format of annual reports After converting into a universal bank, an FI will be required to publish its annual balance sheet and profit and loss account in the in the forms set out in the Third Schedule to the B R Act, as prescribed for a banking company under Section 29 and Section 30 of the Banking Regulation Act. m) Managerial remuneration of the Chief Executive Officers On conversion into a universal bank, the appointment and remuneration of the existing Chief Executive Officers may have to be reviewed with the approval of RBI in terms of the provisions of Section 35 B of the Banking Regulation Act. The Section stipulates fixation of remuneration of the Chairman and Managing Director of a bank by Reserve Bank of India taking into account the profitability, net NPAs and other financial parameters. Under the Section, prior approval of RBI would also be required for appointment of Chairman and Managing Director. n) Deposit insurance

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An FI, on conversion into a universal bank, would also be required to comply with the requirement of compulsory deposit insurance from DICGC up to a maximum of Rs.1 lakh per account, as applicable to the banks. o) Authorized Dealer's License Some of the FIs at present hold restricted AD license from RBI, Exchange Control Department to enable them to undertake transactions necessary for or incidental to their prescribed functions. On conversion into a universal bank, the new bank would normally be eligible for full-fledged authorized dealer license and would also attract the full rigour of the Exchange Control Regulations applicable to the banks at present, including prohibition on raising resources through external commercial borrowings. p) Priority sector lending On conversion of an FI to a universal bank, the obligation for lending to "priority sector" up to a prescribed percentage of their 'net bank credit' would also become applicable to it. q) Prudential norms After conversion of an FI in to a bank, the extant prudential norms of RBI for the all-India financial institutions would no longer be applicable but the norms as applicable to banks would be attracted and will need to be fully complied with. Concluding Remarks

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The following are the steps suggested: a. Equalize the net regulatory burden across the financial system (including banks, DFIs, mutual funds, NBFCs and Insurance companies). Lower the regulatory burden on the over regulated entities. Promote and encourage strong competition. Do not allow the merger of a weak bank with a viably strong DFI or vice-versa. DFIs should be permitted to set up a 100 percent owned banking subsidiaries. Need is felt to re-examine the minimum level of SLR requirement in order to meet the best of international standards.

b. c. d. e. f.

Principles of Sound bank lending
Lending depends on obtaining and analysing the facts of a loan request. It is an art of making judgements about the information, the feasibility of the business and the credibility of the borrower. An intelligent lender focuses on the key business issues quickly. He determines what information is required. Based on the information, he makes a prompt decision. The lending banker should take time and experience to develop sound credit decision. This part of the unit deals with some basic principles for lending. The following principles are

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implemented before making a decision. Investment in people, management and leadership, and a systematic approach to risk are the key elements that allow lenders to be effective. The principles of effective lending presented below reflect the lessons that micro lenders have learned through experience and the innovative approaches being used for small business lending today. This does not include marketing and outreach discussion because demand is assumed to exist if a programme offers the right products and services. The use of technical assistance in loan screening and borrower evaluation is discussed below under the Role of Technical Assistance. 1. Know your Borrower: Understand your market niche and the types of people, and characteristics needed to succeed in the local environment. The best entrepreneurs may be stubborn, without formal education, and blithely unaware of any personal weaknesses, yet they may have the street smarts, resourcefulness, and ability to do one thing well to be successful entrepreneurs. Be aware of their strengths, limitations, and weaknesses, and why you like or dislike them. In other words, lend to the person, not to the idea. Personal commitment to repay is the strongest bond between a lender and its customers. 2. Structure Loans to Minimise Risk: Successful lenders provide minimal credit amounts at first and then increase the subsequent loan size

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once a borrower has demonstrated his or her ability and commitment to repay. These “stepping loans” minimise risk to the borrower (particularly start-ups or early stage expansions) and to the lender. In addition to “stepping loans”, other methods for reducing risk to the lender include: 3. It is Hard to Fix a Poor Underwriting Decision: If staff misjudged either the business or the borrower, it is difficult to fix the problem once the loan is made. Loan restructuring and collections take significant staff time and reduce the time available for other borrowers. Careful evaluation of the business viability and borrower character is essential to lending unless the organisation can rely on (a) collateral, (b) cross-guarantees borrowers, or within a group of

When it comes time to collection, collateral melts like ice cream in the summer sun. Therefore, prudent judgements of business viability and borrower character are essential. 1. Pay Attention to the Details: Lending is a business of details. Careful information gathering and analysis, loan documentation and rapid follow-up on any discrepancies all require a focus on details. Although many credit programmes learned this the hard way, the most successful programmes now are meticulous in their loan

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procedures and prompt in their follow-up if any payments or reporting requirements are past due. Collect aggressively to establish market credibility and minimise loan losses. 2. Streamline loan administration systems, but stay in close touch with the borrower. Most of the lending programmes in operation are using direct loans to individual businesses in a manner similar to traditional banking. The key is to stay in close touch with the borrower by a. requiring frequent payments at the local office and b. making periodic site visits. A missed payment or disarray at the place of business is immediate signs of trouble. Lending staff must monitor loans for changing economic or market conditions and spot early signs of potential trouble. 1. Charge “market” interest rates: Access to credit is more important than its cost. Because access to credit can dramatically improve the income generation of any business, most entrepreneurs are less cost-sensitive and more access-driven. Most credit organisation charge fees and interest rates those are higher than the conventional finance system and lower than informal moneylenders. Additional margin on each loan has a relatively small impact on the borrower (given the small loan amounts and increased income

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generation) and a huge impact on the programme’s prospects for self-sufficiency. 2. Be driven by the deal, not charity: Despite their development mission, lenders must evaluate each deal on its business merits and the capacity and character of the borrower. Experience gives lenders the ability to recognise those deals that do not make sense and those that might if they were structured differently. If an existing loan suddenly looks precarious, take action swiftly with clear intentions rather than allowing non-payment or problems to continue. 3. Collect hard and fast: Consistent and disciplined loan collection reinforces the business relationship between the lender and borrower, and sends a strong message that delinquency will not be tolerated. Do not use the threat of collection actions unless you are prepared to take them. The key lending principles from international institutions have been to streamline the loan approval and delivery systems, rely on personal character rather than an analysis of the underlying business, and standardize products and delivery mechanisms to reduce administrative costs. In addition, they have demonstrated that subsidised credit benefits neither the borrower nor the institution in the long run. However, existing programmes appear to combine the efficiencies of

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delivery with the more rigorous assessment of borrower and business that has been used. 4. Loan Assessment and Credit Analysis There is no formula for determining creditworthiness. The loan officer must assemble and evaluate information and then determine what the entire picture looks like. Traditional bank lenders refer to the “Four Cs” of lending: Credit, Capacity, Collateral, and Character. Lending uses the rigorous credit assessment principles, but applies them to situations in which the lender must rely on borrower character and cash flow from the business. The loan application and the first meeting with the borrower are the first screen of whether a business is a potential candidate. Beginning with the first meeting, the lender must evaluate the quality of the business deal, the fit with the borrower’s experience and capacity, and whether the financing amount and structure is appropriate. Example Fair Lending Policy of Indian Bank FAIR LENDING PRACTICES CODE 1. Preamble (a) Scope: Fair lending practices code (FLPC for short) aims at providing information to customers seeking credit facilities of all categories of loans irrespective of amount of loan sought by the borrower and facilitates

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effective interaction of customers with the bank. (b) Extent: modified FLPC is put in place by our bank with effect from 30.04.2007. (c) The bank reserves the right to modify / incorporate / delete any of the clauses in this flpc at any time and will announce the revised code, in place of the present flpc furnished hereunder. 1. Important declarations: Our bank declares and undertakes A) to provide professional, efficient, courteous, diligent and speedy services in the matter of lending. B) not to discriminate on the basis of religion, caste, sex, descent or any of them (except participation in credit-linked schemes framed for weaker sections of the society like women entrepreneur scheme etc.) C) to be fair and honest in advertisement and marketing of loan products D) to provide customers with accurate and timely disclosure of terms, costs, rights and liabilities as regards loan transactions. E) if sought, to provide such assistance or advise to customers applying for loans.

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F) to attempt in good faith to resolve any disputes or differences with customers by the complaint redressal cells within the bank. G) to comply with all the regulatory requirements in good faith. H) to spread general awareness about potential risks in contracting loans and encourage customers to take independent financial advice and not act only on representation from banks. 1. Fair practices: 3.1 product information: A) a prospective customer would be given all the necessary information adequately explaining the range of loan products available with our bank to suit his needs. B) on exercise of choice, the customer would be given the relevant information about the loan product of his choice. C) the customer would be explained the processes involved till sanction and disbursement of loan and would be notified of timeframe within which all the processes will be completed ordinarily at our bank. D) the customer would be informed of the names and phone numbers of branches (or the persons) whom he can contact for the purpose of loan to suit his needs.

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E) the customer would be informed the procedure involved in servicing and closure of the loan taken. 3.2 interest rates: 3.2.1 Interest rates for different loan products would be made available through and in any one or all of the following media, namely: A. In our bank's web site B. Over phone, if tele-banking services are provided C. Through display in the branches D. Through other media from time to time. 3.2.2 Customers would be entitled to receive periodic updates on the interest rates applicable to their accounts, if the revision is individual customer-specific. 3.2.3 On demand, customers can have full details of method of application of interest. 3.3 revisions in interest rates: A. Our bank would notify immediately or as soon as possible any revision in the existing interest rates and make them available to the customers in the media listed in para 3.2.1. B. Interest rate revisions to the existing customers would be notified within a reasonable period of ten days from the date of change through the media as per para 3.2.1.

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3.4 default interest / penal interest : Our bank would notify clearly about the default interest / penal interest rates to the prospective customers. 3.5 charges A. Our bank would notify details of all charges payable by the customers in relation to their loan account. B. Our bank would make available for the benefit of prospective customers all the details relating to charges to all loan applicants of all categories of loans irrespective of amount of loan sought by the borrower in the media as specified in para 3.2.1. C. Any revision in charges would be notified in advance and would be made available in the media as listed in para 3.2.1 D. Our bank would clearly specify the charges to be recoverable from the borrower for interest and charges, wherever necessary and get a mandate for debiting the said account along with the documentation. 3.6 terms and conditions for lending: A. Our bank would ordinarily give an acknowledgement of receipt of loan application and if demanded by the customer, a copy of the application form duly acknowledged would also be given, as soon as the customer chooses to buy a retail product or service of his choice. In

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respect of loan applications all loan applicants of all categories of loans irrespective of amount of loan sought by the borrower, the acknowledgement will indicate the timeframe for disposal of such applications. B. Immediately after the decision to sanction the loan, our bank would show draft of the documents that the customer is required to execute and would explain, if demanded by the customer, the relevant terms and conditions for sanction and disbursement of loan. The bank would obtain the customers' acceptance / guarantor's acceptance of these terms and conditions on record by way of an acceptance signature in the copy of sanction advice / ticket issued to the customer. C. Loan application forms, draft documents, sanction letter, declarations or such other papers to be signed by a customer would comprehensively contain all the terms and conditions relating to the product or service of his choice. D. Wherever possible, reasons for rejection of loan would be conveyed to the customers. E. Before disbursement of loan, our bank upon written request would deliver the format (copy) of the documents to be executed by the customers against their acknowledgement at their cost.

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F. If the borrower desires to have the copies of the executed loan documents, bank upon written request would deliver the copies of duly executed documents after due verification by the branch lawyer, against the borrowers’ written acknowledgement, at their cost. G. Modification on time frame for disposal of applications in respect of all categories of loans irrespective of the amount of loan shall be as under: Up to Rs. 25000 Within 15 days

Beyond rs.25000 and Within 4 weeks up to Rs. 5 crore - fresh limits and increase in limits for existing units Above Rs. 5 crore - Within 8 weeks fresh limits and increase in limits for existing units For adhoc limits 3.7 account practices: A. Our bank would provide regular statement of accounts, unless not found necessary by the customers. B. Our bank would notify relevant due dates for application of agreed interest, penal interest, default interest and charges if they within 3 weeks

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are not mentioned in the loan applications, documents or correspondence. C. Our bank would notify in advance any change in accounting practices that would affect the customer, before implementation, in the media listed in para 3.2.1. A. 3.8 information secrecy A. All personal information of the customer would be confidential and would not be disclosed to any third party unless agreed to by the customer. The term 'third party' excludes all law enforcement agencies, credit information bureau, reserve bank of India, other banks and financial institutions. B. Subject to above Para, customer information would be revealed only under the following circumstances, namely; • • • if our bank is compelled by law if it is in the public interest to reveal the information if the interests of our bank require disclosure.

3.9 financial distresses A. Our bank would reckon cases of customer's financial distress and consider them sympathetically. B. Customer would be encouraged to inform about their financial distress as soon as possible.

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C. Our bank would adequately train the operational staff to give patient hearing to the customers in financial distress and would render such help as may be possible in their view. D. In the event of default our bank will take every legal means for the recovery of the loans from the borrowers / guarantors / securities / other assets. 3.10 grievance redressal • The branch manager can be approached through letter or in person, who will attend to / give personal hearing to the grievances of the credit applicants on any working day during the banking hours. The findings will be communicated within one week to the aggrieved party. If the customer is not satisfied with the reply, he can approach the circle head (whose name and office address are displayed in the branch) for redressal of the complaints / grievances. All circle heads or the nominated officer at the circle. Office will attend to the complaints / grievances and also give personal hearing to the applicants. The decision will be communicated to the applicants within two weeks. The grievances can be represented in plain paper with all relevant particulars by the applicant.

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General terms and conditions applicable for all facilities /all types of borrowers 1. All applicants / borrowers and guarantors must furnish their passport size photos along with application. 2. the advance will be released only upon completion of documentation in all respects as per bank’s rules 3. Processing fee and other charges as per bank's rules should be paid upfront. 4. Processing charges for renewal of facilities will be charged on due dates irrespective of whether the renewal papers are submitted or not. 5. Bank is entitled to charge and recover interest, various fees, and charges as per actuals / prescribed tariff from the borrower as applicable from time to time. 6. the limits shall be availed within the prescribed time limit as specified in the sanction ticket or within 3 months from the date of communication of sanction which ever is earlier 7. The advance must be used for the purpose for which it is sanctioned. Unless otherwise specified, the working capital limits disbursed are valid for a period of one year from the date of sanction. For any request for renewal/enhancement, application should be made at least three months in advance

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furnishing all the relevant data as required by bank. 8. Acceptance of immovable properties offered as security is subject to the unqualified legal opinion of the bank‘s approved lawyer conveying a clear, valid, subsisting and marketable title. 9. Valuation of the property, wherever given as security, should be done by the bank’s approved engineer/revenue authorities. 10. In the case of immovable properties given as security the borrower should furnish upto- date encumbrance certificate showing nil encumbrance and up-to-date tax paid receipt at the time of documentation. Stamp duty charges for creation of em to be borne by the applicant / borrower. 11. Immediately on completion of 4 months from the date of creation of equitable mortgage, further encumbrance certificate shall be produced. Thereafter, encumbrance certificates and property tax paid receipts shall be produced every year. 12. Securities for one or more facilities shall also stand as additional security for all other facilities granted or to be granted from time to time to the said borrowers, unless specifically waived by the bank. 13. Fixed assets charged to the bank shall not be leased / disposed / substituted / relocated/

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mortgaged / assigned without prior approval of the bank. 14. All the assets charged to the bank [except for the assets exempted from insuring in certain loan products/ schemes] shall be adequately insured against all attendant risks at the expense of the borrower(s). The insurance policy with bank clause (viz. Bank as mortgagee, hypothecatee or pledgee as the case maybe) shall be lodged with the bank. The insurance cover shall be kept in force at all times through prompt renewals and with suitable enhancements to include any increase in the value of securities. 15. Machinery, equipment, vehicles, etc. Charged to the bank should be painted with the Bank’s name or affixed with the bank’s name board. In the premises where stocks hypothecated/pledged to the bank are stored, bank name board with specific mention of the branch name should be displayed prominently both inside and outside the premises. 16. Assets charged to the bank are subject to inspection by bank’s officials from time to time. 17. For working capital facilities against stock etc, monthly stock statement with break up of stocks as required by the bank is to be submitted. Delayed submission of stock statements / financial statements etc., will attract levy of

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penal interest as per bank’s rules in force from time to time. 18. All fund based/non-fund based /fee based transactions shall be routed only through the account with our bank. 19. Interest will be generally charged on the last working day of every month and should be paid as and when charged. 20. Default in payment of interest / instalments on the respective due dates will attract overdue interest on the defaulted amount at 2% over and above the contractual / maximum interest rates or at such rates as applicable from time to time. 21. Stipulated margin on securities charged to the bank should be maintained during the currency of the advance. 22. If any default / deterioration occurs in any security charged to the bank, the liability of the borrower shall become immediately due and payable. 23. Upon sanction, the duplicate copy of the sanction letter is to be returned duly signed by the borrower / guarantor in token of acceptance of terms and conditions. 24. The bank is not under any obligation to make further advances or other accommodation to the borrower, unless deemed fit and necessary by the bank.

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25. Changes, if any made to the structure of ownership/management of the borrowing concern shall be promptly informed to the bank. 26. Besides general terms and conditions, schemespecific / activity-specific terms and conditions will be stipulated in the sanction ticket and should be complied by the applicant, based on the nature of facility; constitution of the borrower; purpose; end use; security and nature of charge on the security. 27. For scheme-specific / activity-specific loans for activities like small scale industries, cottage industries, agriculture, allied activities, poultry, minor irrigation, land development, gobar gas plant, self help group, crop loans for specific crops, tie up arrangement details, personal loan products, consumer articles, vehicles for commercial / personal use, retail traders, service providers, etc., terms and conditions can be had from the branches separately. 28. The bank may at its discretion recall the entire advance upon default of a single instalment / interest. 29. In addition to these terms and conditions all the facilities sanctioned shall be subject to the bank’s rules as well as the directives issued by rbi or any other regulatory authority from time to time. 30. The bank reserves to itself the right to cancel / suspend / reduce any or all the limits

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sanctioned / alter / amend / vary the terms of sanction including rate of interest at its sole discretion without assigning any reason. 31. Bank at its discretion may approve or disallow, drawings beyond the sanctioned limit or honouring cheques issued for the purpose other than specifically agreed to in the credit sanction. 32. Bank may disallow drawing on a borrowal account on its classification as a nonperforming asset or on account of non compliance with the terms of sanction. Rs.70/- per charge Note : (1) for computerised accounts 40 entries or part thereof will be reckoned as one folio (no folio charges for facility deposit accounts and rrbs of our bank) (2) the charges are to be recovered annually on 28th february every year or at the time of closure of the account whichever is earlier 4. Cost of Kisan credit card (not exceeding rs.50/-) to be borne by borrower 5. CGTSI charges (SSI a/cs which are collateral free / without third party guarantee): guarantee fee 2.5% (one time) – initially Annual service fee 1% (on the amount outstanding as of march 31st every year) 6. Insurance charges actual

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7. Out-of-pocket expenses including legal charges, remittances by post: All out-of-pocket expenses such as pre-sanction and post-sanction visits, recovery visits, valuation fees payable to approved valuers, fees to panel advocates for opinion, sending notices, etc., should be paid by the borrower, as applicable 8. Penal interest for overdue / irregularities: Upto rs.25000/- nil Above rs.25000/- additional interest @ 2% above the applicable rate 9. Periodicity of charging interest: As per RBI master circular - interest rates on advances (DBOD dated 01.07.2005), banks should charge interest on agricultural advances for long duration crops at annual rests. As regards other agricultural advances in respect of short duration crop and allied agricultural activities such as dairy, fishery, piggery, poultry, bee-keeping etc., banks may take into consideration due dates fixed on the basis of fluidity with borrowers and harvesting / marketing season while charging interest and compounding the same if the loan / instalment becomes overdue. In our bank, for crop loans, interest on simple basis is debited to the account and only on the due date the same is compounded at half yearly rests. In other words, interest on stpl is not compounded till it becomes due.

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In case of all agri-term loans interest is debited to the account on simple basis at half yearly rest till the instalment become due. However, interest is compounded on due dates as soon as the holiday/gestation period is over. For non-agricultural advances, interest will be charged at monthly intervals. *service charges are subject to periodical change service charges are charged according to the rating of the account. Any revalidation and / or modification in sanction terms after 15 days from the date of communication of sanction by the bank/branch will attract further processing charges at 25% of the original processing charges stipulated. Adhoc limit if adjusted beyond 3 months will attract penal interest as per extent guidelines. Review Questions: 1. Define banking. 2. What additional businesses can the commercial banks do? 3. List out the various agency business of commercial banks. 4. How is Indian financial system controlled? 5. Explain the banking structures in India.

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6. How is Indian capital market controlled and monitored? 7. What is demutualization? 8. List the features of Banking Regulation (Amendment) Bill, 2005. 9. What are the various functions of commercial banks? 10. Explain primary functions of commercial banks. 11. Describe the secondary functions of commercial banks. 12. What are the different modes of short term financial assistance? 13. Compare and contrast the primary and

secondary functions of commercial banks. 14. Briefly explain different modes of acceptance of deposits 15. What is current deposit? Explain its features. 16. Why do we call some deposits fixed?

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17. List

out

various

deposits

mobilized

by

commercial banks apart from main deposits. 18. How do commercial banks grant loans to clients? 19. What is cash credit? What are the stipulations followed by banks to grant it? 20. Differentiate demand loan from term loan. 21. Explain bank overdraft. What are the procedures to be followed to grant overdraft to the clients? 22. What is meant by discounting of bills? 23. List out various agency services rendered by the modern banks. 24. Define universal banking. Explain its status today

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