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The total assets of all scheduled commercial banks by end March 2010 is estimated at Rs 40,90,000 crore Opening up of the financial sector from 2005, under WTO, would see a number of global banks taking large stakes and control over banking entities in the country Some of the Indian banks may also emerge global players.
On the asset side, the pace of growth in both advances and investments is forecast to weaken. Consolidation On the growing influence of globalisation on the Indian banking industry, the financial al sec o would be opened up for greater international competition under WTO. Opening up of the financial sector from 2005, under WTO, would see a number of global banks taking large stakes and control over banking entities in the country. Multi National Banks would bring with them capital, technology, and management skills which would increase the competitive spirit in the system leading to greater efficiency voting rights of shareholders are pointer to these developments. The pressure on banks to gear up to meet stringent prudential capital adequacy norms under Basel II and the various Free Trade Agreements that India is entering into with other countries, such as Singapore, will also impact on globalisation of Indian banking. Some of the Indian banks may also emerge global players. As globalisation opens up opportunities for Indian corporate entities to expand their business overseas, banks in India wanting to increase their international presence could naturally be expected to follow these corporate entities and other trade flows out of India. Alongside, the growing pressure on capital structure of banks is expected to trigger a phase of consolidation in the banking industry. In the

S.C. Gupta committee appointed by IBA has observed the following in its report on Banking Industry : Vision 2010. Cost Control In the future, as domestic and international competition hots up, banks may have to shift their focus to ‘cost’ which will be determined by revenue minus profit. In others words, costcontrol in tandem with efficient use of resources and increase in productivity will determine the winners and laggards in the future. Qualitative growth The growth of banking in the coming years is likely to be more qualitative than quantitative, according to the report. Based on the projections made in the “India Vision 2020” prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end March 2010 is estimated at Rs 40,90,000 crore. That will form about 65 per cent of GDP at current market prices s compared to 67 per cent in 2002-03. Banks assets are expected to grow at an annual composite rate of growth of 13.4 per cent during the rest of the decade against 16.7 per cent between 1994-95 and 2002-03. On the liability side, there is likely to be large additions to capital base and reserves. As the reliance on borrowed funds increases, the pace of deposit growth may slow down.

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past mergers were initiated by regulators to protect the interest of depositors of weak banks. In recent years, there have been a number of market-led mergers between private banks. This process is expected to gain momentum in the coming years. Mergers between public sector banks or public sector banks and private banks could be the next logical development. Consolidation could also take place through strategic alliances or partnerships covering specific areas of business such as credit cards, insurance etc. Risk and reward The ability to gauge the risks and take appropriate position will be the key to successful banking in the emerging scenario. Risk-takers will survive, effective risk mangers will prosper and riskaverse are likely to perish. Risk management has to trickle down from the corporate office to branches. As audit and supervision shifts to a risk-based approach rather than transaction oriented, the risk awareness levels of line functionaries also will have to increase. The report also talks of the need for banks to deal with issues relating to ‘reputational risk’ to maintain a high degree of public confidence for raising capital and other resources. Technology Technological developments would render flow of information and data faster leading to faster appraisal and decision-making. This would enable banks to make credit management more effective, besides leading to an appreciable reduction in transaction cost. To reduce investment costs in technology, banks are likely to resort more and more to sharing facilities such as ATM networks. Banks and financial institutions will join together to share facilities in the areas of payment and settlement, back-office processing, date warehousing, and so on. The advent of new technologies could see the emergence of new players doing financial

intermediation. For example, we could see utility service providers offering, say, bill payment services or supermarkets or retailers doing basic’ lending operations. The conventional definition of banking might undergo changes. Social banking All these developments need not mean banks will give the goby to social banking. Rather than being seen as directed lending such lending would be business driven. Rural market comprises 74 per cent of the population, 41 per . cent of the middle-class, and 58 per cent of disposable income. Going Rural would be the new mantra of banks. Consumer growth is taking place at a fast pace in 17,000-odd villages with a population of more than 5,000. Of these, more than 50 per cent are concentrated in just seven states. Small-scale industries would remain important for banks. However, instead of the narrow definition of SSI based on the investment in fixed assets, the focus may shift to small and medium enterprises (SMEs) as a group. Changes could be expected in the delivery channel for small borrowers, agriculturists and unorganised sectors also. Regulation The expected integration of various intermediaries in the financial system would require a strong regulatory framework”. It would also require a number of legislative changes to enable the banking system to remain contemporary and competitive. Underscoring that there would be an increased need for selfregulation, development of best practices could evolve better through self-regulation rather than based on regulatory prescriptions. For instance, to enlist the confidence of the global investors and international market players, the banks will have to adopt the best global practices of financial accounting and reporting. It is expected that banks would migrate to global accounting standards smoothly, although it would mean greater disclosure and tighter norms.

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Technology in banks is no longer a matter of choice Globalisation, online revolution, internet banking and e-commerce, computer based technologies are some of the factors that contribute towards this trend. Information flow, ease of supervision, creation of new delivery channels, better customer service are some of the advantages Thus there is a strong need to align technology with business strategy to successfully compete in future. enterprise – not only the way transactions are made and processed but also the way messages are sent and received, data is managed and protected, systems are monitored and maintained and information is gathered, analysed and put to use. Internet Banking and e-commerce: These are the days of Internet banking and e-commerce activities, wherein IT has greatly influenced the entire banking and financial sector in a very big way. As use of the Internet continues to expand, more and more banks will be using the Web to offer products and services or otherwise enhance communications with consumers. The Internet offers the potential for safe, convenient new ways to shop for financial services and conduct banking business, any day, any time. On the other hand, using the same platform, any form of business transaction in which the parties interact electronically rather than by physical exchanges or direct physical contact is the much talked about e-commerce. The impact of electronic commerce will be pervasive on banks and financial sector and those that fully exploit it’s potential, will benefit a lot; the electronic commerce offers the possibility of breakpoint changes - changes that so radically alter customer expectations that they re-define the market or create entirely new markets. The ones, who try to ignore the new technologies, will then be impacted by these changes in markets and customer expectations. Equally, individual members of society will be presented with entirely new ways of purchasing goods, accessing information and services, and interacting with banks and financial

Information Technology is no longer a matter of choice. The question no longer is whether you would be computerized or not. Those who do not use IT will be out of business. Without computerization one will not be able to do business 10-15 years down the road. The need of the hour is to use the modern means of communication. What is more important from the banking point of view is that the use of Information Technology could produce tremendous results, speed up processes and eventually reduce costs. Banking and Financial Services industry is changing rapidly and the winners in the financial market place will be those that adopt new technology. Technology will be used not only as a channel to reach new and existing customers, but also to provide a structured framework for an efficient and profitable business. The following few paragraphs describe in brief the impact of IT in the Banking and financial sector : Globalization, the impact of the Internet: The opening of the economy and competitionhave forced banks and financial institutions to try and cut operational costs and to manage more information to re-engineer their business. This re-engineering process is creating new business opportunities for technology suppliers. Technology offers the path to a sustainable competitive advantage. No other industry is as dependent on technology, which is the foundation of every financial services product, from analysis and planning through to distribution and control. The online revolution: On-line is the buzzword today touching all facets of an

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organisations. Choice will be greatly extended, and restrictions of geography and time eliminated. Globally, many banks have offered on-line querying of accounts for quite some time and each one is vying with each other to offer their services over the net. This is true of our country too. Computer Based Technologies: The impact of technology on banking has been spectacular in the industrially advanced countries. Against the background of growing volume of transactions and the need to meet customer needs expeditiously, technology upgradation has become indispensable. To strengthen internal control, to improve accuracy of records and to facilitate provision of new products and services, banks will have to rely increasingly on computerbased technologies. Apart from improving the functioning of banks at various levels, technology has a key role to play in developing a payments system network through which funds can be transmitted quickly and efficiently. It is expected that, in India too VSAT satellite based network will, facilitate this as RBI and banks have already done much groundwork in this regard. Information flow: With the computing and telecommunications capabilities, the pace of financial innovation does not appear to be slowing. Technological advance has expanded the scope and utility of our financial products and increased the ability to unbundle risks. It has also promoted the faster and freer flow of information throughout the financial system. We are able to quickly move to real-time systems, not only with transactions but also with knowledge. Supervision and regulation: The speed of transactions and the growing complexities of financial instruments have required a focus more on risk-management procedures. This is justified by the recent technological innovations and proposals attempting to harness and to simulate market forces in the financial system. This impact on financial services therefore emphasizes on supervision and regulation, which forms the critical issue that frames the supervisory agenda as we move into the twentyfirst century. In today’s more complex world, the

diversity of financial product choices facing consumers and businesses is truly astonishing. The complexity has provided consumers with more choice but presented new challenges as well. In modernizing our banking laws and making them more consistent with marketplace realities, financial services industry can expand and innovate with far fewer artificial constraints. Consolidation and reorganization needs: The banks in India, which grew by leaps and bounds by increasing their branch network, have to think on consolidation and reorganization of such network by enforcing on stricter reporting system and head office controls over the branches. Control over such a large network of branches would require extensive use of Information Technology. If we recall, to bring in better internal controls and monitoring standards for sensitive transactions, the Central Vigilance Commission had directed that at least 70% of a bank’s business should be computerized by January 1, 2001. Asset Liability Management & Risk Management: If we also look into the recent guidelines issued by the RBI, IT infrastructure upgradation along with early adoption of Asset Liability Management system and Risk Management guidelines would facilitate Indian banking to migrate to better operational standards on par with global ones, and enhance their MIS capabilities for optimization of earnings. Changing with environment: It is widely accepted worldwide that the banks and financial institutions have to reorient their policies, practices, procedures, products and clientele in tune with the changing global environment without losing focus on their core competencies. It is also a well known fact that, globally the bank mergers are taking place among equally strong institutions –to expand the reach and coverage through retail banking, in pursuit of investment and wholesale banking, treasury services and such other activities which may not necessarily fit into the accepted tenets of banking business in the traditional sense. Such synergies aimed at maximizing profits and expansion of assets will be possible only if such institutions have an open mind towards reforms and especially in the IT sector.

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Impact of developments in Information and Communications Technology (ICT). It is a subject that is of increasing interest to bankers and central bankers around the world. There is increasing recognition of the enormous potential for these developments to transform the financial industry in a manner that will bring tremendous gains to businesses and consumers. There is also mounting evidence that ICT is not only creating new alternative delivery channels, but is bringing about compelling changes to the financial landscape that may threaten the very existence of the traditional financial institutions. Whether or not such developments do in fact take place, it is of paramount importance that financial institutions and central banks are well placed to manage the challenges and opportunities brought about by developments in Information and Communication Technology. Essentially, the potential benefits from the new technology need to be exploited without undermining the security and stability of the financial system. Computer Based Training (CBT) or e learning: Last but not the least IT has influenced training in a radical way. Today learning is better achieved through CBTs, regardless of whether a person is trained at his/her workplace or in a designated learning centre. In fact technology oriented learning is the novel methodology of distance learning across the globe today. It is becoming an important option because it imbibes the advantage of the same very technology that businesses are using to gain competitive advantage in the current competitive scenario. However design of the course and the intellectual matter/ contents thereof are critical for such platforms to be successful. As far banking system is concerned, in the area of education and training substantial amount of money is spent each year and resources have been already spent to computerize major branches and plans are in force to implement and use VSAT technology in a big way. In this connection, Computer Based Training (CBTs), popular world wide, supports on-line education in all areas that would facilitate reading and selfdevelopment through interactive process built

on advanced technology platforms on the WEB. Banks are thus enabled to put to use this advanced CBT technology and implement this mode of training at all levels across diverse locations in more than one way especially considering the large scale human resource employed by this sector. Popularly also referred as e-learning, it will be possible to reach large number of personnel at a lower cost providing quality learning online, anytime anywhere learning year around. It is therefore very clear that, the need to align technology with business strategy is a pillar of Banks and financial institutions of 21st-century strategy. The impact of IT on the financial sector is so forceful that, our survival on the evolving needs of businesses and consumers amidst the process of change poses real challenges to adapt to. Given the rapidity of innovation and technological change it is impossible to predict with any certainty about tomorrow. Accordingly, developing an optimal model either for financial services providers or for financial regulators is extremely difficult. If proceeded cautiously facilitating and participating in prudent innovation the financial sector can reap the maximum benefits out of technological revolution allowing markets to signal the winners and losers among competing technologies and market structures. And this is more so with the ability of an organisation to adapt to the change happening in the IT sector. The financial sector should learn how to use IT, and use it sooner than later for its own survival. The banks and financial sector in future may have to be a lot more oriented to customer needs. In India, RBI is implementing technology upgradation in a big way and going ahead with computerization of Public Debt Office, Real Time Gross Settlement System (RTGS), electronic clearing, VSAT related payment system etc., One can appreciate the initiatives of central bank providing technological infrastructure required, particularly in terms of externalities for banks. Now the time has come for Banks to take the full advantage of the IT infrastructure and its positive impact on our country.

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There are 93 banks in India with PSBs 27 in number. Though India is the 12th largest country in terms of GDP, we do not have a bank of international size. For example, SBI ranks 26 in size among Asian banks. Advantages of consolidation: Size, economies of scale, prospects of technological upgradation, elimination of redundancy, better bargaining power, cost reduction, financial strength and the strength to enter into new markets. Challenges: Need for legislative amendment, willingness of small banks to lose control, cultural factors during integration Key Drivers of Mergers



Background As at the end of Mar 03, there were 93 Banks in India- 27 PSBs, 30 Pvt Sector Banks and 36 Foreign Banks. The total deposits and advances of All banks in India as on 19th March 2004 were respectively Rs. 15.04 Lac Crore and Rs. 8.40 lac Crores. The number of branches of All scheduled commercial banks were more than 50,000. Besides this, there are 198 RRBs having more than 14,000 branches. There were 1941 UCBs, 29 State Co-op banks and 343 District Co-op banks in India as at the end of Mar 03. Thus the competitive landscape of the banking industry is wide and distributed. The case for merger in the Indian Banking sector has, therefore, long existed. There are 27 banks in public sector, which accounts for about 75% of bank deposits. These are a homogeneous lot, offering the same products and services to the same customers. Most of the banks have their operations concentrated in a particular state or region. Despite the size of the economy, India has no big banks with assets of over Rs. 1, 00,000 Cr other than SBI and ICICI Bank though India ranks 12th in the world in terms of GDP. Citibank, the number one bank in U.S has 12 times the asset base of SBI. ABN Amro bank, the sixth largest in U.S is more than 1 ½ times the size of SBI. SBI with the asset base of more than US $ 80 billion – Rs. 4,10,000 Cr, in terms of asset size, is ranked 26th among the Asian Banks and over 90 in the Global ranking.

To gain size and profit: Larger banks are able to provide a fuller range of products and services and have a greater ability to access the local and international capital markets in order to meet increasing capital adequacy requirements, stemming from natural growth and the demands of Basel II. They are also able to compete internationally and with international players in the domestic market in India. With the gradual fall in income from investments due to hardening of yields, the Banks would find the going tough unless they are able to profitably deploy their funds elsewhere. Mergers would automatically increase the size and bottom line. Favourable climate: The present government is apparently in favour of consolidation. Though the government may not force mergers, it may consider creating a favourable climate for market driven mergers. Advantage of economies of scale: Increased efficiency would result from economies of scale in technological expenditure and reduction in intermediation costs. The shared ATM network arrangement among many banks is a case of virtual consolidation to save on technological cost while providing more channels for customers. Economies of scale and the ability to absorb the latest technology would enable the consolidated
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entity to offer world-class services to its customers.

Technological penetration: Today, one of the biggest expenses being incurred by public sector banks is in the area of technology. For example, SBI is investing more than Rs. 500 Crore in the latest platform. With rapid technological obsolescence and the need to provide superior technology to meet customer demands, banks with lesser resources may not have the funds to upgrade technology. Consolidation in banks would increase the penetration of banking technology. Better bargaining power & financial strength: Size enables the bank to command more respect in the international markets. It provides better bargaining power and increases the level of comfort for the depositors. Size enables the bank to cut its intermediation cost due to economies of scale and consequently reduce the lending cost. Cost savings through rationalization: Size can help to rationalize staff and offices. Wide range of services: It can confer the ability to provide a wider range of products and services. Banks will be better placed to become a one-stop financial services shop for customers needs. Thus the breadth of services will increase with consolidation. The merger of ICICI and ICICI Bank, IDBI and IDBI Bank are cases in point. To gain entry into new markets/business: Due to historical reasons, some banks are concentrated in particular geographical area, say, south-based, north based etc. To gain entry into new markets, it may be more sensible to acquire a bank which has presence there instead of taking the evolutionary process.



scale banks have announced their intent to acquire banks. But any progress in consolidation would hinge on the government’s ability to push through enabling legislation. The merger of nationalized banks would require an amendment of the Banking Regulation Act and the Bank Companies (Acquisition and Transfer of Undertaking) Act. As far as SBI group is concerned the government would have to amend the SBI Act and State Bank of India Associate Banks Act. Then there are questions of control. The smaller bank may not like to lose its identity. The small banks also often excel in customer service at the counter in niche areas. A large consolidated entity may lack this extra edge in giving value to the customers. One could observe in most surveys that the largest banks are not necessarily the best banks. Another ticklish issue is the challenge in rationalization of staff and offices after merger, which may be met with resistance. Cultural integration of the merged entity, which is one of the major issues of poor post-merger experience, is another foremost concern. Way forward Presently we witness consolidations in varying formats such as virtual consolidation through ATM sharing, opening of JVs abroad (SBI and Canara Bank), floating subsidiaries for asset recovery/information sharing etc jointly ( such as ARCIL, CIBIL) and so on. In other words, the current tendency seems to be consolidation in the back office and competition in the front office. The guiding theme is ‘collaborate where it is advantageous and compete where it is necessary’. S.C.Gupta Committee report on “Banking Industry: Vision 2010” projects that there would be more consolidations in coming years due to various advantages referred in this article. Banks and employees should gear themselves to adapt to the Banking industry going for a shake out driven essentially by business considerations.



Challenges Sensing the favourable disposition of the present government, several large and medium

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2 billion in Dec 1990 crossed the magical US$ 100 billion mark in 2003. Even U. As at the end of Mar 04. Higher reserves help in providing greater relaxations in foreign exchange and in prepaying debt. the fifth largest stock of forex reserves among the Emerging Market Economies (EMEs) and sixth in the world ( Only Japan.02 bn US $ 107. top-rated foreign commercial banks. This RBI seeks to achieve by eschewing risk that may cause sharp volatility in returns.95 billion as on Mar 04 The objective of reserve management of RBI is to preserve the long-term value of reserves. Risk Management in Forex Reserve Investments RBI Act. provide confidence in the market and adds comforts to market participants The reserve requirement of a country would depend on various factors. among other things. liquidity and returns constitute a hierarch of preferences that encompass all strategic as well as tactical decisions on deployment of reserves. Benchmarks are constructed to reflect strategic investment objectives after taking into account. South Korea and Hong Kong are ahead of us). maturity pattern of the investment portfolios in each currency segment. In this chapter an attempt has been made to present the composition of forex reserves and the objectives of reserve management and other related issues. the Bank of International Settlements (BIS).44 bn Special Drawing Rights (SDR) US $ US $ 112. debt securities issued by sovereigns and supranational institutions with residual maturity not exceeding 10 years and any other instruments or institutions as approved by the Central Board of the Reserve Bank.FOREIGN EXCHANGE RESERVES POSITION AND MANAGEMENT l l The forex reserves of the country was US$ 112. China.30 bn 0. Broad objectives of management of forex reserves RBI Act 1934 provides the legal framework for deployment of Foreign Currency Assets.S has lesser reserves than India. 1934 provides guidelines for investments of FCA. Sufficient reserve helps in enhancing capacity to intervene in forex market. Considerations of safety. India held Forex reserves of US$ 113 billion.95 bn * the investment universe of FCA comprises Banking Briefs (For private circulation only) . deposits with other central banks. the long-term prospects of the markets 8 l l Background India’s Foreign Exchange reserve which declined to a record low of US$ 1. Taiwan. limit external vulnerability. Composition of Forex reserves Our Forex reserves as at the end of Mar 04 comprises of the following: Gold : Foreign Currency Assets * Reserve in IMF Total US $ US $ 4.19 bn 1. Benchmarks have been established for currency allocation. The broad objective of reserve management in India is to preserve the long term value of the reserves. Excessive reserve causes interest loss. The excessive forex reserves have generated considerable debate among the economists about the usefulness of holding large reserves and the avenues for deployment.

the Governor of RBI). which means that we have 100% coverage of our external debt. At the end-March 2004. if all other inflows and outflows (For private circulation only) Enhancing capacity to intervene in forex markets Limiting external vulnerability by maintaining foreign currency liquidity to absorb shocks during times of crisis including national disasters or emergencies Providing confidence to the markets especially credit rating agencies that external obligations can always be met. the ratio of India’s reserves to GDP improved from 2% at end-Mar 91 to 17. Decisions involving the pattern of investments are driven by the broad parameters of portfolio management with a strong bias for capital preservation and liquidity. A long-term 2. An attempt is made to explain each of them in brief. Reddy.10 billion while our reserves were US$ 113 billion as at end-Mar 04. India’s net debt (gross external debt minus foreign exchange reserves) was extinguished by end-Mar 04. Adequacy of reserves has emerged as an important parameter in gauging its ability to cushion external shocks.V. unforeseen contingencies and liquidity risks associated with different types of capital flows. 1.2% at end-Mar 2004. expected returns and for tactical deviations. Need for holding forex reserves As per RBI ( as given in a speech in 2002 by Dr.6% at end-Mar 91 to 36% at end-Mar 2004. the import cover of reserves was about 17 months. As regards the money-based which FCAs are deployed. reserves is measured in terms of the coverage of months of imports. Benchmarks are set for risk tolerance. In terms of macro indicators. The ratio of short-term debt to foreign exchange reserves declined from 146. there has been a marked improvement. In terms of overall external debt and total external liabilities. indicative of reduced vulnerability of economic activity to any possibility of massive capital outflows. What is the appropriate level of forex reserves for any country? There are four sets of indicators to assess adequacy of reserves. Banking Briefs 9 . This is viewed not only in relation to trade needs.5% at end-Mar 1991 to 4. by demonstrating the backing of domestic currency by external assets. The Money based indicators: This relates the reserve to broad money or base money which provides a measure of potential for capital flight. thus reducing the overall costs at which forex resources are available to all the market participants Incidentally adding to the comfort of the market participants. Trade based indicators: Under this. India’s reserves were broadly adequate. there are four major objectives for holding forex reserves: l perspective of liquidity is also taken with a view to ensuring that reserves are also adequate in terms of short-term debt obligations and portfolio investments. The ratio of volatile capital flow (defined to include cumulative portfolio inflows and short-term debt) to reserves declined from 146. Y. US$ 112. Our external debt at the end-2003 was Rs. but also in terms of the preparedness to meet shortterm liabilities and to fulfil the need to maintain orderly conditions in the foreign exchange market in the event of occasional mismatch between supply and demand. Furthermore.7% at end-Mar 04. It measures the number of months a country can continue to support its current level of imports. l l l Adequacy of Reserves The RBI has been pursuing a policy of maintaining an adequate level of foreign exchange reserves to meet import requirements.

As generally observed. It makes imports cheaper and companies which depend on imports would benefit. the loss would be a whopping US$ 3 billion. Debt-based indicators are useful in gauging risks associated with adverse developments in international markets. At the same time. We have witnessed in recent times a lot of relaxations in foreign exchange provisions in view of the comfortable forex position. Implications of High Reserve Excess reserve makes the domestic currency harden. It affects export competitiveness ( as the domestic currency appreciates.cease. Normally. Reserve accumulation involves an interest loss. Debt based indicators: This measures the cushion of reserve against financial crisis. An appreciating rupee has a softening impact on inflation due to lower cost of oil imports. Comfortable forex position helps to move towards aggressive foreign trade policy. Deputy Chairman Banking Briefs 10 (For private circulation only) . financial shocks ( like the Asian financial crisis) and Political shocks (like war with Pakistan). it provides comfort for the nation to further liberalize by moving towards full convertibility. Recently. This is the ratio of reserves to short term debt by remaining maturity. export becomes costlier) and causes lesser realization for exporters. no level of forex reserves is high so long the country is able to utilize the resources properly. If the excess reserve is not productively deployed it would result in loss and missed opportunity for the country. if India’s foreign debt carries an average interest rate of say 5% and Indian reserves consist of foreign securities yielding an average of say 2% that entails an interest loss of 3%. Reserves are protection against trade shocks (like high oil prices). of Planning Commission mooted an idea to utilize the reserves for financing our infrastructure. For example. thereby facilitate capital formation. It helps us to prepay our external debt. it is considered that reserves should cover 6 months of imports (as said earlier. It was proposed to use US $ 5 billion every year for the next three years to finance our infrastructural requirement. It helps to liberalise imports. At a reserve level of US $ 100 billion. It makes us to lend at cheaper rate to the US and Europe. our present reserves covers more than 17 months of our imports) 3.

5. world class standards of efficiency and professionalism and core institutional values. Fairness in all dealings and relations. 9. 6. The objectives can be summarized as: l VALUES 1. 2. Transparency and discipline in policies & systems. The Bank believes that proper corporate governance facilitates effective management and control of business. l Integrity. To ensure transparency and integrity in communication and to make available full. accurate and clear information to all concerned. Profit orientation. (For private circulation only) l l Risk-taking and innovation. Learning and renewal. in turn. VISION STATEMENT 1. HRD PHILOSOPHY HRD in State Bank is a continuous movement and direction to enable every individual as a member of an effective team and the SBI community. 11 l Banking Briefs . 8. An institution with a culture of mutual care and commitment. To provide corporate leadership of highest standard for others to emulate. To ensure accountability for performance and to achieve excellence at all levels. Retain its position in the country as a pioneer in development banking. TRAINING PHILOSOPHY Training in State Bank is a proactive. to realize and activate his potential so as to contribute to the achievement of Bank’s goals and derive satisfaction thereof. Maximise shareholder value through high sustained earnings per share. with world class standards and significant global business committed to excellence in customer. shareholder and employee satisfaction and to play a leading role in the expanding and diversifying financial services sector while continuing emphasis on its development banking role. Excellence in customer service. a satisfying and exciting work environment and continuous learning opportunities. 4. employees and society at large. 3. enables the Bank to maintain a high level of business ethics and to optimise the value for all its stakeholders. 4. Belonging and commitment to the bank. 3. 2. THE BANK’S PHILOSOPHY ON CODE OF GOVERNANCE State Bank of India is committed to the best practices in the area of corporate governance. Team-playing. improve skills and reorient attitudes for individual growth and organizational effectiveness. It seeks to impart knowledge. Premier Indian Financial Services Group with global perspective. This.KNOW YOUR BANK MISSION STATEMENT To retain the bank’s position as the Premier Indian Financial Services Group. planned and continuous process as an integral part of organisational development. To enhance shareholder value To protect interest of shareholders and other stakeholders including customers. 7.

reasons for delay in detection and reporting. including two whole time Directors.1. market risk and operational risk. non-executive Directors. monitoring progress of CBI/Police investigation. Arrears in balancing of books at various branches. SHAREHOLDER’S/INVESTORS’ GRIEVANCE COMMITTEE: This committee looks into the redressal of shareholders’ and investors’ complaints regarding transfer of shares. (RS.CORPORATE GOVERNANCE COMMITTEES The Central board has constituted five committee of directors viz. ACB provides direction as also oversees the operation of the total audit function in the Bank. RISK MANAGEMENT COMMITTEE: The Risk Management Committee overseas the policy and strategy for integrated risk management relating to credit risk. non-receipt of balance sheet. Functions: 1. 4. non-receipt of interest on bonds/ declared dividends etc. reviewing the efficacy of remedial action taken to prevent recurrence of frauds and putting in place suitable preventive measures. 4 Joint Ventures and 5 Associates: (For private circulation only) l l Banking Briefs .the system. Frauds. It obtains and reviews half-yearly reports from the Compliance Department in the Bank Regarding statutory audits. All other major areas of housekeeping 12 l l SUBSIDIARIES/JOINT VENTURES/ ASSOCIATES The Bank has 17 subsidiaries. Total audit function implies the organisation. two Managing Directors and three non-executive Directors. operationalization and quality control of internal audit and inspection within the Bank and follow-up on the statutory/ external audit of the Bank and inspection of RBI. recovery position.00 CRORE AND ABOVE): The major functions of the committee would be to monitor and review all the frauds of Rs. if any. It interacts with the external auditors before the finalization of the annual /semi-annual financial accounts and reports. 3. AUDIT COMMITTEE BOARD (ACB) Composition: The ACB has six members of Board of Directors. one of whom is a Chartered Accountant. It also specially focuses on follow-up on: l Inter-branch adjustment accounts. Audit Committee. The committee has five members viz.00 crore and above with a view to identifying systemic lacunae. SPECIAL COMMITTEE FOR MONITORING OF LARGE VALUE FRAUDS. It reviews the inspection reports of specialized and extra large branches and all branches with unsatisfactory ratings.1. ACB reviews the internal inspection/audit functions in the Bank. Shareholders’/ invertors’ grievance committee. Risk Management Committee and Special Committee of directors for monitoring large value frauds. two official Directors and two non-official. ensuring that staff accountability exercise is completed quickly. its quality and effectiveness in terms of follow-up. Unreconciled long outstanding entries in inter-branch accounts and nostro accounts. 2... ACB follows up on all the issues raised in the Long Form Audit Reports. Executive Committee.

4. SBI cards and Payment Services Pvt. Nepal SBI Bank Ltd.Ltd.Ltd. 2. 3. Bank of Bhutan UTI Asset Management Company Pvt. Ltd GE Capital Business Process Management Service Pvt. Banking Briefs 13 (For private circulation only) . 3. Clearing Corporation of India Ltd. 4. Credit Information Bureau (India) Ltd (CIBIL) OTHER ASSOCIATES: 1.Ltd. SBI Life Insurance Co. 2.SUBSIDIARIES: State Bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore SBI Commercial & International Bank Ltd SBI Capital Markets Ltd SBI Gilts Ltd SBI Funds Management Ltd SBI Factors and Commercial Services Ltd Discount and Finance House of India Ltd State Bank of India (Canada) State Bank of India (California) SBI International (Mauritius) Ltd Indo Nigerian Merchant Bank Ltd JOINT VENTURES: 1.

The bank along with its non-banking subsidiaries has emerged as a financial services supermarket offering the entire gamut of financial services including investment banking. ix) On the consumer banking side. both in public and private sector and has over 115 million customers. However. declining market share is a cause of concern. insurance. i) The largest commercial bank in the country with branches spread all over India. targeting high networth individuals. With a 16. credit card. State Bank of India is the premier commercial bank of the country and.77% market share for advances and a 18. has more than 130 million customers accounting for about 11% of India’s population. The bank has long standing customer relationship with the majority of top Indian corporates. The subsidiaries have been built into highly focused.Every tenth Indian is our customer presence. asset management primary dealership. efficient and tech-savy organisation which work closely with the customer relationship groups in order to cross-sell products building on Group synergy. factoring. project finance. SBI is an excellent brand name that is synonymous with trust and security. besides having presence in all the time zones of the world covering several countries.67% market share for deposits (September 2004). SBI with its associates. Macro economic proxy for the Indian Economy Has emerged as a Financial services supermarket Group holds more than 25% market share in deposits and advances Large base of skilled manpower SBI Group has more than 115 million customers . SBI has a very strong ii) vi) iii) vii) The Bank has also introduced a MidCorporate SBU to cater to the exclusive needs of the mid-corporates in India. The Bank has also introduced lot of innovations for quicker delivery of the Bank’s products and introduced target(For private circulation only) iv) Banking Briefs 14 . etc. as a Group.STRENGTHS OF STATE BANK OF INDIA l l l l l l Largest Commercial Bank in the country with presence in all time zones of the world. agriculture sector bank has specialised SSI Branches and Agricultural Development Branches (ADBs) at various places throughout the country. v) The bank has a large base of skilled manpower specialising in various areas of banking whose skills are continuously updated through on-the job and in house institutional training. among its strengths. the following would merit attention. the bank has established specially designed Personal Banking branches. gold banking. SBI is well positioned to capture growth in India’s dynamic banking market and is seen as a macro economic proxy for the Indian economy. As the largest financial institution in India. securities trading. housing finance. viii) For specialised attention to customers in small scale. These fully computerised branches offer personalised customer service and a full range of retail products in high visibility metro/urban locations.

Ltd has commenced in right earnest through our Branch Network in the entire Group. The Bank has also opened various outfits like Personal Finance Cells to cater to that segment and garner higher market share in the retail sector. McKinsey & Co has been engaged as advisor for the project. Over 2600 Branches are now engaged in insurance selling distributing a range of life insurance products like Mortgage Redemption Insurance.2004) branches of the Bank are running under CBS solutions and the Bank has ambitious plans to bring around 1000 branches under CBS by March 2005.Corporate Accounts Group. and SBI Funds Management Pvt. So far 240(as at Oct. Efforts are continuously made to improve the motivation and morale of the bank’s employees through on-going training and on-site initiatives. Pension and Term Insurance. The Corporate Accounts Group (CAG) is a dedicated service group catering to about 200 top corporates. data processing capabilities. competitive pricing and skilled credit expertise. cost effective IT architecture focused on MIS. 1135 ATMs of UTI Bank and 870 ATMs of HDFC Bank and the ATM network of Andhra Bank and Indian Bank. Substantial part of the corporate business of the bank is handled in 3 Strategic Business Units (SBUs) .28. and making use of internal expertise. an academy. our Bank branches have covered over 1. an institute for rural development and an institute for information management and communication technology. real-time transaction processing and provide on-line interface to a multitude of technology driven delivery channels. The bank’s management and organisational structure is sufficiently decentralised to provide senior managers decision making responsibility within their business units.700 lives and collected premium of Rs. xvi) Cross selling of products from SBI Life Insurance Co. build lasting relationships with existing customers and to increase customer satisfaction through world-class service. Senior management is accountable to the Board represented by reputed professionals having extensive experience in diverse fields. Endowment. The Core Banking Solution will enable on-line. Through 5 branches in India’s major cities. office automation and Banking Briefs (For private circulation only) . decision support systems. xiii) The bank has adopted an IT strategy aiming at a comprehensive. 15 xi) xii) The bank has developed an excellent inhouse staff training infrastructure including a College. it offers our top clients high quality relationship banking a broad product portfolio. xiv) The Bank is rapidly moving towards a centralized database with a state-of-the-art Core Banking Solution. learnings from international and Indian players.specific schemes. The bank customers can access over 4174 ATMs of the State Bank Group. x) The bank has long standing relationship with 80% of Indian Bluechip corporates. The objective of this exercise is to strengthen Bank’s ability to acquire new customers. During the financial year 200304. Ltd. Project Finance and Leasing and branches in Commercial Network under National Banking Group. The State Bank Group has achieved a unique distinction of 100% computerization of all its13635 branches. xv) The Bank is also in the process of implementing BPR involving in-depth study of its internal processes. allowing them to continuously improve their management skills.

buy Rupees from an Authorised Dealer in India to fund the Special Rupee Account. Stressed Assets Management Group (SAMG) has been formed and the existing RARBs are being converted into SAMBs. maintain Special Rupee account with an Authorised Dealer in India out of the convertible foreign exchange resources for meeting local expenses.82 Crs. As at the end-March 2004.756 cr as on 31st March 2003 to Rs 5. for distributing their non-life products through our Branch network.096 on 17th July 2003 .316 cr in FY 2002-03. The Bank has recently tied up with New India Assurance Co. Group net profit for the year 2003-04 stood at Rs. STATE BANK GROUP Group assets have increased from Rs. Open foreign currency accounts abroad as well as with other OBUs in India Trade in foreign currencies in the overseas market and also with banks in India where both legs of the transactions are denominated in foreign currencies. Agri-Business Unit. Ltd. Raise funds in convertible foreign currency as deposits and borrowings from Non Residents sources. l l l Banking Briefs 16 (For private circulation only) .568 cr as against the operating profit of Rs 11. Provide customised loan and liability products for the benefit of clients.97. xviii) State Bank of India has opened the first Offshore Banking Unit (OBU) in India at the SEEPZ Special Economic Zone. 4199 cr in FY 2002-03.50. SBI Life had covered 14.. Government Business Unit.another landmark in the history of India’s Financial Sector. Transact in foreign exchange with residents in India who are eligible to enter into or undertake such transactions in terms of various Rules and Regulations as framed under Foreign Exchange Management Act. Group Operating Profit for the same period stood at Rs 14. xvii) SBI Life has insured the highest number of lives under group insurance schemes among private sector insurance companies.00 lakhs lives or about 14% market share. 1999.984 cr as on 31st March 2004. to enable Mid-Corporate Group and CAG business units to focus on clean business without getting involved in NPAs. Andheri (East) Mumbai 400.5531 cr as against the figure of Rs. 4. Thus the SBI Group has crossed the Net Profit of US $ 1 Billion mark. The OBU will be deemed as an overseas branch of the Bank and undertake the following activities: l xix) Consequent upon the creation of the Midcorporate group. xx) Separate business units viz. New Bank Building. Psegment business unit and SME Business unit created for focu-sed attention to respective segments.

To reach 3% by Mar 04 and 3.40% 17.e Deposit – 15%.5% Deposits of ASCB to grow at 14. housing loan : Rs.10% by Mar 05 l The Year Ahead .43% Dec 03 19. customercentric organisation.20% 17. BPR and tech drive is set to transform the Bank into a tech driven.25% STATE BANK GROUP MARKET SHARE: Business Deposits Advances Mar 02 21. noninterest income.POLICY GUIDELINES :: 2004-05 l l l l l 3 Core Priorities: Improve market share.83% 19. 12000 Cr.five Strategies for three Core Priorities l Incremental share of low cost deposits (CA plus SB) in total deposits to go up to 50% Ratio of loans to earning assets to go up by at least 1% Greater thrust for Retail/SME/Agri to increase yield Reduce NPAs to increase yield on assets (For private circulation only) l Improving Market Share Reducing Transaction Cost Improving Net Interest Margin 17 l l Banking Briefs .20% and net profit.94% Mar 03 20. 6000 Cr Growth target for whole bank: 15-16-20-25 i.Economic Outlook l l l Transaction Cost and NIM l l l l l l l Effect: Changes in Risk profile and new business opportunities l The 3 Core Priorities Core Banking.5 %–15% Non food credit of ASCB to grow at 16% Global tariff reduction.5 – 4. liberalisation and opening of markets in SAARC to impact Indian economy Foreign Currency rating upgraded to investment Grade and ECB for corporates liberalised l l Our growth should surpass OSCBs growth We should scan the environment to align our growth budgets with the potentials available. Our NIM is below 3%.22% l l l Full Computerisation of all branches of State Bank Group Increased delivery channels like ATM/ Internet Banking Launch of tailor made products for different target segments Today State Bank Group leads in the Banking industry with the largest number of ATMs and computerised branches GDP growth to be close at 7% with further growth momentum Agriculture and allied sector to grow between 3.In this background our challenges are: l l l 5 for 3. Surplus manpower to be used for marketing our Products and for recovery of NPAs Transaction Cost: Cost reduction essential for competitive pricing Volume growth and migration of customers to alternate delivery channels would drive cost reduction Net Interest Margin (Interest IncomeInterest Exp/Average Earning Assets): Stiff competition and falling interest rates impact NIM. reduce transaction cost and improve net interest margin Leverage technology for customer service 50% growth in corporate banking to come from new business Target for Personal loan growth: Rs. Advances – 16%.

Cross selling of products of our Group companies Leveraging technology for customer delight Uninterrupted functioning of ATMs l l l l Credit Growth. Media entertainment. Communications.4 Strategies to improve credit l Enter into more consortia Refinance high cost TL for units with CRA of SB-3/SBTL-3 and above with other banks and Fis Sanction line of credit to corporates based on information in published annual reports to book new business Market aggressively to bring more midcorporates l l l l l l l Banking Briefs (For private circulation only) . Pharma.l Plan for substantial growth in high interest earning assets l Debit cards to reach 6. education and tourism). Project Finance outfit to aggressively enter into new opportunities and offer new Products Project Finance to invest in securitised loan assets of infrastructure activities l l l Internet to offer more services and to be at par with world class international bank 9 steps to leverage technology for customer service and business l l Operationalise SWS at all branches and enhance quality of service Trade Finance solution. vendor financing. infrastructure. trade.5 million CBS for 2000 SBI branches and 3000 branches of State Bank Group l Note: Budgetary exercise to focus on increasing interest and other income by offsetting the negative impact of declining interest margin Credit Growth. Services (Health. retail banking. financing of tractors. marketing and customer service Deployment of Surplus manpower: Creation of marketing hubs for Housing Finance.Corporate Banking l l 50% growth in budgeted growth should come from new business and on a monthto-month basis CAG and CNW to canvass business from sectors such as IT. channel financing.Issues l Technology initiative and business growth l Our NPA management yet to reach international benchmarks Credit growth below OSCB growth rate Bulk of credit growth in last quarters More opportunities in Retail. EXIMBILLS to be implemented in all domestic and foreign offices handling trade finance Internet Banking enabled branch to reach 2000 (from 1000) Additional 500 Corporates and 500 SMEs to be enrolled for internet banking Additional 1500 branches under STEPStotal to increase to 4500 On Line Tax Accounting System (OLTAS) to be implemented in branches conducting Govt Business Additional 1000 networked ATMs to be installed in prime locations 18 l l l Corporate Banking. auto. trade and infrastructure needs to be tapped BPR calls for employee focus on sales. management of NPAs. Gems and Jewellery. Agriculture.

tourism. Arthias Plus.Each Circle to identify at least 3 Projects 19 l l l l NPA Management and Monitoring of Standard Assets l l l l l 2002-03: New NPAs of Rs.34% . personal loans etc with asset quality l l l Give special thrust and hunt for Services Sector. General Purpose TL.7 Point Action Plan l l l l l l l l l l l l l Other Income l Banking Briefs .000 more SHGs Open 2000 Agrifinance/SHG/Advances cells Aggressively market new products such as Krishi Plus.5%. broaden our growth in car loans. Net NPA to be less than 2% Upgrade assets by properly monitoring Substandard and SMAs Implement systematic drive for restructuring/rehabilitation/ reschedulement to upgrade NPAs Aggressively restructure assets through CDR mechanism Promptly examine compromise proposals Effectively utilise provisions of SARFAESI Outsource recovery efforts for AUCA.Focus on hospitality. educational loans. KCCs etc to achieve the benchmark in Agri lending Popularise SME credit plus. Doctors/hospitals Exploit the opportunity in trade sector. BPO outfits. l l l l l Credit Growth in Personal Banking.00.5200 Cr Gross NPA: Mar 03: 9. Redesign and refocus our products/ services to tap large trading houses and retail chains Introduce CMP for trade Focus on tie ups with companies Open 1000 trade finance cells to focus on collateral financing – whole sale/retail trade Exploit opportunities in tourism through paryatan plus Each and every branch should adopt schools/Colleges/Institutions to intensify retail lending to doctors/teachers etc. Dairy Plus. 6000 Cr Apart from thrust in HL.000 SHGs) Establish new linkages with 1. transport.Personal Banking l l Leverage our network to improve Market share Thrust on improving P segment loans to total advances to continue P segment to grow by Rs.12000 Cr. Explore options for sale of impaired assets to ARCs Issues: Growth of other income not (For private circulation only) Credit Growth.5 Specific goals l No of customers using Net banking to increase to 6 lacs Open 20 more PBBs and 2000 PB finance cells/Mortgage cells Create 200 hubs for retail housing and car loans in Circles and a few additional hubs for marketing internet banking Open 4 million new SB accounts Each and every branch should adopt schools/Colleges/Institutions to intensify retail lending to doctors/teachers etc Our present share in SHG finance is 24% (1.65. SME smart score Give special thrust to Technology Development Scheme of Central Govt to increase high value advances Identify cluster of industries for coverage under Project Uptech in a big way. HL to grow by Rs. call centres. educational institutes.4688 Cr added Estimate for 03-04: New NPAs.Rs.50% Projections for Mar 05: Gross NPA to be around 5. Mar 04 Est: 7.Development Banking l l NPA Management. written off accounts and for other NPAs.Credit Growth. Tractor Plus.

22.Export Credit l l Achieve RBI’s Benchmark level of 12% Country’s export growth expected to be faster. increased trading in forex markets Use of derivatives for hedging as well as structuring products for customers. Huge customer base offers immense potentials for cross selling (For private circulation only) l l l l Treasury Operations l l l l International Banking Business l l Other priorities l l l Treasury operations. STPI and Indian OBU Circles to target export credit growth of 30% Treasury Assets account for 45 % of total assets and 63% of interest income of the Bank Threats: Declining yields.500 Cr Increased volume of churning both HFT and AFS fixed income portfolio in narrow market movements Increased trading and investments in equities and mutual funds.impressive. Govt business and enlarging the reach of CMPs International Banking Business – Domestic offices l Our Declining Market share in International Business Arrest the decline in Market share Target growth rate of 30% Circles to achieve growth rate of at least 35% l l l l Risk Management and the New Basle Accord l l l New Basle Accord likely by early 2007 Focus Areas: Strengthening capital adequacy applying state-of-the-art financial modeling technique Risk Mitigation measures and systems should be introduced Meticulously follow systems and procedures to reduce operational risk Implement KYC guidelines—Meticulously monitor High value transactions and use for cross selling Prevent money laundering No of Foreign offices to increase to 75 (from 50 now) with focus on Foreign Offices Focus on Middle East. squeeze in margins/spreads. Africa and Australia to continue Substantially improve the qualitative and quantitative aspect of manpower Strengthen the IT infrastructure Foreign offices should independently competitive become International Banking Business. One way decline in interest rate and increasing higher income will not be there. large and stable resource base. AEPZ. Hence draw up challenging targets Exploit the business potentials in SEZ. Target: Income to exceed Rs. changing risk profile of assets Our strengths: Strong market presence.75% 10% 70 9000 20 l Cross Selling l Banking Briefs .55% 6% 40 6500 Mar 05 11% 0. Threat of competition l Strategies: Emulate ‘Six Sigma’ standard implemented by CAG to drastically reduce delay in NF business CAG to take up challenging targets for increasing NII by focusing on IB.Targets ROE ROA Contribution to Bank’s profit Net Profit (USD Mio) Balances Sheet (USD Mio) Mar 04 (est) 7% 0.Focus areas l l l Strategies: l l Overseas funding to increase to 20% l Foreign Offices.

IMD) Advances Non interest income ROA ROE CAR Net NPA to Net Loan assets Expenses Ratio Growth in Net Profit Growth in Operating Profit Contribution to Bank’s profit NIM >10% 3. Virtual merger of the group is becoming a reality. Our Website to become more attractive. Loss Making Branches: Have Branch Specific action plan and Rationalise Branches Image Building and Customer Service: Premises to have ambience of any Private Sector or Foreign Bank Improved ambience to result in business growth and recover expenditure on ambience in 6 months through increased profit Build better brand image through ‘Ads’ in Print media and TV.20% >20% >12% < 2% 40% >23% 25% 25% >30% NBG 15% 16% 20% CBG 10% 20% 30% IBG >80% >20% >35% Banking Briefs 21 (For private circulation only) . user friendly and updated Human Resources Development: l l l Bank is in the process of implementing certain specific measures to re-tool/re-skill people through e-learning solution. SBI Cards and Payment Services Ltd: To bring good profit in 04-05 and attain leadership position SBI Mutual Fund: To draw up a plan to improve Asset Under Management SBI Life: To create a commanding position for itself All associates and subsidiaries to post substantially better performance and profitability l l Other Key areas l Subsidiaries l l l l l l l l l l l Business and Performance Parameters-for the year 2004-05 Growth in Deposits (ex. SBI capital Markets: Should acquire the status of the leading merchant banker in India. more informative. Every one to take steps to strengthen and benefit from group. car loans and tractor loans to be covered by SBI life policies Adequate branches to sell SBI MF and SBI cards Create collaborative effort between CAG and NBG to cross sell our products. training for marketing insurance products. Group Synergy: Many steps taken at the Corporate level to strengthen the Group synergy. revamping performance management system.10% Whole Bank 15% 16% >20% 1.l Branches selling insurance products to increase from 1100 to 4000 At least 50% new housing loans.

This was a first major attempt by the Bank to carry the administration and powers of decision making closer to the market. attract younger generation/high networth customers. National Banking Group etc). namely. there is a need to change our internal processes as otherwise we would be pushed out of the market place. This exercise has resulted in further decentralization of powers towards enhancing the speed of response to the needs of market. rationalization of workflow and committee approach to decision making are some of the significant features of the restructuring. systems etc and seeks to replace them by new processes Radical Redesign: The redesign is not evolutionary but revolutionary.BUSINESS PROCESS RE-ENGINEERING IN SBI l l l l l BPR is a fundamental rethinking and radical re-design of our business processes to bring about dramatic improvement in performance. BPR Plan: Branch redesign. reduce NPAs. focus besides strengthening our capability to harvest the market potentials. has undertaken a lot of change initiatives in response to the needs of customers and market. Organisations come into existence with a set of features with respect to particular market context. improve market share. BPR is the “ ‘fundamental rethinking’ and ‘radical redesign’ of business processes to bring about ‘dramatic improvement’ in performance” . core process redesign. alternate channel design. 1979: Consultants. increase advances.IIM. Business Process Reengineering (BPR) launched in 2003 ( Consultants. Metro and Urban branches would be covered in 3 years. enhance service quality. the authors who coined the term: “ Business Process Reengineering” in the early 1990. decentralization of powers. 1995: Consultants. free up branches to focus on sales and marketing and retain undisputed leadership in India Eight reasons for BPR in our Bank: Challenge competition . When things change externally. The following three key words set apart BPR from other change initiatives: l Fundamental Rethinking: It questions the validity and relevance of the existing processes. Central processing centers and data base marketing. increase productivity BPR will be rolled out in Jan 05 in 20 cities. segregation of planning and operation and market segmentation. It does not (For private circulation only) l Banking Briefs 22 .McKinsey: Restructuring done on a grand scale. In sum. Objectives: Enhance customer satisfaction and convenience. The following are some of the key changes attempted at different periods: 1972: Consultants. new positions of staff functionaries. Ahmedabad: Creation of LHOs. Ahmedabad: Creation of Modules and Regional offices.IIM. GENESIS State Bank of India. structures. Creation of Strategic Business Units ( such as Corporate Banking Group. since its establishment in July 1955. reduce transaction cost. we have been making significant changes at regular intervals since inception to enhance our speed of response and customer What is BPR? According to Michael Hammer & Steven Standon.McKinsey) is one more step in the direction of revamping our processes to bring in world class capabilities in our organisation and to respond to the ‘2 Cs’ . Customer expectation and Competitive pressure.

Increase customer satisfaction and convenience Free up time for branch and BMs to focus on sales and marketing Simply processes Define new processes and supporting organisational structure And finally retain undisputed leadership in India and emerge as a world class financial institution Eight Reasons for BPR in SBI l l Globalisation and Competition: Our competitors are delivering better in view of the modern technology and global practices. The entire BPR project would cover 2500 branches (in Metros and Urban Centres) during 3 years from Jan 05 to Jan 2008. In metros. the top 100 centres in India contribute to 63. The Pilot launch of BPR. BPR is a ‘transformation’ as opposed to ‘change’ that alters the basic rhythm and character of the organisation.77 lac (for the year ended Mar 04). is around 17% (For Group. Apparently.propose incremental changes but brings in new and untested changes which are totally different from existing ones. is currently underway in 12 branches in Mumbai. it is 26% in deposits and 24% in advances). l l To reduce cost. To enhance service quality 23 l l l l BPR Roadmap The blueprint for BPR was completed in Dec 03. To attract high end customers: We are generally low end players and seek to pick low hanging fruits. 2.6% of Deposits and 75. rural and semi-urban centres are beyond the coverage of the project. 1. The formal rollout of BPR would be done in Jan 05 in top 20 cities in India. we are losing market share. As per the publication of RBI.5% of advances (as at the end. we are losing heavily with our market share at less than 10% and in Mumbai at around 6%). The BPR model of the Bank proposes to create world class capabilities in our organisation which would enable us to serve our customers better than competitors. The fall in market share in metros signify that where the competition is intense. done in July 04. Lower productivity: Our efficiency levels are lower in comparison to competitors. Our market share is declining continuously and more steeply in advances. Already. it attempts create capabilities substantial increase in performance.Mar 04) of All Scheduled Commercial Banks (ASCB) in India and it is in most of these areas. Our Business per Employee is Rs. we are losing more. today. l Objectives of BPR Following are the major objectives of BPR: l In a way.income ratio from 50% to 35% To increase advances To reduce our NPA levels. l l BPR PLAN What does BPR seek to change? l Banking Briefs (For private circulation only) . We need to devise methods and processes to attract younger generation/high networth customers. Retail Asset Processing Centre etc) are being rolled out in all Circles. The BPR team at the Corporate Centre ( comprising officials of SBI and McKinsey & Co) is actively engaged in the implementation of the project. around 15 initiatives of BPR (such as drop box. l Dramatic improvement in performance: Through radical redesign.20 Cr and Profit Per Employee is Rs. Continuous decline in market share: Our market share.

Central Processing Centre Design: As mentioned under ‘Branch redesign’. This would result in the loan officers focusing exclusively on marketing while other functions being handled by central processing centres. sales centres in high traffic areas. Home Banking. the cross selling efforts ( selling one or more products to the existing clients) in the bank is very low. product specific outlets are contemplated. mobile banking. draft shops. statements and opening of time deposits. l Alternate Channel Design: As per the Plan. which are handled at the branches are proposed to be shifted to central processing centres. To harvest the potentials of the existing customers. To handle these processes. Introduction of data base marketing: At present.BPR attempts to build performance and delivery capability by redesigning/creating the following elements: l Branch Redesign: A typical branch under BPR would have 3500 sq ft with staff around 10-15 and 70% of the branch space earmarked for customers. loan administration unit for follow up and recovery of loans will be set up. issue of cheque book. internet banking etc) for day-today transactions. though State Bank of India has got 9 Crore customer accounts (Group has 11 Crore accounts). * Apart from the generic model. most of the work. phone banking and call centres would be created/ strengthened. Following are some of the activities. Technological tools such as data warehousing and data mining would (For private circulation only) l l Banking Briefs 24 . separate processing centres such as Liability processing centres for account opening. other delivery channels like Internet Banking. The call centre is presently proposed to be outsourced. data base marketing team would use the available customer data base to sell more products to them. Cheque handling centres and cash handling and management cell for collection and processing of inward and outward clearing cheques. The branches would have Customer Sales Representatives (officers) for consultative selling. retail loan processing centres for processing retail loans. The branch would have meter-greeter ( award staff) who would function as enquiry assistant and also would actively canvass customers to use our alternate delivery channels ( such as ATMs. * Inward Clearing * Outward Clearing * Outbound collections * Currency Management ( A separate Currency Management Cell stationed at select location in major centres would cater to the remittance and collection of cash from satellite branches). 2 Call centres with (1500 seats in each call centre) will be set up which would work round the clock to respond to the customer queries emanating from all parts of the world. which would be diverted from the branch to the central processing centres: * Account opening * Issue of ATM cards * Issue of Time deposits * Cheque book issue * Statement of account * Processing and sanctioning of all loans (except Gold loans and loans against NSCs and TDRs). there are other variants of branches such as self assisted outlets with 1-2 staff. apart from ATM.

Commerical Business Segments: The Corporates are divided into Large corporates ( turnover above Rs. In addition to the above. New Business Models under BPR l Micro Market: Contiguous 12 branches would be brought under a Micro Market Head (Rank of AGM). our bank proposes to revamp the performance management design to develop objective measures for assessing and rewarding performance in the organisation. 1 Cr and Rs. The new initiative calls for developing competencies such as customer handling skills. Core Process Redesign: Core Banking Solution currently under implementation in various branches facilitates our core process redesign. It would help operating functionaries to focus on sales and marketing. 25 Cr to Rs.25 Cr). The head of micro market branches would function as a marketing head. He would have a mobile sales team to support him. 1 Cr and Medium with turnover between Rs. Mid-Corporates ( Turnover between used to build our data base marketing capability. Apart from personal segment. For information on Core Banking please read a separate chapter on ‘Core Banking’ brought out in the book. The budget of the micro market head would be more than the combined budget of the branches attached. 350 Cr) and Small and Medium Enterprises ( Small with turnover below Rs. small and medium enterprises would be handled by the micro market head under the present retail network. marketing and technological skills and it is time we develop new competencies to make BPR project unleash its immense potentials for our customers and the organisation. l Banking Briefs 25 (For private circulation only) . Core banking solution is the backbone for all the other elements of the BPR design. A separate MidCorporates Group has already been created under Commercial Banking Group.. It would strengthen our abilities to exploit the market potentials in a big way and capture market share in metro and urban centres. salesmanship. l Conclusion Business Process Reengineering project of the Bank would provide us superior capabilities to strengthen customer satisfaction and convenience. the Small and Medium Enterprises (SMEs) would be served by the micro market head. Apparently. while Large Corporates would be covered by CAG. 350 Cr).

Core Banking will make available 24 x 7 banking and Anywhere Banking to the customers. Core Banking. integrates all other technology projects. on the contrary. through any of the Core Banking Branches. as also those in ATMs/ Internet Banking etc. and all processing of transactions are carried out in this database. Transactions in Core Banking. 3. which denotes inter-branch transaction capability through a central database. 26 This Article attempts to explain the salient features of the Core Banking Solution (CBS) implemented by the Bank. Internet Banking etc. residing at the Central Data Centre (CDC). will travel through SBI Connect. need ‘Core Banking’ as a pre-requisite. Internet Banking. enabling customers to draw cash from any of these networked ATMs. Through introduction of Core Banking. All other technology projects (like Trade Finance. has a centralised database. will be fully integrated with branches. irrespective of where their accounts are maintained. Why ‘Core Banking’? Through the power of technology available Banking Briefs (For private circulation only) .1000 branches One of the components of our BPR Plan through ‘Core Banking’. makes available 24 x 7 banking and anywhere banking Oct 04 240 branches covered. transactions for the current day. The Business Process Re-engineering initiatives of the Bank which are proposed to be implemented shortly.CORE BANKING – AN INTRODUCTION l l l l l l denotes inter-branch transaction capability through a central database. 2. and all other channels like ATM. Similar inter-branch transaction facility is available through our Internet Banking Solution. the facility of inter-branch transactions will cover a wide range of business (as decided by the Bank from time to time). 1. our dedicated leased line network. signatures of customers. Asset Liability Management. outline the benefits that are intended to accrue to the customer and the organisation. Treasury. in our Group. STEPS etc.) will be fully integrated with Core Banking. Certain features (such as the screens. implemented to enhance our service delivery and effectively compete in the market. therefore. It has. the new generation banks and foreign banks are able to target niche markets and provide value-added services with speed and efficiency. ATM. for smooth and speedy conduct of operations. become imperative that State Bank Group also inducts this technology to effectively leverage it for business and maintain our supremacy in the marketplace. We already have. a strong network of ATMs which are inter-linked. As all the data will be in a centralised database and branches as well as administrative offices can be connected through ‘Core Banking’. What is ‘Core Banking? ‘Core Banking’ is a generic term. and current implementation status. end-of-day balances of previous day) are also made available at the Branch. This is a branch level computerisation. Target for March 05 . and the ‘Branch’ will also be a delivery channel available to the customer.. Salient features of ‘Core Banking’: State Bank Group has computerised all the branches with Bankmaster under our Universal Computerisation Project.

will run for all our Associate Banks as well. Between Core Banking branches. in July 2002. 4 The Solution & Current Status of the Project: The Bank has chosen the Core Banking Software Solution called’B@ncs24’from M/s. Transactions between Core and Non-core. which are automatically handled by the system for escalation to higher levels for resolution. controlled roll-out of the solution has been undertaken at ten centres in six Circles (Mumbai. has been entrusted with customisation. as customized for SBI. The task of customization of the software and release of initial versions (1. M/s TCS Limited. TCS) commenced its work at Belapur. The necessary infrastructure thereat is being put in place. Associate Banks. The Bank has tied up with NIIT for training through eLearning. will become customers of the State Bank Group and derive benefits. Financial Network Services. powered by information available through the central database. Training is a key issue. The quantum of transactions between Core and Non-Core branches will come down significantly when coverage under Core Banking is expanded. Chennai. New Delhi. enabling branches to focus on efficient product delivery. Our customers. marketing and cross-selling. all ‘reporting’ to the relative Reconciliation Department. thus. Hyderabad. integration and pilot implementation.better MIS/ Decision Support System/ Executive Information System will be possible.1. 40 branches were brought under CBS. inasmuch as users will be debiting an account and crediting another account in the same database. Mumbai in August 2003. USA. Banking Briefs 27 (For private circulation only) . Hiranandani. Many of the back-office functions currently performed by branches can be conveniently handled at a central location (or locations) after introduction of ‘Core Banking’. At the end of Mar 04. We are now in the process of improving the Help Desk Facility by installation of a state-of-the-art package. We have a Help Desk facility at Belapur. involving a process of unlearning and learning. This will facilitate learning by users at their respective locations. The Core Banking Project Team (SBI. who are currently associated with a particular Branch. At present more than 200 branches have been covered and it is proposed to complete 1000 branches by Mar 05. which require reconciliation. transactions do not need to be ‘reconciled’. Australia. SBIICM and STCs at these Circles will take care of the training needs for Core Banking. the largest software and service company in the country. Similarly. 1. To facilitate this. also dc not need to be reported by the Core Branch concerned. Thereafter. Officials of implementation teams and users at branches being taken up for Core Banking implementation are being trained in sync with our rollout plans.11) has been completed. the organisation (State Bank Group). There will. through which users at branches log in their problems/difficulties. This connectivity will also facilitate timely and informed decision-making. be no need for ‘remittances’ and ‘collections’ between Core Banking branches. will be done by the CDC. Navi Mumbai. The Core Banking Solution. The solution was implemented first at Personal Banking Branch. has been acquired for General Ledger. will be positioned to conduct its business in a far more efficient manner. common accounting practices will be adopted across the Group. Another product called ‘Finance One’. from M/s Comlink. Bangalore and Chandigarh). considering the need to reach out to a large number of staff in quick time and with efficiency. at their own pace and time. Another major area of change is inter-branch reconciliation of transactions.105 and 1.

Value added services like ATM locator. accurate bookkeeping.2004) l l l l · Technology improves customer service. meeting customer and market expectations and facing competition. savvy image. voice over and drawal of cash advance by SBI credit card holders have been introduced. computerized passbook printing. helps better management of bank’s funds and information. This strategy has enabled improved Customer Service. The achievements are all the more creditworthy since they have been built around the existing platform utilising to the utmost the present infrastructure and at the same time bringing on board the latest in technology to help the Bank achieve a techno- ATM Deployment : These ATMs are located at centres spread across the length and breadth of the country. Our achievements are summarized below. The projects successfully implemented by us including current plans are given below. faster remittances etc. 4453 networked ATMs.09. Core banking in 240 branches are some of the important milestones SBI Times provides interactive webpage on the Bank’s intranet Single window system. efficiency in housekeeping and improvement in base level customer services like prompt interest application. payment of fees for college students. provides single point view of customer . SBI Connect are other major additions. WHY TECHNOLOGY? Technology helps in l l l l PRODUCT Full Branch Computerisation (FCB’s) : All the Branches of SBI and its associates have been computerized there by achieving 100% computerization of the State Bank Group. It comprises of three projects:l l l Improved customer service Customer relationship management Reduced time to market new products Better management of bank’s fund and risks Providing cash management services for customers Reduced transaction costs Increased staff productivity Ability to do a profitability analysis Management and monitoring of NPAs Fulfilling US GAAP requirements Single-point view of customer l l l l l l l Bank Master Branches Universal Computerisation Project Core Banking Solution The year under review has been a truly watershed year in the field of technology for the Bank when many technological milestones were established largely with in-house competence. The programme aims at achieving efficiency in operations. smart cards. extended working hours. single window service. l 4453 networked ATMs (October 2004) (For private circulation only) Banking Briefs 28 . increases productivity.TECHNOLOGY INITIATIVES IN THE BANK (As on 30. telebanking. reduces transaction cost. multilingual screens. reducing costs. video conferencing. Universal computerization. there by creating a truly national network of ATMs with an unparalleled reach. internet banking in 1677 branches.

seek issue of Demand Drafts. view balances.09. Access is permitted to the customer only to his pre-defined accounts.000 per day. book rail tickets online etc. Internet Banking for Corporates launched on 1st March 2002. Bulk upload of data for Corporate. During the month of August 2004.3. transfer funds. and Railway Ticket Booking are the new features deployed.253 SMS alerts were sent. The customer has to dial a specified number and on getting the line.04 and average hits exceeds 47.l Number of ATM Cards issued: Over 4. we hope to earn a substantial fee-based income when other banks’ customers use our ATMs. download statements. Fee Collection. there was 8585 retail and e-rail transactions amounting to Rs. Individuals for . Our bank has entered into a tie-up for use of each other’s ATMs with HDFC Bank. insurance etc. E-Poll.000 as at 30. All functionalities other than Cash and Clearing have been extended to individual retail customers. IIT. A separate Internet Banking Module for Corporate customers has been launched and available at 634 branches. the customer is allowed access to the telebanking server at the branch through a telephone. Pay various utility bills towards electricity.7/. The Internet Banking facility permits the i-banking customer to access his accounts. TELEBANKING: In telebanking. covering 398 centres. Indian Bank.79 crores and as many as 23. he has to identify himself by dialing his Personal Identification Number.3 Million SBI’s Network is a national network providing truly “anywhere banking”. Apart from the number of ATMs what is creditable is that we have taken this customer-centered technology all over the country – from metros to small towns to remote corners. GATE.per transaction Facilities Offered l l extending INB service to their customers as at 16. Andhra Bank. Inter-branch funds transfer for Retail customers.9. one can spend only upto the amount available in the account in case of a debit card. ATM cards have since been upgraded to ATMcum-debit cards under MasterCard’s MaestroCirrus programs which will enable our cardholders to transact at our networked ATMs. are Transfer of funds on request Draft issue for pre-defined amounts Cheque book issue request Balance enquiry (For private circulation only) Banking Briefs 29 . UTI Bank and ICICI bank. Any time” Banking. SMS Alerts.2004. boundary less basis. 1677 branches.Total number of registered users has crossed 3. The following transactions are permitted through telebanking:l l l l Balance Enquiry Last five transaction enquiry during day time when branch is open Pin change option Withdrawal of money e-fee payment in case of IITs Sharing of ATM with other Banks Railway Seasonal tickets issue through ATMs l l l l l INTERNET BANKING FACILITY: This on-line channel enables customers to access their account information and initiate transactions on a 24x7.18/and for enquiry services Rs.  ATMs of other banks linked to MasterCard and also at 26000  merchant establishments linked to MasterCard. While one can spend without having any balance with a Credit Card. The Bank has operationalised the Internet Banking facilities meeting the requirements of various types of customers like Corporates. “Any where. The fee for cash withdrawal would be Rs.50. As we have a large number of ATMs spread through out the country and spare capacity is available. telephone. Electronic Bill Presentment & Payment.

09. Entire software package designed and developed in-house.290 transactions amounting to Rs. the customer can access his account from his own office using a PC. management compliance reporting etc. the Products offered are 30 l l l REMOTE LOGIN FOR CORPORATE CUSTOMERS:  Under Remote Login. 14249 corporate customers are using Internet Banking Services for enquiries and 1533 customers for transactions. anywhere banking single view of all his accounts one time stop for all his banking needs multiple access channel cost reduction in all the transactions exploitation of state bank group synergy Relationship banking made more practical Pricing based on such relationship Customer wise profitability analysis Quick response time to changes in market environment Standardization of systems and procedures Quick launch time between concept. there were 15. and VSAT connectivity is also increasing to cover more areas in the country. The customer is benefited as under: l l l l l l Single sign-on Filtered Access & Delegated rights Fully empowered user management Single Debit single Credit Single Debit Multiple Credits Bulk upload of transactions Single Authorisation/ Multiple Authorisation E-receivables EDI payments Reverse file of transaction/ statement anytime.2004. development & launch of product Cross selling of state bank group products l l l l l The benefits accruing to the Bank are: l l l l l l l l STEPS: (State Bank Electronic Payment System) It has been launched on 1st January 2001 to meet customer demand for faster remittances and speedier collection of outstation instruments. During the month of August 2004. l l l l l Transfer of funds request Draft issue/ Bankers Cheque Cheque book issue request Balance enquiry Downloading of account statement at client’s end Transaction enquiry l Banking Briefs (For private circulation only) . CORE BANKING SOLUTION It is a centralized system for a retail banking capable of processing asset & liability accounting.l Account statement enquiry and through fax also Transaction enquiry Remote-Login facility has been extended at 237 branches. Corporate Internet Banking As at 16.601.11 crores. STEPS Office has set up a web based enquiry facility at Belapur to facilitate branches to make online enquiry of the status of STEPS messages generated by them as well the messages which are pending against them Under STEPS. Software system has been duly audited by M/s. the bank’s electronic funds transfer system. Price Waterhouse. SBI uses the VSAT technology consisting of 162 INFINET VSATs in 113 cities to extend the STEPS service to the customers. The features available to Corporate Customers are: l l Telebanking facility has been extended at 552 branches.

Briefcase Facility (www. is available.36 lacs hits during September 2004.l eTransfer (eT)in place of TT ( same day credit) eRealisation (eR). The site offers detailed corporate profile. one click navigation. for reconciliation purposes. reconciliation. to facilitate efficient and expeditious Inter-bank transfer of funds. which is affording all necessary advantages of a networked environment. equated monthly instalment (EMI) calculators. section for news letters and tenders. (For private circulation only) Banking Briefs 31 . and also to offer other value-added services. be it a circular instructions or promotions/ movements of officials etc. documentation required for Personal segment loans. imports. forward SBI Briefcase facility launched in January 2002 provides for instant on-line sharing of files between users on one to one and one to many basis. l l l SBI . product wise Frequently Asked Questions (FAQs). SBI Homepage (www. and maturity value calculators etc… Help line facilities for customers in all the circles. Kolkata in all FOREX intensive branches (444). seamless integration with net banking. SEFT: SBI has launched the Special Electronic Fund Transfer (SEFT) Scheme of RBI. The reconciliation position has improved to 99% by amount. Transactions : Software has been developed and rolled out to more than 4141 fully computerised The site is a window for all the products of the Bank and the popularity of the website is growing ever since it has been redesigned.sbibriefcase. l Good response from the users in domestic and foreign offices. Remote connectivity and enquiry/investigation facility has been extended for select branches/ offices. eDebit:. inward Provides. 29 branches of our Bank in various LHO Centres are participating in the The system provides connectivity with all Forex Branches and handles all types of forex transactions. ELECTRONIC NOSTRO RECONCILIATION (ELENOR) An on-line real-time reporting package for forex transactions from branches to Foreign Department. e-poll facility and citizens charter.statebankofindia. STEPS handles  payment messages and reconciliation simultaneously l and outward remittances. Entire reporting package designed and developed in-house.E-Realisation is introduced to facilitate expeditious collection and reconciliation of outstanding entries in Cheques/ dividend warrant purchased accounts at the branches. The site has the following notable features: l l l l STEPS has emerged as a frontline Technology Product. settlement and reconciliation of Govt. FCNB loans etc. It will result in cutting down our transaction costs. etc. Useful information like branch locator. seamless integration of different products and services offered by the bank. which makes available latest status of remittances/bill payments/collection on line. ensure improved monitoring.:. It has recorded 1. including exports. funds. The website has enabled the Bank to reach its branches/ administrative offices/staff instantaneously. downloadable application forms. Security of message transmission has been enhanced.Cash Management Project ATM reconciliation. annual report. Govt. Electronic generation of all reports for reporting.

Smart Cards etc. Booking of long-distance reserved and unreserved tickets as well a season tickets enabled through i-banking channel of the Bank using Credit Cards. and Currency Transfers) which are specific to India. installation of Software at the branches and the testing has been handled successfully during February 2003. SFMS to nonSWIFT branches is proposed to be taken up after stabilization in SWIFT branches.. The software has gone live from 1st March 2003. Therefore. SWIFT standards have been adopted for SFMS. To take advantage of Group synergy and to reduce the cost of transmission of messages. l l E-Recon : l SMART Cards l l Railway Project l Elrecon l Single Window Service: With a view to improve our customer service and enhance customer satisfaction. without having to congregate at Staff College. without intervention of Zonal Offices or DPC LHO. Single Window Service module is implemented at all computerised branches. all LHO’s. i. ATM Cards. Drafts/ Agency Clearing and RTC* through internet directly from branches to IOA. there are some restrictions as well as cost considerations in the use of SWIFT for domestic messaging. Belapur.sbitimes. The issue of Digital Server Certificates. a new software E-learning l Video Conferencing (VC) : Implemented at 24 locations covering Corporate Centre. causing dislocation at Branches. E-learning is an on-line knowledge dissemination strategy. AB&R 32 Banking Briefs (For private circulation only) . SWIFT : l (SFMS) has been developed by RBI and the formats for financial messaging are structured exactly in alignment with the SWIFT formats. Fully Computerised branches. Co-branded smart The Bank has developed another webpage as an intra-net on its IP network. This is expected to reduce substantial costs and improve the flexibility and efficiency in transmission of the messages. Transmission of Branch Clearing and Drafts Accounts data for reconciliation through internet. 98% of FCBs. SFMS expected to be interfaced by IDRBT with SWIFT. Additional 1549 branches added during the year taking the tally to 2849. in due course. Structured Financial Messaging System (SFMS): Currently.e. Training Centres.SBI TIMES: (www. The page has separate pages for its apex institutions to share the information to the staff of the Bank and post their publications on line for dissemination of information. launched on 8th July 2002 as a Smart Card-cum-ATM Card in Mumbai in a tie up with Indian Oil and Sodexho. New formats have been developed by RBI for transactions (like Govt. the standalone SWIFT systems are being converted to SFMS so that SWIFT messages will be routed in SFMS format.. SFMS is meant for domestic messaging for the banking This will ensure cash-less transactions for the Railways. Transmission of Branch Clearing. l Hardware/Software upgraded at SWIFT Operations Centre (SOC) and SWIFT connectivity expanded. wherein access is restricted and lots of data of relevance to the personnel are available. I&A Dept. to suit the pace and convenience of branches. The site has become an interactive medium through which the Bank can implement its e-learning initiatives.

All computerised branches and other offices in these cities All ATMs including off-site All Associate Banks joined the Network All computerised branches will join the network 33 Applications on Network l l l l l l l l l l l l l l l l Network – Coverage l Features of the Core Banking Solution l l l l l l l l Banking Briefs . The VCs have enabled the Bank to save on cost enormously and enabled savings of the valuable time of top executives. COCC/ NPA Meetings are held regularly and saves precious man-hours. However. Anywhere Banking Single view of the customer across all delivery channels Exposure monitoring at an aggregate level Integrated System : covering transaction and administrative processing Need therefore to move to a centralised architecture Network supporting various forms of traffic – critical to achieve the above objectives Present Communication Infrastructure – Application Specific – not integrated. Bangalore Disaster Recovery Centre at Chennai Software from FNS. it is now proposed to be shifted onto the SBI Connect project SBI CONNECT GENESIS l l l Other access channels – POS terminals. Inaugurated on the 5th January 2002 and is growing in popularity – VC’s have been a regular feature for inter-office interaction.. and connecting multiple locations using multi-point conferencing unit (MCU). It helps save time and cost when conferences/ meetings have to held among various functionaries located at different places. Branches to have both Leased Line & ISDN Lines –64kbps Vendor to arrange connectivity ( Datacraft of Singapore—Network Integrator ) Data from branches of a city to go through a separate location called City Aggregation Point From City Aggregation Point data to go to Core Aggregation Centre From Core Aggregation Centre to Central Data Centre. messages from the top executives of the Bank to various target groups both at the administrative offices and the apex training institutes. kiosks etc. administrative dislocation and cost.. and CAG Central linked for providing VC facilities in the Bank. Anywhere Banking (For private circulation only) SBI Connect :WAN l l l l l l l l l Need to provide Anytime. Belapur Network monitoring to done on-line by Network Operations Centre.Dept. It was made functional using ISDN lines from basic telecom operators.Australia—FNS B@nks24 Core Banking Software Customisation of software being done by TCS Core Banking Trade Finance Treasury & ALM ATM Internet Banking STEPS ELENOR CMP Voice Video Any application requiring connectivity 24 x 7 Processing capability Platform Independent & Database Independent Highly scalable Central Customer Information File (CIF) Anytime.

Integration with all other delivery channels Standardization of workflow processes Roll out to Associate Banks Subsidiaries and Foreign Offices Core-banking : Business Benefits l l l Better management of bank’s funds Better Monitoring of NPAs . and reversal of INCA entries. Asset classification and on-line identification of NPA by the system at user defined intervals. Drawing power & interchangeability of limits supported. Write off : manual action. Not supporting drawing power & limit together. Back-value dated interest / transactions done on simple interest basis. Back value dated interest calculations done on compounding basis. Data Mining and Decision Support Systems Lead towards US-GAAP compliance Deployment across 3500 plus branches/ offices. Write off: will be automated & entries put through by controllers Automatic calculation. Statutory reports are generated through MISLA NPA identification not supported by the system. Data Warehousing. Banking Briefs 34 (For private circulation only) .l l l Multi-Currency Support for Multiple Delivery Channels Global Limits/ Exposures l l Reduced time-to-market for new products Low implementation/maintenance costs vis-à-vis distributed system Capability to introduce CRM. maintenance & entries are manual. Statutory reports will be generated through the system. INCA calculation.increase profitability Ability to do profitability Analysis Cash Management Services for customers Increase in staff productivity Standardised workflow processes and practices Single view of customer assets / liabilities l l l l l l l l l l l Core-banking : Challenges l l REDUCED INTER-BRANCH RECONCILIATION l Better Risk Management COMPARISON With Bankmaster PRESENT SOFTWARE Accounting software Does not support maintenance of registers B@ncs24 More than an accounting software Registers will be maintained in the system. posting.

Thus. The package helps the Bank to meet with stringent regulatory requirements. The main disadvantage of the existing system is lack of On Line Transaction Processing (OLTP) leading to delay and errors all around. How does the existing system work? In the existing system. In the FD Bank Master. investigation and enquiry at FD.THE PROJECT ELENOR l l l l l Launched on 15th Dec 2000. our foreign offices or correspondent banks. as a result. accounting will be done in Bank Master. OBs and other critical branches to login. Similarly. Each transaction at the branch will be picked up by the Groupwise client and pooled in the message queue for transmission to the nearest Service branch VSAT Centre en route to FD. It was also felt desirable to provide a comprehensive modern system that would ensure not only up-to-date Nostro account reconciliation on a day-to-day basis but also obviate situations of forced provisions in respect of outstanding debit items as per regulatory requirements. branches. This would totally eliminate the delays and inaccuracies in the processing of Forex transactions into the system at FD. Phase II launched on 1st January 2002 enables on-line reconciliation. How will the accounting be done? All computerised branches have opened a new General Ledger account styled “Forex clearing General Account (FCGA)” and the forex transactions are delinked from Branch Clearing General Account. Calcutta as their existing reporting and reconciliation procedures and systems/ networking infrastructure were not adequate to cope with the workload. Reconciliation. the particular branch account under the FCGA General Ledger head will be debited or credited instantaneously depending upon the nature of transaction. 35 How does Elenor work? At FD. Corporate Dealing. any aberrant transaction will get thrown up in the process of Nostro account reconciliation at FD who monitor the second leg in foreign currency. investigation and enquiry at FD. FD runs several software modules to take care of merchant transactions. Launched on 15th December 2000. Phase II launched on 01st Jan 02 hase II enables on-line reconciliation. The systems available for Forex transactions in FD and branches do not ensure data integrity and. FCNR(B). Elenor stands for Electronic Nostro Accounts Reconciliation. require manual intervention and verification of data at several stages. Inter Bank dealing. This would be facilitated by maintenance of multicurrency accounts at the FD and provide online and transaction-by-transaction movement of data with proper acknowledgements from both ends. The two parties in any forex transaction are our domestic Banking Briefs (For private circulation only) . etc. This project has been conceived in order to bring about a total system overhaul at FD. Thus. the FCBs as also foreign Branches (FBs) and Foreign Correspondents (FCs) will be treated as customers of FD. enquire and trigger investigation with our Foreign Branches and correspondents. whenever a transaction pertaining to a particular branch is received. How about accounting at FD? The new FD system will run on the Bank Master model with the central server running Bank Master software and each of the computerised branches being treated as a customer with a unique customer number. view. each entry will be posted in foreign currency in each of the detailed accounts of the designated domestic branch under a Memo. Stands for Electronic Nostro Reconciliation Meant for speedy Nostro reconciliation. Smart stream Reconciliation (SRS) Software is installed at FD for reconciliation. It also sets up remote user terminals at all LHOs.

User defined ratios from the fields in CMA. Each field in the CMA data. It stands for Submission of Proposals for ECCB decisions It makes proposal preparation easy and complete as per requirement It helps in building Industrial Data. Efficiency ratios. Branch-wise and LHO wise list of accounts overdue for renewal/review. FoxPro but the branches do not require FoxPro to run the application. Update the database every time a new loan is sanctioned. There is a provision for reporting of irregularities also in electronic format. The first version of SPEED was rolled out to LHOs in March 1998 and. a lot of number crunching and a lot of mind wrenching at various levels.7 have since been sent to Circles. Inter-firm data for a range of turnover within an industry. it is a software designed and developed by Industrial Financial Department. Who can use this software? SPEED is the front end for users at LHOs and Commercial Network Branches all over the country. Draw industry averages on each one of the headings in CMA data. Secondly. The later versions have taken care of new requirements of COCC and also modifications suggested by LHOs/Branches. the branches merely need to load the software using the files sent by IFD from time to time to run the application. Inventory & Receivable levels. subsequently. Banking Briefs 36 (For private circulation only) . by using the latest version of SPEED. Other ratios in the CMA data. you are assured that all requirements of Corporate Centre are taken care of. At present. this software is capable of generating the output on all the units in a database on the following indicators: a) b) c) d) e) f) g) h) i) All items of our Standard Performance and Financial Indicators. l to create and update an extensive electronic database as a part of the Bank’s normal work flow. Basically.SPEED l l l l l Speed is a software for preparing credit proposals. Corporate Centre primarily as a carrier of proposals from Local Head Office to Corporate Centre in an electronic format. Processing of loans involves a lot of paperwork. This is automated to a great extent with the aid of a new software called SPEED. How do the branches use this software? SPEED application has been developed in One of the main advantages of SPEED is that making proposals becomes easy. What does this software aim to do? The basic aim of this software is l to facilitate preparation of proposals at branch/LHO level with a uniform approach all over the country. eight versions up to SPEED 1. Functions of the Software: a) b) c) d) Split databases and prepare branch-wise database. Ratios involved in Risk Rating Exercise. Instead. What is SPEED? “SPEED” is the acronym for ‘Submission of Proposals for ECCB Decisions”. Add to this database information in respect of new borrowers financed by us. All working capital proposals involving Fund Based or Non Fund Based facilities in C&I segment are to be processed using this software. It helps in reporting irregularities.

LOAN POLICY – SBI l l l l SBI Loan Policy was approved in Nov 96 and reviewed from time to time. Risk Management Department (RMD) will no longer set CRA linked hurdle rates for specific industries. managing and monitoring credit risk. JHF. Hurdle Rates: l SBI Loan Policy. l l Individuals as Borrowers M a x i m u m aggregate credit facilities ( fund based and non-fund based) of Rs 20 crore (earlier Rs 10 crore) excluding loans against specified securities for which there is no restriction. is an embodiment of the bank’s approach to sanctioning. The policy applies to all domestic lendings. Education Loans and Agricultural Term Loans under approved schemes). Non-corporates (Partnerships. For sanctions of CCC-I and above. review and renewal. managing and monitoring credit risk. exposures and 40% of capital funds for group exposures. Capital funds include Tier-I and Tier-II capital. It aims to make the bank’s systems and controls effective. take over of advances. credit appraisal standards. The above ceiling will also be applicable to the aggregate of all facilities sanctioned to partnerships firms that have identical partners. etc. RMD will only issue advisories on the general outlook for industry from time to time. Housing Loans. Infrastructure Loans. discretionary powers. CRA. Corporates: Maximum aggregate credit facilities as per prudential norms of RBI on exposures which currently stand at 15% of Bank’s capital funds for single borrower l Maturity of Advances: l The maturity of any term loan should normally not exceed 8 years including moratorium period (except cases under CDR mechanism approved by the Bank. No enhancements in credit limits are to be considered in existing accounts rated below SB4/SBTL4. subject to certain exceptions detailed in the circular. (For private circulation only) Banking Briefs 37 . aimed at accomplishing its mission. Deviations in hurdle rates as specified above would need the approval of CCC-I for sanctions of CCC-II and below. Some of the chapters covered are Exposure levels.) Maximum aggregate credit facilities ( fund based and non-fund based) of Rs 80 crore (earlier Rs 50 crore) excluding loans against specified securities for which there is no restriction. the sanctioning authority is empowered to approve the deviations also. Industry specific hurdle rates stand withdrawn. It aims to make the systems and controls effective. documentation. pricing. The Policy is laid down by Credit Policy & Procedures Committee (CPPC) and deals with the following: Revision in Exposure Levels:. The ceilings on exposure levels to various categories of borrowers have been revised as under: Category of Borrower CEILING EXPOSURE No new connections are to be considered in respect of accounts rated below SB4/ SBTL4. The policy lays down the bank’s approach to sanctioning.

38 Banking Briefs (For private circulation only) . SB3/ SBTL3. prior administrative clearance is to be obtained. C&I and Trade & Services would remain unchanged. l l l l l l Letters of Credit (LCs). For sanctions by CCC-I and above. Bank will ensure that actual service are rendered and accommodation bills are not discounted. For take-over of units not complying with any one or more of the norms. issue Guarantees / Acceptances and discount bills under LCs only in respect of genuine commercial and trade transactions of borrower constituents who have been sanctioned regular credit facilities by the Bank. Prior administrative clearance is to be obtained in all cases of take-over proposals other than for DGMs and above. No deviation may be permitted in the minimum CRA rating prescribed. the sanctioning authority may approve the tenor as part of the proposal in all cases./Research/ Defence/Educational and other statutory organizations who have no borrowing arrangements with any other bank/FI. l Bankable business from non-borrower constituents such as Govt. For sanctions by ZCC and above. Issue of guarantees favouring FIs/ other banks and lending agencies for loans extended by them is not proposed for domestic operations. Bank may extend fund based/non-fund based credit facilities against guarantees issued by other banks/FIs. may be accepted subject to compliance with KYC norms. the sanctioning authority may approve the tenor as part of the proposal in all cases. i. the deviation may be permitted by CCC-I for sanctions by CCC-II and below. The exposure assumed against such guarantees will be deemed as an exposure on the guaranteeing bank/FI and would be subject to the Permissible Global Exposure Limit (PGEL) on other banks/FIs in place in the Bank. Guarantees and Bill Discounting: l Bank will open LCs. l l l Take-over of advances: l l Take over norms under SSI.e. In cases where the maturity period exceeds 10 years. Separate norms have been laid down for refinancing of high cost term loans. While discounting bills of the services sector. the loans should be administratively cleared by ZCC.. Take-over of advances under AGL segment will be permissible selectively for which suitable norms are being separately advised. A sub-limit for such exposures will be fixed within the PGEL as part of the periodical review exercise undertaken by Risk Management Department.l In cases where the maturity period exceeds 8 years and is upto 10 years (except in cases of exempted categories mentioned above). Bank will not open LCs and purchase/ discount/negotiate bills bearing without recourse clause.

2 billion (25711 crores). donees. Banking Briefs 39 (For private circulation only) . 25711 Crores (US $ 5.a.85% p. The funds would earn a return of 12 percent if they were lent at prime lending rate. pound sterling and Euro Rs. the dollar rate on IMD is only 1. The following are some of the features/ developments relating to the scheme: l State Bank of India launched IMD in October 2000 for NRIs.75 percent coupon rate on RIB that was 2. without penalty. The IMD is treated as FCNR(B) deposit. Indian residents can hold jointly with NRIs as second holders. Tax benefits available to transferees. The Scheme is a five-year deposit denominated in the US Dollar.5 percent on dollar deposits and bear the exchange risks up to one percentage point annually.75 percentage point above LIBOR.25 percentage points above the then prevailing LIBOR.INDIA MILLENNIUM DEPOSIT (IMD) l l l l l Launched in Oct. nominees and returning NRIs. l l The deposit is exempt from CRR requirements by RBI in its monetary policy of October 2000. Compared to the 7. l l l l l l l The interest rates in the IMD are lower than those offered in the RIB deposits in 1998.GBP 7. 2000 5 year deposit: Denominated in US dollar. Minimum subscription US $2000.50%. the Pound Sterling and the Euro.2 billions) mobilized Interest rate on IMD lower than RIBs Matures in 2005 The scheme received a good response from non-resident investors and made a collection of US $ 5.85% & Euro 6. Can be gifted to Indian residents. Interest and principal fully repatriable for non-resident Indians. Premature encashment facility. Interest payments on half-yearly or on a cumulative basis. survivors. The other salient features of the deposit scheme were: l Coupon rate US$ 8. GBP 2000 and Euro 2000. SBI is expected to offer a return of 8. Exemption from Income and Wealth taxes in India. The scheme was not open to people based in USA because of regulatory conditions. after 6 months in non-repatriable Indian rupees. Easily transferable between NRIs/OCBs. l l l Banks in India permitted to grant loans in rupees against the deposit certificates at their discretion. This will help to protect the bank’ s spread despite its having to pay a higher interest on the deposits.

NEW PRODUCTS RENT PLUS Finance against assignment of future rentals. Maximum loan is Rs. housing agencies/ Urban Development authorities with a maximum of Rs.00 lakhs LOAN FOR EARNEST MONEY FOR ALLOTMENT OF A PLOT/HOUSE/ FLAT A new scheme to finance applicants for earnest money for booking of residential plots/built-up houses being sold by Govt. TEACHER PLUS Product to be offered to permanent teachers/administrative staff of educational institutions which have been regular in payment of salaray to their teachers/staff for atleast the preceding two years. PRAVASI PLUS Identified select loan products can be offered in a package at attractive terms against the collateral security of FCNR (B) and NRE Rupee term deposits.00 lakhs.1. Banking Briefs 40 (For private circulation only) . to promote young entrepreneurs in rural areas to take up the activity of custom hiring.4. KRISHI PLUS A new scheme for financing tractor to Rural Youth has been launched.25.00 lac. The maximum limit that can be sanctioned is Rs. ARTHIAS PLUS The scheme to be implemented in those states having a licensing system enables financing commission agents against their receivables from farmers.

10.00 lacs for construction. US $ and Euro. Scoom. With the launch of this product ‘Justice Plus’ is discontinued and merged with this scheme.50 lakhs for noncorporates and Rs. Sahayog Niwas is a scheme to finance Self Help Groups for on lending to members for housing in rural areas. working capital needs etc. GRAM NIVAS b. for acquisition of machinery/factory building/ modernization.0. RICE MILL PLUS Banking Briefs (For private circulation only) .1.00 lac for repairs/renovation and Rs. 41 SBI SHOPPE RAKSHAK TRACTOR PLUS SBI CREDIT KHAZANA PARIVAHAN PLUS ADVANCES TO FLEET OPERATORS PRASHASAN PLUS (for Government Employees) New Products – Scheme for financing Rural Housing a. New scheme for purchase/modernization of shops/ establishment/ offices/modernization/renovation/expansion etc. Education Loan. with no upper ceiling. Term loan is repayable in 5 years.20.7. A scheme for Government employees where check-off facility is not provided. Personal Loan Tractor Loan.KANAK DHARA variant of Cash Certificate and available in 3 currencies i. Rs.. SAHAYOG NIWAS BANCASSURANCESETUBANDHAN for NRI customers. provided he is otherwise eligible as per the individual schemes.TL of Rs. SBI Life has developed a new product – a long term saving instrument with maturity option of 5/10 years for NRIs.e. provided they furnish post-dated cheques. Quantum . The product is designed to ensure that the entire loan needs of a financially disciplined customer is taken care of.) New scheme for financing tractors to Kisan Ex-servicemen for financing Mahindra and Mahindra tractors initially to the extent of 90% of the value of the tractor. under which one is automatically entitled to one or more of the Bank schemes like Car Loan. by offering concessional interest rate through rewarding customer relationship. subject to observance of take-over norms. The deposit can be issued in favour of the applicant or any other person specified by the applicant.2. GRAM NIVAS: Purchase/Construction including Renovation of House/ workshed/ purchase of a plot of land for pursuing income generating activities with a maximum of Rs. Take-over of good units is also permitted. a. any other loan for which he is eligible under the PLUS scheme.00 lakhs (max.00 lakhs for Corporates. The scheme envisages sanction of Cash Credit/Term Loan for profit making Corporate/Non-corporate owners satisfying certain eligibility criteria for the purpose of financing new vehicles/takeovers. New scheme for financing Rice millers. Rupee. The maximum quantum of finance is Rs.30 lac for purchase of land b.

00 lacs. Scheme for Financing Medical practitioners. A MOU has been signed by the Bank with M/s Apollo Hospitals under which the product has been branded as SBI Apollo Medi Plus scheme. Scheme to finance Corporate/Non-corporate owners of fleet of trucks/tankers/trailers/luxury buses owning more than 10 wellmaintained vehicles. SBI Life has developed a new product. scientists and administrative staff of various research institutions all over India. Rate of interest is similar to domestic savings bank/TDR 42 DOCTOR PLUS BANCASSURANCECreditor protection product – Tractor Loan NURSING PLUS TRANSPORT PLUS Advances to Fleet operators SBI-SIEMENS Medical Equipment plus EQUITY PLUS MEDI PLUS ARTISAN CREDIT CARD (ACC) GAVESHAK PLUS CAPGAINS PLUS Banking Briefs (For private circulation only) . Scheme for financing of medical equipments to the doctors who are doing private practice. New product designed to be offered exclusively to employees of leading PSUs which consent to provide check-off facility.000 for a Term Deposit. Maximum loan is Rs. The new product Capgains Plus puts at one place all relevant instructions on the Capital gains scheme. running small clinics/nursing homes and also to Hospitals who are banking with us.a group credit protection scheme for our tractor loan borrowers to provide life insurance cover to tractor loan borrowers as a protection against risk of death due to any reason during the tenure of the loan. The scheme is being implemented in the SSI sub-segment to support the government initiative of providing hassle free credit to artisans engaged in production / manufacture of handicrafts The product is aimed at another category of P segment borrowers namely.25. The concessions will be offered to Permanent research and financial & administrative staff who have put in a minimum of two years of service. The facility could be disbursed either as Term Loan or as Cash Credit.000 for a savings bank account and Rs 5. special concessional in issuance of Demand Drafts and concessional terms and conditions for “P” segment loans.NAVY PLUS The circular details the concessional package for administration of salary. An Education loan scheme for offering concessional rate of interest to students opting for graduate and post graduate degree courses in nursing. providing convenience in ATM services. to those institutions which provide check-off facility . holding valid route permits and willing to exclusively bank with the Bank. The minimum deposit is Rs 1.

New loan product for individuals with NMI of Rs.p. However. Hip and Knee replacement surgery. interest on savings bank account under the scheme will be applied half-yearly. The term deposit can neither be accepted as margin money for non-fund based nor as collateral to any type of fund based facility. for expansion including preliminary/pre-operative expenses and also for modernization including expenses for patenting. Coronary by-pass. Product to be offered to individuals to avail specialized expensive medical treatment for illness where mortality probability is less than 5% e.g. Subject to a maximum of 4 times the NMI. branding and quality improvement programme. and above. The product is aimed at Permanent research and financial & administrative staff who have put in a minimum of two years of service and working at various research institutions all over India.50000/-. satisfying certain conditions.50 lacs per annum. Minimum amount Rs. Term loans for acquisition of machinery/factory building. The scheme is open to students with qualifying marks of 60% and wards of parents whose income does not exceed Rs.5000/. XPRESS CREDIT New product akin to Personal Loan scheme. etc.account.2. New product.Maximum Rs.3000/. No loan facility is available against deposits made under the scheme. to employees of leading PSUs and Government orgainsations. STUDENT LOANS SCHEME (GOVERNMENT SPONSORED) GAVESHAK PLUS FESTIVAL LOAN FOR PUBLIC MEDI PLUS MORTGAGE LOAN DAL MILLS PLUS Banking Briefs 43 (For private circulation only) . The product introduces the convenience of a simplified method of assessment wherein the quantum of cash credit/overdraft limit is based on the value of the mortgaged property/turnover The product has been introduced for Profit making existing units with a credit rating of SB4 and above. which has an element of interest subsidy of 2%. in the shape of a preapproved loan.m.

creation / registration of charge / mortgage etc. Devolvement of DPG instalments and nonpayment within a reasonable period Frequent devolvement of LC and nonpayment within a reasonable period Frequent invocation of BGs and nonrepayment within a reasonable period Return of bills / cheques discounted Non-payment of bills discounted or under collection Poor financial performance in terms of declining sales and profits. and Sub-Standard Assets (SS) SPECIAL MENTION ACCOUNTS Modification* in definition Earlier Definition l Non-compliance of terms and conditions of sanction PRIMARY INTENTION BEHIND THE INTEGRATED APPROACH l Category I: INTEREST/ INSTALMENT OVERDUE > = 30 DAYS Category II: SIGNS OF SICKNESS (Early Warning Signals) Category III: SB 6 / SBTL 6 & BELOW* l Initiation of appropriate. net losses. Incomplete documentation in terms of 44 Stressed Assets Review (SAR) • l l l l l l l l l l l l l l Purpose: Examine viability (For private circulation only) Banking Briefs . Early Warning Signals (EWS) l l l Delay in submission of stock statement / other control statements / financial statements. not included any more for facilitating a focused review (less crowding).STRESSED ASSETS .on operation. and SS does not slip to D/L. II). Focus is an assets with outstanding Rs.10 Lac and above Time-bound action plan for rehabilitation. erosion of net worth etc. time-bound corrective action. No prior administrative clearance needed for holding . l STRESSED ASSETS ARE: l l Special Mention Accounts (SMAs). I) or do not show any warning signals (Cat. cash losses. so that SMA does not slip to SS. due to lack of timely finance &/or reliefs / concessions Quick identification Establishing intrinsic viability Where restructuring feasible. restructuring and recovery. Return of cheques issued by borrowers.REVIEW AND MANAGEMENT l l l l Stressed Assests are Special Mention Account (Category I & II) & Sub-standard Assets. to be considered as first option Else exit /recovery option Each step to be taken quickly Aim: To streamline the multiple review process Integrate Bank’s approach towards management of Stressed Assets & their restructuring Supercedes all existing instructions Non BIFR/ non CDR Review of problem loans/SMAs /NPAs / AUCA Two-pronged approach – Review of stressed assets with focus on restructuring – Review of Doubtful /Loss assets with focus on quick recovery action l l l l * MODIFICATION: If not in default (Cat.

focus on various options of recovery Cut off: Rs. if still viable. Promoter related l l Discuss with B & G whether they have a plan of action Assess whether promoters /borrowers have genuine intent to rehabilitate the unit Obtain realistic and time bound commitment from borrower / guarantor Assess the ability of the management to turnaround the unit To commence from the date branch identifies SMA as potentially viable (No Administrative Clearance / approval/ sanction needed.1 lac but below Rs 10 lacs. Else. SS) which have a potential for quick turnaround Assets Cut off: Rs 10 lacs & above (outstanding) report individually on prescribed format Strategy: Initiation of corrective action at appropriate time If not considered potentially viable. Only needs to be reported as per report format) Reviewing authority to give necessary directions to the branch on the proposed action plan To continue for a maximum period of 3 months from date of identification as SMA & for a maximum period of 1 month from date of approval of rehabilitation package Outer limit. (For private circulation only) l l l l l l Holding on operations l RNW Set up For accounts below cutoff amount (above Rs.l Approve action plan to proceed with restructuring Coverage: loan assets (SMAs. could be permitted selectively Where necessary. on a consolidated basis. Restructuring to be examined as a first option. which ever is higher Allowing operations within such frozen limit Full interchangeability between LC and CC within the overall frozen exposure level. Verify adequacy of cash accruals. and security has not deteriorated in quality. concessionary margins may be considered as part of rehab package. to the controllers.4 months in larger accounts The sanctioned limit or. LC to be opened even if earlier LC devolved.1 lac but below Rs 10 lacs) l Branches would formulate and pursue account specific action plans with approval of sanctioning authority Report on all stressed accounts above Rs.10 lacs & above. to be submitted monthly. 45 l l l Banking Briefs . due to genuine cash flow problems /mismatches No increase in margins may be sought. insurance cover rectify deficiencies l l l Treatment of LCs l l l l l l l l Review of Doubtful / Loss /AUCA l l Identify primary and secondary sources of cash flows. average daily exposure during the previous one month prior to date of reporting. directions for recovery effort to be given immediately. l l l Important parameters for branch level review Account related l l Freezing the loan’s exposure at l Determine whether the unit is intrinsically viable Diagnose reasons for the deterioration in asset quality Evaluate whether problems are of temporary nature Proactive action needed from bank to sustain viability Revalidate assumptions at the time of sanction Verify completeness and correctness of documentation – – – – revival position creation /registration of charge.

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I.T Act was passed on 9th June 2000. The Act provides legal recognition to transactions carried out through any electronic medium The Act facilitates growth of commerce. The Act does not apply to negotiable instruments, power of attorney and sale and purchase of immovable properties. Who verifies and issues digital signature certificates? This will be done by certifying authorities who would authenticate and issue digital signature certificates. The certifying authorities could be private sector companies. The certifying authorities are required to obtain a licence from a new body called the Controller of Certifying Authorities which the Act creates. The Controller - who will head this body - will be appointed by the Central government. The controller’s job will be to supervise the certifying authorities and specify the standards which the certifying authorities have to maintain. What is the regulatory structure which the Act seeks to create? The Controller of Certifying Authorities is part of the regulatory structure. For the first time the Act also defines cyber crimes, which includes hacking into a computer network, creation of viruses and forcibly taking over a computer network. The Centre will appoint adjudicating officers to decide whether or not a cyber crime has been committed. The adjudicating officer will have the right to award compensation not exceeding Rs.10 lakh. The decisions of the adjudicating officers can be challenged before the Cyber Law Appellate Tribunal, a new body created by the Act. Decisions of this appellate tribunal can in turn be appealed against to the high court.

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What does the IT Bill seek to achieve? The IT Act enacted on the 9th June 2000, provides legal recognition to transactions carried out by means of electronic data interchange or through any electronic medium including the internet. This means that contracts entered into using electronic medium like e-mail can now be enforced. The IT Act ensures that records can also be kept in an electronic form. Before the IT Act, contracts could only be enforced if documents were signed. The law now recognises digital signatures. Digital signature means the authentication of an electronic record by a person using electronic means. The word electronic in the Act refers to all kinds of computer systems. Why was the Act needed? In the absence of enforceable contracts ecommerce - commerce carried out over the internet - could not have taken off. Suppose a company wants to shift most of its procurement to the internet. In the absence of the IT Act it could not have taken it’s suppliers to court for breach of contract if the original contracts were entered into using e-mail. The enactment of the law removes these difficulties. The IT Act is therefore expected to boost e-commerce. The Act also seeks to encourage electronic governance by allowing government records to be kept in an electronic form. It also permits applications and forms to be filled up and bills to be paid over the net.

Banking Briefs


(For private circulation only)

What are the punishments for hacking or other cyber crimes? The Act provides for a maximum imprisonment for three years or a maximum fine of Rs.2 lakh or both. Transmitting obscene material may also be punished up to 10 years imprisonment. What are the problem areas of the Act? There is a section of the act which allows an officer of the rank or deputy superintendent of police to search and arrest without a warrant. This section has caused concern. Besides the liability of service providers such as the ISP or the portal are not clear if somebody transmits obscene material without the ISP’s or the portal’s knowledge. The passage of the IT Bill is a step in the right direction to boost e-commerce. The Act does not apply to Negotiable Instruments, power-of-attorney, will and contract for sale and purchase of immovable property.

Banking Briefs


(For private circulation only)

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Virtual banking is banking in an environment other than the branches. Banking in ATMs, Internet; and through Credit/debit/smart cards are examples of virtual banking. It helps in customer convenience and reduction in operating costs. It opens opportunities for cross selling These payment systems saved time and offered security in its wake. Different types of services under virtual banking ATMs including shared ATMs, Electronic funds transfer using credit/debit cards, smart cards, internet banking are the different types of services under Virtual Banking. Benefits to Banks:

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Virtual banking would mean any banking service delivered to the customer by means of a computer controlled system that does not directly involve the usual bank’s branch. In essence in a virtual bank the traditional paradigm of a customer’s integration with the bank is replaced by an electronic paradigm which is new and innovative. Customer demand, commercial motivation and technological developments have been the key drivers of virtual banking. In the changing environment adaptation to market realities as well as technology is causing the virtual banking revolution. Thus, virtualisation is driven by twin engine of customer-pull and bank-push. The reasons for increase in virtual banking could be traced to the following main factors. 1. The use of computers as accounting tool and also as a tool to expand and improve customer service. The routine banking transaction was becoming both costly and time consuming. The banks resorted to computerisation to cut cost and time overheads in handling routine transactions. The introduction of automated teller machine (ATM) imparted flexibility to bank customers and gave further filip to virtual banking. The introduction of credit cards and debit cards helped both the consumers and retailers to be free from cash handling.

Larger satisfied customers and consequently higher customer retention rates Possibilities of attracting new customers More scope to improve quality and differentiate services Greater opportunities to cross sell Greater operational/customer base Saving on cost of developing system through sharing of network Lower operating costs Opportunities for making profits through increasing profitable business segments like loan, remittances, low cost deposits, etc. Reduce overall risk to the institution handling transaction












Benefits to Customer:

More convenience
(For private circulation only)

Banking Briefs


Better knowledge of stage of account Wider range of products/services available to customers Lowest cost of accessing banking servic



As regards the strategic challenge posed by the virtual banking, the banks have to ensure the following service standards. 1. 2. The service must be error free and accurate. The bank has to adopt new attitude towards customer service, putting the customer at the center of their attention. The bank will have to have right type of people to face the emerging challenges in banking service. With the emphasis on virtual banking, the bank will have to make use of its branch network not for so much for routine transaction but for selling more profitable products, such as loans and investment products.

maximum monetary limits and authorisations, the system operators have to be extremely vigilant and provide clear-cut guidelines for operations. On the larger issue of electronically initiated funds transfer, issues like authentication of payments instructions, the responsibility of the customer for secrecy of the security procedure would also need to be addressed.



However, it needs to be recognised that such high-cost technological initiatives need to be undertaken only after the viability and feasibility of the technology and its associated applications have been thoroughly examined. It is not the inherent sophistication of technology, but the usefulness it offers to customers and, by extension, the commercial advantage it provides to institutions that needs to be kept in mind before going ahead with such technological practices. The popularity which virtual banking services have won among customers, owning to the speed, convenience and round-the-clock access they offer, is likely to increase in the future. However, several issues of concern would need to be pro-actively attended. While most of electronic banking have built-in security features such as encryption, prescriptions of

Banking Briefs


(For private circulation only)

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It is concerned with settlement of funds between participating banks Real Time Gross Settlement System facilitates speedy settlement In RTGS risk of default by a participant is avoided. Technology advancement has enabled faster funds settlement.

Settlement of payments is the vital element in the payment system. The participants in the clearing and settlement arrangement run a settlement risk, if a participant is not able to meet the obligations due to other participants. There is also the possibility of illiquidity or insolvency of one or more participants in a settlement network, causing the insolvency, or inability to settle other participants claims. Naturally, greater the accumulated unsettled balances in a settlement system, greater is the possibility that a single case of insolvency could trigger off a chain reaction of systemic proportions. Each participant in the system must take sufficient measures to limit risks. Secondly, risk can be minimised by appropriate controls within the settlement systems. Such controls can be by way of limits on transactions on a bilateral basis between participants or against the system in toto (i.e. gross or net “sender” or “receiver” cap). In Deferred/Discrete Net Settlement (DNS) systems i.e. where payments cannot be made unless there are funds in the settlement account, the risk is lower. But in the Real Time Gross Settlement system (RTGS), payments can accumulate speedily and large overdrafts can occur and unless controls are built-in-risk would be greater. Features of Good Payment System:

Institutions participating must have confidence in each others ability to deliver value in the agreed form at the appropriate time. There should be adequate safeguards against fraud. Payment arrangements should be efficient in a technical sense and also in the sense that services are made available to consumers at the lowest price. It should be flexible and innovative, able to adapt to the community’s changing needs and new technological opportunities. Participants should be accountable because of the clear public interest in payments.





RTGS: Settlement of payment transaction can be either on a net basis or on a gross basis. The timing of settlement can be either: i) ii) immediate, which is described as being in ‘real time’ or on the same day, either in batches at predetermined intervals(discrete) or at end of day (‘deferred’).

A payment system which operates as “a gross settlement system in which both processing and final settlements of funds transfer instructions can take place continuously (i.e. in real time)” is termed as Real Time Gross Settlement System. Key elements of the system in brief are:

It has to be both reliable and secure. Its integrity is of paramount importance. The currency should not be easy to counterfeit.

Orderly queuing of messages and their
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disposal are intrinsic to the design of RTGS system.

Avoidance of gridlock by providing for intraday liquidity to the participants. (Gridlock may arise when series of interdependent payment are stalled due to insufficient funds to settle the primary transaction). The risk inherent in net settlement system namely settlement risk, principal (credit) risk and systemic risk resulting in default by one bank leading to ‘knock on’ or domino effect on the system is avoided.


MICR technology at 9 centres and one-way intercity clearing between 14 centres at State capitals, (8) an electronic fund transfer (retail) system with the aid of RBI net at 4 metropolitan centres, and (9) a shared ATM network in Mumbai city. With the launching of VSAT network, funds transfer (large value) as between (several) banks centres on a real-time basis will be facilitated. The payment system today is segmented. We have different arrangements and processes and procedures for cheque clearing, securities transactions, money market transactions and so on, resulting in over-lapping clearing and settlement. While for local and intercity clearing and settlement, separate payment systems may be useful and desirable, large value payments should be cleared and settled centrally. With the growing volume of large high-value transactions, settlement will have to be on an on-line real-time basis. High-value fund transfers, money market transactions, and securities transactions which is on a delivery vs. payment mode will have to be integrated into a single payment and settlement system. For example, in the case of securities transactions based on delivery vs. payment arrangement, the transaction is effected through the current account. It can be arranged through a separate clearing account on line at the Central Bank or on a separate but linked computers. An integrated payments system will have DNS system for local transactions and a RTGS system for high value payments. Computer and communication technologies have vastly improved and various systems can now be integrated. A new set of procedures and settlement practices suited to an electronic payment environment will have to be laid down. While an integrated payment system would involve large investments on the part of the banks, it would also have to have a core of very highly-skilled persons for facilitating the introduction of this technology.

Migration to RTGS environment would lead to optimisation of use of available resources in the banking sector in addition to faster movement of funds and information among various constituents of financial sector. Towards An Integrated Payment System: As a developing country which is in the process of integrating with the global economy, we have besides the paper-based instruments, other payment media such as, magnetic tapes, plastic cards and electronic payment instruments. The clearing and settlement systems in India consists of : (1) a general clearing for cheques drawn on bank branches: a manual clearing and settlement system at 860 centres, at or below district level, (2) a manual clearing-cumcomputerised settlement system at most state capitals, (3) a manual-cum-computerised clearing and settlement system using machinereadable (MICR) cheques at 16 centres to be extended in a phased manner to 26 centres, (4) a high-value same day settlement system for Rs.1,00,000 and over, drawn on and paid into bank-branches located within the hub of the financial district at 9 centres, (5) electronic credit (bulk) clearing systems at 14 centres and an electronic debit (bulk) clearing system at 6 centres, (6) an inter-bank same day clearing and settlement system for payment orders at 4 centres, (7) a two-way inter-city clearing and settlement, system using paper-media and

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The settlement of payments occurs on either a gross or net basis. When payments are settled on a gross basis, each transaction is settled individually. Each payment instruction results in an immediate debit for the sender and credit for the receiver in the settlement accounts with the clearing house (managed by the Central Bank of the country). If gross or continuous settlement systems do not allow overdrafts against the clearing house (e.g. Swiss), then payment instructions can be executed only if the payer has a sufficiently large credit in his account. If clearing house allows overdrafts (Fedwire, USA) then it is necessary to determine the length of the period at the end of which the overdraft has to be cleared. In this case, the clearing house is exposed to intrasettlement period credit risk arising from overdrafts. With real-time gross settlement systems, incoming funds are not used to offset outgoing funds. Therefore, participants normally have higher liquidity needs than in net settlement systems. Payments are often bunched. The settlement agent (usually Central Bank) bears credit risk if it grants uncollateralised daylight overdrafts facilities such as automatic overdrafts. The systemic risk in gross settlements can be reduced by developing efficient inter-bank borrowing facilities or a Central Bank borrowing facility, apart from establishing procedures for smooth functioning of payment system.

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Is a major milestone in the development of systemically important payment systems (SIPS) Settlement is done on a real time basis and the funds settled can be further used immediately is a fully secure system which uses digital signatures, and Public Key Infrastructure (PKI) based encryption for safe and secure message transmission RTGS provides for transfer of funds relating to inter- bank settlements as also for customer related fund transfers to inter- bank settlements as also for customer related fund transfers. More than 75 per cent of the value of inter-bank transactions, which was earlier being settled through the deferred net settlement systems (DNSS) based Inter-bank clearing, is now being settled under the RTGS. Payment systems based on discrete time are known as deferred net settlement systems (DNSS), while continuous-time settlement systems are referred to as real time gross settlement (RTGS) systems. Under DNSS, each participant pays/receives only the net amount. Typically, the central bank acts as the settlement agency by debiting/crediting current accounts maintained by the participants with it. The RTGS system, on the other hand, embodies settlement of transactions instantaneously, i.e., on a gross basis, thereby completely obviating the need for any clearing arrangement in the transaction. The advantage of DNSS is a lower level of collateral/settlement balance requirement for effecting payment transactions as against higher level of collateral/ settlement balance under RTGS system. Settlement risk in the event of default is, however, higher under DNSS. The Reserve Bank would provide the intra-day liquidity (IDL) to RTGS participants. This may eliminate liquidity risk but the credit risk is transferred from the participants to the central bank. Cross-country experiences in dealing with credit risk show that central banks may (i) adopt strict membership standards for participants; (ii) require full collateralisation with suitable margin; and (iii) enforce participant-wise caps for granting intra-day credit.




The Operation of Real Time Gross Settlement (RTGS) system from March 26, 2004 India marked a major milestone in the development of systemically important payment systems (SIPS) and complied with the Core Principles framed by the Bank for International Settlements (BIS). The Reserve Bank is also a participant in the RTGS System. Currently, there are 71 direct participants in the RTGS system. Scheduled banks, primary dealers and clearing houses numbering around 125 are the targeted members. The RTGS system started with pure inter-bank transactions  Customer based inter-bank transactions were permitted to be settled through the system, effective April 29, 2004. The RTGS system will be fully integrated with the accounting system of the Reserve Bank and other payment systems and services. Salient features of the RTGS system are: l Payments are settled transaction by transaction for high value and retail payments; l Settlement of funds is final and irrevocable; l Settlement is done on a real time basis and the funds settled can be further used immediately; l It is a fully secure system which uses digital signatures, and Public Key Infrastructure (PKI) based encryption for safe and secure message transmission; l There is a provision for intra-day collateralised liquidity support for member banks to smoothen the temporary mismatch of fund flows. l RTGS provides for transfer of funds relating

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As a part of TIN. l The Income Tax Department has set up a National Tax Information Network (TIN) to act as a repository of all taxpayer related information. The Reserve Bank and the Tax Information Repository at the National Securities Depository Ltd.ONLINE TAX ACCOUNTING SYSTEM (OLTAS) l Under the OLTAS. (NSDL) are also part of the OLTAS. with data being transmitted using encryption facilities and digital signatures for enhanced security. including payment and refund of taxes.000 branches of various banks authorised for collection of tax receipts has been established. The OLTAS works in a fully secured environment. besides providing the Income Tax Department with information for accounting in a scientific and accurate manner. Data are captured from the challans submitted by tax payers tendered at the designated bank branches and transmitted electronically to the repository. Under the OLTAS. The collection and transmission of data on tax collections is on a T+1 cycle basis. an Online Tax Accounting System (OLTAS) has been conceived. a network of about 11. The OLTAS works in a fully secured environment. with data being transmitted using encryption facilities and digital signatures for enhanced security.000 branches of various banks authorised for collection of tax receipts has been established. It would enable assessees to pay taxes and get refunds electronically. a network of about 11. Banking Briefs 54 (For private circulation only) .

technocrats are now in the process of converging all the three together. high speed systems for transmitting video. Those that do not join the bandwagon may be left out. The opening up of the Internet to private service providers was a signal of the government’s keenness to carry out further reforms in this sector. entertainment and communication will also be transmitted through the fibre optic network. five years from now. depository services. like ICICI Bank and HDFC Bank.CONVERGENCE l Convergence means bringing together of Information. With convergence fast becoming a reality. Today we are witnessing meetings of different phenomenon. which were previously separated and this is happening in almost all the fields. They have also been able to move into synergistic products like online broking services. and integrates them both to a device that has advantages of both. media. No wonder. only one device and wire is required. telephone calls. They operated on different networks and even the regulations were different. Traditionally. etc. separate regulations for information technology. while using these services. are growing much faster and reaching out to customers. Convergence tries to eliminate the disadvantage a TV or a computer has as a single and separate entity. Internet Banking. telecom and other related sectors will become obsolete. The government has to put in place an appropriate mechanism that does not stifle growth but aids the process of development.000 times more capacity than the present dot fibre optic inter-city system should start soon. media and computers. Also. the bandwidth demand in the country would be 300 gbps. An important requirement for policy makers is to recognise that new regulations should be created for the convergence market by bringing the three different laws of information technology. have been considerably successful in it. having a higher bandwidth and better network reliability. and the disadvantages of none. Since information. it will become a central piece for the whole convergence economy. The construction of a fibre optic cables network with may be 1. Communication and Entertainment (ICE). and. instead of numerous wires and devices. online broking service. Technology has indeed simplified our lives. till now. Banking Briefs (For private circulation only) . cable. in the US. Simply put. Not happy with new inventions or innovations in telecom. Short Messaging Services(SMS) are examples of convergence. 55 l l Convergence typically means coming together. do not exist in India. communications and media have always been separate. Broadband networks. it is convergence. music or any form of communication that can digitised. According to NASSCOM. and entertainment together. The impact of convergence on the banking sector is already being felt. Building adequate infrastructure for convergence may become the biggest investment opportunity for the next ten years. The medium that makes the actual convergence possible is the optical fibre cable. Those that are technologically more advanced. and corporates in India are doing just that. The glaring example is that of Reliance Industries which has linked almost all the major cities/towns in a broadband network. if TV and Computer are made as one gadget. it is not Microsoft or IBM but Cisco which enjoys the highest market capitalisation.

l l l Message categories : Message text formats are standardized in SWIFT which has eliminated interpretation problems and enabled automated processing. Message security is better compared to other means of message transmission. It is used predominantly for sending remittances and LC advices.SWIFT l l l l SWIFT stands for Society for Worldwide Interbank Financial Telecommuncation. All computers within the network have atleast one standby processor which provides insurance against computer failure. Likewise. It helps in high-speed transmission of information among member banks. SWIFT has a Regional Processor (RP) in each host country through which all the messages meant for the country are routed. Standardized message formats eliminate ambiguity and facilitate automated handling at the source and the destination. Security features incorporated in the SWIFT network ensure that no fraudulent message can enter the system nor can any message be modified during processing.T.F. The user base has been enlarged and its services are now also available to non-bank financial institutions like dealers in securities. SWIFT network : SWIFT Computers are linked by a high speed global communications network. Each user in that country is required to install a Computer Based Terminal (CBT) in his own premises. Messages are transmitted globally through high speed communication channels on standardized message formats for many international banking operations. It standardizes messages. As an additional security measure all information travelling through this system is encrypted on their global network. The network is available 24 hours a day and seven days a week with all messages delivered within normal business hours irrespective of geographical destination. The CBT is a device Swift provides a quick. SWIFT allows member financial institutions worldwide to electronically exchange information amongst each other. etc. Evolution : In May 1973. clearing and depository institutions.W. reduces cost and ensures speed and security for interfacing with the SWIFT RP through the telephone lines. reliable and secure. Message authentication is automatic. Live operations commenced with effect from 9th May 1977. all data transmission paths within the network are duplicated to ensure continued service in the event of single path failures. SWIFT ensures against loss or mutilation of messages during transmission. Services offered by SWIFT are cost-effective. brokers. stands for Society for Worldwide Interbank Financial Telecommunication. 239 major international banks from 15 countries formed SWIFT as a cooperative society with its headquarters at Brussels. Belgium. Benefits of joining SWIFT : The major benefits of joining SWIFT are as under: l The acronym S. trust or fiduciary services companies. All transaction instructions is entered into the system on specified format as 56 Banking Briefs (For private circulation only) . SWIFT provides connection to approximately 3000 users spread over 84 countries all over the globe.I. reliable and cheap medium for communication of financial messages which has a direct impact on customer service.

per message type. Responsibility under SWIFT : SWIFT assumes responsibility for the functioning of the network and maintenance and security of the system. SWIFT also bears financial liability arising from loss or delayed delivery of messages provided it is due to SWIFT. SWIFT takes no responsibility for the security of any communication facilities and transmission lines between RP and users’ CBT or for the security relating to the users’ premises or terminal facilities of the user. Banking Briefs 57 (For private circulation only) . The responsibility undertaken by SWIFT for delivery of financial messages of its members is only upto the Regional Processor (RP) in the destination country. each designed to meet the very precise data requirements on specific transactions are available to users. It is the users’ responsibility to maintain their communication lines (between CBT and RP) and terminals as per SWIFT’ requirements. Currently nine financial message categories covering more than 113 message types.

Coming to the bottom line or practical side of the dotcoms. notwithstanding its fantastic services. While a typical dotcom company need not put in a lot of investment. who would like to touch and feel a commodity before actually purchasing minimal costs on warehousing and hyped up valuation. needs much more than the usual matter-of-fact writing. Yahoo. with 58 Banking Briefs (For private circulation only) . membership fee. hotmail are some of the famous dotcom companies. Neither the existing content creators nor the technical writers are effective writers of informal. Indian dotcoms will have the advantages of being the first movers on the arena. commissions on transactions. The most talked about example. The content on the e-commerce portal requires a style that captivates. e-commerce solutions would emerge as a major technological and business opportunity for Indian software houses. Unlike the traditional IT companies dotcoms do not involve in any software development or software services. membership fee for providing value-added services. They can offer large margins to both buyers and sellers. Dotcom companies are exploring new avenues for income generation. amazon. revenue from offline activities and banner advertisements. The biggest problem with ecommerce in India is associated with the consumer psyche. rediff. particularly the e-commerce market. eliminating a long chain of middlemen. The is still running with loses. characteristic of Indian market. The worldwide phenomenon of shortage of content providers might add to the problems of the dotcom companies. conversational and chatty style.DOTCOMS l l Dotcom companies basically engage in e-commerce and internet-related activity Their revenue comes from transaction fee. attracts. They can utilise the large pool of software talent and low-cost data entry operators to their advantage. hotmail. The dotcom companies are known to be so because of their domain name registration and their basic activity is ecommerce or some other Internet-related activity. Sending SMS messages to cellphones through internet is a new business opportunity tapped by these are some of the popular dotcom companies. rediff. compels and forces the browser to go in for the goods on the offer. The options include per transaction fee. Indian scenario for the dotcom companies has both advantages and there are hundreds or thousands of failures and also-rans for each success story. Even those who use credit cards are scary of giving it out on the net with the prevalent sense of insecurity. Other major hurdles on the way to dotcom splash would be the poor use of plastic money. commissions on transactions and advertisements Many dotcom companies have failed due to poor revenue. l l l Dotcoms make hay while e-commerce shines The dotcom fever is the advanced stage of the IT phenomenon that has been spreading its wings for over a decade. its typical revenue generation model rests on different options. Security concerns and psychology of people are main reasons Yahoo.

cards etc. Worldwide. Insecurity of transactions on the web has impeded on-line commerce. Electronic Funds Transfer (EFT). Internet seems to be creating the possibility of a permanent worldwide bazar in which no prices are ever fixed for long.. products and services over computer communication networks. Digital certificates provide one such answer. B2B. false or malicious order confirmations. whether idea makes money and the idea has sustainable competitive advantage. Yahoo and AOL are the only companies making profits in the internet business. food. these sites are offering low value items like CDs. Internet shopping. Its success depends on connectivity. It is faster and cheaper. lack of a tracking system like a social security number and the vast unorganised industrial sector could throw internet based businesses out of gear. cassettes. the idea works. Unauthorised access to data bases. which is metamorphosing the way business is done. Electronic Mail. emails are examples of e-commerce. Currently.Commerce) l l l l l E-Commerce denotes buying and selling goods/services using electronic media. B2C (business-to-consumer) and C2C (consumer-to-consumer). E-commerce has unleashed yet another revolution. the other issues are as follows. after eight years of start up. In a word. Electronic Bulletin Boards. FAX and other network-based technologies. Banking Briefs (For private circulation only) . Internet provides a perfect medium for aggregating buyers and sellers from all over the world. fraudulent payment transfer . B2C and C2C Buying and selling on the internet is known by the generic term e-commerce. It not only automates manual processes and paper transactions but also helps organisations move to a fully electronic environment and change the way they operate. B2C is still hampered by the poor penetration of PCs. internet access is still very expensive and the access devise is primarily a PC which most Indians cannot afford. Lack of internet infrastructure In India. Profitability One has to visualise before thinking of ebusiness the idea is relevant. Internet Banking. compounded by worries over payment facilities and infrastructure costs. and information is instantly available. because no complicated logistics are they through the banking or credit card channels. Lack of infrastructure (like availability and costs of telecommunications and information technology) and lack of awareness about technological developments are some of drawbacks which impede the development of e-commerce. toys. Ecommerce is associated with buying and selling of information. It reduces operational cost for businessmen. Business on the net is classified into B2B (business-tobusiness). flowers. Besides these. Security The biggest problem facing all the B2B portals is the absence of secure on-line payment gateways in the country.ELECTRONIC COMMERCE (e . Removal of intermediaries 59 Electronic Commerce (E-commerce) refers to the paperless exchange of business information using Electronic Data Interchange (EDI).

gaining customer trust and flexibility to keep pace with the market conditions. The third issue is the legal process. Orders can be booked electronically. Other key success factors include providing value for money. manage their supply chains well and cut out on inefficiency. The real winners are going to be clicks and bricks companies that are going to adopt latest communication mechanisms.T. Most firms are not making any real gains. The second issue is the revenue divide between the center and the states which has resulted in a multiple and complicated system of taxation. Success of e-commerce The most important factor for the success of ecommerce is delivery. Instead. Existing intermediaries. but the actual delivery of goods is still to be done physically. Roadblocks: The single largest roadblock in our country today is connectivity. It is easy to set up a portal but difficult to deliver the goods. Banking Briefs 60 (For private circulation only) . could capitalise on databases to customise products and services.Bill is a step in the right direction for the growth of Ecommerce. it is may find their role redefined or eliminated. is yet to demonstrate that their business models are profitable.One of the problems in today’s Indian producer/ consumer chain is that it is the intermediaries like distributors or dealers who make most of the money. the world’s biggest e-commerce firm. for example. However. Amazon. from retailers to stockbrokers to banks. that the net would create new categories of intermediaries who. the passing of I. The new economy is actually all about making the old economy more efficient.

installation. It facilitates total resource planning of an organization Baan. and database independence. Ramco and SAP. An ERP installation can take anywhere from 18 months to three years. Excellent training programme. ERP helps plan the 4Ms of the enterprise — man. Peoplesoft. distribution. l l l l l On the other hand. customisation requirements. warehouse management. tuning. Edwards. MRP (Material Requirements Planning) systems resulted from a requirement for control and efficiency in manufacturing systems. webenabling. IBM. electronic commerce (e-commerce). The integration between the different modules so that combination data can be obtained easily. quality control. business process reengineering. Some of the existing ERP system companies are Baan. D&B. Coda. l l Enterprise Resource Planning (ERP) systems have a suite of software modules that address all the data requirements of an enterprise. ERP then expanded to include the back-office systems such as order management. ERP systems have modules that integrate with one another easily. Marcam. report designing. system design. Oracle. An ERP consultant with experience in implementing ERP systems can speed up the implementation. analysis and user documentation.D. They are typically installed to improve business processes or replace aging enterprise systems. and supply chain systems. Ease of customisation and upgrade. financial management. Peoplesoft. ERP was coined in early 1990 as a successor to MRP II. A complex set of tasks — namely. asset management. materials and machines — to their best. The skills required of the team members include: providing functional requirements. marketing automation. The modules have the same user interface and users have an easier time moving from one to another.ENTERPRISE RESOURCE PLANNING (ERP) l l l l ERP is a suite of software. ensuring business control. and upgrades — are involved in converting the existing system to one of ERP. It further expanded to include front-office systems such as sales force. maintenance. User-friendliness. client/server capabilities. SAP are examples of ERP packages The benefits from ERP depend on how it is used. The hardware and software technical skills are provided by the IT department. l l l Banking Briefs (For private circulation only) . selection. J. mapping of requirements to module functionality. and human resources management. money. ERP systems are selected by the following criteria: l Good reporting. Flexibility and scalability to keep up with the growth of the company. which succeeded MRP. A successful ERP implementation needs a result-oriented team with representation from all relevant business areas. Ease of implementation and return on investment. Excellent reference from other installations. 61 Functionality fit with the company’s business processes. Therefore. production. Oracle. Technology. Whenever a change takes place in the business process. ERP had its origins in manufacturing and production planning. Availability of local support. the enterprise systems can adjust to it immediately as the ERP systems are more flexible and changes across the board can be made more easily.

VSATs are a relatively new technology. the capacity of the hub would remain unutilised. How has the VSAT industry performed? The VSAT industry took off very fast after its inception in early 1995. The VSAT operator owns and runs the hub. The National Stock Exchange is the most prominent organisation which uses a VSAT-based communications system in India. VSAT service providers want to be allowed to negotiate with foreign satellites. It is a satellite-based communications system linking a number of locations. What is the role of VSAT service providers? There are companies which run VSAT services just as companies offer cellular services. it would not make sense for a company to invest in a hub unless the number of VSATs exceeded at least 50. Recently they have been allowed to use the Ku Frequency band. for instance. The VSATs themselves are small fixed earth stations. It is also possible for a company to buy and operate its own hub. However. has its own hub. There are currently more than 8.e. Otherwise. the hub monitors the signal between the two VSATs. They were also allowed to use only a part of the frequency spectrum known as extended band.. uplinked again to the satellite and finally down-linked to another VSAT. A VSAT from a particular location sends a signal to a satellite. 62 Banking Briefs (For private circulation only) . uncertain weather conditions do not affect them (i. It is a satellite communication system linking many stations. l l What are VSATs and how do they work? VSATs stand for very small aperture terminals. privately-run VSAT services started from March 1995. There is a larger earth station called a hub which controls the network and finally there is a satellite through which the VSATs link up with each other. A VSAT to VSAT communication typically involves what is known as a double hop. The most common is what is known as a shared hub service in which a large number of users or What is the policy regarding access to satellite from VSATs? VSATs are only allowed to access Indian satellites. Providing communications links to remote areas or areas where line-of-sight connectivity is not available may be difficult using the terrestrial links. The NSE. Connectivity with the public phone network is not allowed. The signal is then downlinked to the central earth station or hub. companies or large organisations with multiple locations would be interested in subscribing to a VSAT service. Large users typically prefer to run private hub services. in that.VSATs l VSAT stands for Very Small Aperture Terminal. How does it work? A VSAT-based system consists of three parts. It is reliable. However. costeffective with point to multi-point connectivity. Satellite communication provides distance-independent wider coverage which is easily expandable. It was first used in the USA in 1984. In India. Usually. However. thus avoiding the double hop. These have acted as a serious constraint in the growth of the industry because of the delay in sending Indian satellites into orbit. There are other types of VSAT technology now available which allow VSATs to link directly with each other without using the hub. The role of the hub is to control and monitor this whole process. cost effective and provides access to remote areas.500 VSATs in use for shared hub services. the satellite transmissions). These are known as private hub services. However growth had slowed in the last two years because of the problems with satellites. subscribers share the same hub which is owned and operated by a VSAT operator. Satellite communications have definite advantage over the terrestrial ones. This is known as uplinking.

high -quality information. This would help. Like mining. This profiling of customers can then be used to market specific products to them.about the company . transforming it. which helps in detecting patterns of combination items. If they are to pursue the kind of initiatives that translate into competitive and strategic advantage. as they are called) about the different characteristics of a given data. Its goal is to find out patterns of customer behaviour. We can identify customers who are willing to go in for risky products or customers who want only the safest investments and so on. easy access to information – business intelligence . and becomes the foundation for decision support and data analysis. data mining attempts to dig into the data. Data Mining Data mining. competitors. It prepares a company to react to unplanned events and helps close the gap Banking Briefs (For private circulation only) . Herein lies the importance of data warehousing. More recent forms include what is called association. business managers need specific . data warehousing seeks to centralize a variety of data. Data marts are streamlined. all of which enhance decision support in the enterprise. The data warehouse is an integrated store of information collected from other systems. for example. not technology. constitutes the discovery of patterns in the data. Similarly we would like the computer to make such generalisations and provide us with some patterns from the details available. react and adapt more quickly to the everchanging environment they operate in. The practise of data warehousing usually involves centralising a variety of data sources or extending the value of a central repository of doing more with the stored data — mining it. Data warehousing allows organisations to run more effectively and to act. The goal of data warehousing is to help users identify trends. find answers to business questions and derive meaning from historical and operational data. It helps in designing new products and cross-selling products. markets and more. The oldest and most traditional form is through statistical analysis. Data marts have evolved due to the huge time and cost investments required for constructing data warehouses. This would enable us to form multiple images (or models. There are different types of data mining. It lets people focus on business.DATA WAREHOUSING AND DATA MINING l l l l l Like food warehouses. thus delivering a competitive advantage. The idea behind data warehousing is to get all the company data working together so that users can see more. This is typically used to establish profiles among the customers to characterise them by their behaviour. Human beings tend to make generalisations based on experience. analysing it or depicting it visually. learn more and make the organisation work better. in the identification of 63 Managers need quick. customers. highly focused. CRM heavily draws on these. smaller scale versions of the enterprise data warehouse. between a company and its customers.

Overall. (If a customer prefers product A. However. This would help all of us understand the environment we live in and exploit that environment to the maximum extent possible to further our business. the computer. Customer Relationship Management (CRM) tools heavily depend on data warehousing and data mining. Banking Briefs 64 (For private circulation only) . can now be used to interpret data and understand some of the hidden patterns. data mining has not yet reached a high level of maturity and only an expert can work with the tool and interpret the results. he is also likely prefer product Q).product affinity. was considered a tool to churn out data and process it. till recently. which. A number of data mining tools are available in the market now.

Further. The message is then put on the mobile phone operators’ WAP gateway. from the Internet and passed on to the Web more or less on the basis on which e-mails work. Another startup. WAP is an attempt to define the universal standard for how content from the Internet is filtered for mobile communications.General Packet Radio Service . different jobs can be done by a single electronic gadget. The required information is obtained Banking Briefs 65 (For private circulation only) . mobility. and made its appearance in India in 2000. How WAP works? WAP content is available on the Internet. WAP is the gateway to a new world of mobile data-web-based interactive information services and applications.Orange. Also. WAP has its limitations mainly in speed and bandwidth. In India Rediff. the Mobile User receives the message on his phone.WIRELESS APPLICATION PROTOCOL (WAP) l l l l WAP stands for Wireless Application Protocol It is a data transmission standard (otherwise called protocol) It helps in accessing Internet through mobile has tied up with Mumbai’s operator . GPRS .com are WAP . What is WAP? WAP was launched globally in 1999. he dials in. the information is converted into WAP language. then convergence. It puts a relatively simple micro-browser into the mobile phone and uses a new interface called Wireless Markup Language (WML) as against the Internet’s Hyper-Text Markup Language (HTML) format thereby turning a mobile phone into a network based smart phone. WAP enables the mobile phone itself to connect to the Internet through the wireless network of the cellular operator. With advanced technology such as GPRS. send text and high-end graphics data as packets at very high speeds. Currently. The essence of today’s technology is first. has addressed most of these issues. WAP is an emerging data transfer standard.enabled. Indiainfo. and Idya. content has to be minimal. G3 graphic transmission and speed are improved. Finally. one has to connect the ordinary mobile phone to a laptop and dial from the latter to access the Internet. At the web server. When a mobile phone user requires some information. the tiny device does not allow a big display screen. WAP’s nextgeneration offers navigational facilities like city road maps for the benefit of customers who have lost their way and intend to find their way back home. Indiangypsy. GPRS. on account of which the Internet is on its way to mobile phones. since the time available to surf when one is on the move is limited.

Hence. The Smart Card Market in India Though India’s population has passed the one billion mark. The real growth came in 1995 with the arrival of mobile phones in the country. Secondly. transportation. Mumbai’s experiment with smart cards for ticketing for its Brihanmumbai Electric Supply and Transport (BEST) buses. Proximity and Vicinity. healthcare and government. which serves as an identification and for claiming other government benefits. Then after appropriate action has been taken. the introduction of smart card-based national ID documents is natural in such an environment. Hybrid (Twin). However. Smart cards were introduced in India way back in 1990 by companies. In India. bogus voting and inaccurate voting rosters during each election. banking and retail. There are several types of smart cards: Memory. where the red card (SIM card) is a smart card. The smart card has built in security keys such as PIN (Personal Identification Number) that authenticates the user. projects by state governments offer growth of smart cards in India. Smart card is an Banking Briefs (For private circulation only) . Presently 50 million smart cards are used in India. the reader updates the information on the card. India faces the problem of identifying and tracking illegal immigrants. Smart cards have an embedded computer circuit that contains either a memory chip or a microprocessor chip. Contact. Smart Card contains an integrated circuit that gives it a limited amount of “intelligence” and memory. Sometimes referred to as a chip card. Due to the lack of proper ID. The smart cards are basically of three types the storage/memory cards. travel documents. about the size of a credit card. a smart card can store more bits of information than a magnetic stripe card. SIM cards of mobile phones are examples of smart cards Increasing use of mobile phones. The Indian citizen has a paper-based document known as the ration card. five basic sectors are using smart cards — telecommunications. Thirdly. How Smart Cards Work The smart card has to be inserted into a smart card reader. intelligent cards and the hybrid cards. it does not have a national identification (ID) document scheme till date. Contact less. It can be used to store personal identification. Combi (Dual Interface). such as universities and electronic access control system (EACS) that are gaining acceptance in this country. the growth of smart cards is limited to the telecom applications market. their entry was too early for the Indian market and they suffered huge losses. and the Gujarat driving license project are probably the most successful ones to be implemented. as this would destroy the microchip inside it. manual entering of access code is eliminated. Smart cards are being used in a variety of ways including identification and to encode information. Till date. Petro Card. intrinsically secure device. employee cards and ATM cards. medical history and insurance information. with an imbedded integrated circuit that stores and processes information. of counterfeit identification. which in turn reads the information stored on the card. which offered telephone cards. Because it has its own micro processing chip. banking and retail. tampering with a smart card is difficult. although it requires a special card-reading device. which includes GSM and the smart card payphone markets.SMART CARDS l l l l l Smart card was first introduced in India in 1990 Unlike Credit /Debit cards smart cards can be used for multiple applications. 66 Smart card is an electronic information carrier system that uses plastic cards. There are other segments.

The government has to play an active role in three areas to overcome the bottlenecks. However. Other cheaper competing technologies. Use efficient systems like smart cards and replace rudimentary and inefficient systems such as ration cards and other major identification documents. and Fasten the process of overall standard approval. l Promote awareness of such technologies among the end users. Indian smart card industry is growing @ 45% per annum. l l l l Banking Briefs 67 (For private circulation only) . Low technology awareness/cultural shifts. The requirement of smart cards as identity cards. The smart card business potential of India is expected to reach US $ 6 billion by the year 2010. India has got around 3 million mobile phone users and it is expected to reach 8 million users by year 2003. dynamic and competitive environment with greater choice when it comes to suppliers. the main barrier to the open platform technology is the cost. the key drivers of smart cards market in India in near future will be: l The major bottlenecks of smart card market in India are: l l l l l Low purchasing power. The technology trend of the Indian smart card market is gradually drifting toward open platforms. but it is actually far less attractive because of its complexity and has become more of a closed environment application as opposed to an open environment. In addition. Presently India has got approximately 50 million smart cards users with around 30% usage in Cell phone SIM cards. which minimises entry barriers and creates open. An open platform supporting multiapplications can be advantageous to a highly populated country such as India. multi-application may appeal to many. The demand for smart cards in Health care & Transportation sectors is expected to reach 350 million by the year 2005. Huge appeal for banking and retail applications. Large potential market size attracts market participants. In Asia. growth in areas such as banking and finance to reach the grass root level. According to Frost & Sullivan report. Delay in approval standards. the combined municipal card and the welfare sector is expected to be 600 million by the year 2005. Presently. smart cards would be a critical tool. India represents a great deal of potential and a very strong market is developing here after China and Japan. l l l Penetration of the Internet and e-commerce in the large and medium-sized cities. Lack of proper national identification scheme.7 million units by 2005. The cards are expected to hit 21. and Poor allied infrastructure such as telecom infrastructure and ATMs and card readers. where technology would play an important role in the overall growth and development of the country. For faster services. and l l Asia Pacific accounts for approximately 30% of worldwide smart card sales. l l Increasing use in mobile phones as SIM cards. For a developing country like India. making it the second-largest market after Europe. smart card evolution is very critical. Increasing pilot projects by state governments. Personal identification cards and applications such as utilities that presently have strong bottlenecks in distribution would have greater positive impacts on the overall systems if an application such as smart card penetrates faster.According to the Frost & Sullivan report. etc. the smart card market in India is poised to see greater maturity in terms of technology upgrade.

The debit card could be a costly affair to have. bearing a Visa or MasterCard logo. They are an immediate. In case of credit cards. Off-line purchases resemble a credit card transaction. In India too. A Deferred Debit Card looks similar to a credit card. Debit cards are becoming popular in India Debit Cards are growing @ 25-30% in USA and accounting for nearly $ 420 billion of transactions which is more than the total expenditure on personal consumption in India. l l l A debit card is basically a better way of carrying cash or a cheque book. Debit cards allow the holder to spend only what is in his account and purchases should be kept track of just as if one is writing a cheque. It is an electronic card that one can use as a convenient payment mechanism. and can be used wherever your card’s brand name is displayed. Type of Debit Cards There are two types of debit cards and two types of debit card transactions: Direct Debit Cards allow only “on-line” transactions. especially when using an ATM that is not affiliated with your bank. Unlike credit card. avoiding the need to withdraw cash from the bank for such petty expenses. Most importantly. debit card transactions does not give grace period. Purchases through debit cards at points of sale (POS) has seen a sharp growth of 135% in the last one year. when you use it. also called point-of-sale. this card allows “off-line” transactions. It is NOT a credit card. Banking Briefs 68 (For private circulation only) . The merchant’s terminal reads your card and creates a debit against your account. there has been a sharp growth in debit card transactions. It frees the customer from carrying cash or a cheque book. opening an account entitles the depositor for a debit card. as well as online. Rather. the transaction is stored for processing later . The card is generally issued by the bank and is connected through the ATM. However.usually within two to three days. Drawbacks of Debit Cards: Unlike a credit card. The system checks your account to see if there is enough money to cover the purchase. the depositor does not have credit facility. The Banks are also issue cards having international validity. This penalty situation never arises in debit cards. It is an immediate electronic transfer of money from your bank account to the merchant’s account. pay-now deal and can be used only when sufficient balance is available in the account. delayed payments are penalized at exhorbitant rates. Normally. Debit cards may be more readily accepted than cheques. debit cards can be used to make smaller value payments. the money is subtracted from your bank account. Regardless of the type of debit card you have. instead of debiting your account immediately.DEBIT CARD l Debit Cards are similar to ATM cards with an additional facility of using them in merchant outlets. If a credit card was used for making cash withdrawals a charge is levied and concomitantly interest is charged on the amount withdrawn from the day of withdrawal. Benefits of Debit Cards Debit cards are now issued free by most of the Banks.

These teams are given rigorous training including mock drills or simulated attacks so that they are ready and prepared when the disaster strikes. fire brigade. the addresses and telephone number of the persons to be intimated. in such emergencies.. to the alternate site. The plan is based on the criticality of the recovery time period which is the number of days beyond which the company cannot survive without the computer facilities. A Risk Analysis and assessment is undertaken which identifies existing risks and the probability that they will actually materialise. the location of escape routes. It would have standing arrangements with the vendors for providing hardware. The Damage Assessment Banking Briefs (For private circulation only) . viz.. When a disaster strikes the need is for rapid action. The first stage. the levels of exposure of the organisation to different types of risk is ascertained.DISASTER RECOVERY PLAN l Disaster Recovery Plan is essentially a pre-determined blue-print for disaster management. police. It describes the three teams that would go into action and will contain all information regarding them. confrontation of the disaster is dealt with by the Emergency Plan. furniture etc. The Back-up Plan provides the procedures for replacing the data and assets damaged in the disaster. For companies using on-line real time processing. Team assesses the nature and extent of the damage. their duties and responsibilities. the persons who would be ready as standbys in case of their absence. Another type of evaluation called Critically of the Assets is also undertaken through which the assets that are likely to be affected are identified and ranked in the order of priority of attention required during disasters. including the managers. (e. stationery. The risks are ranked in the order of their severity and capacity to inflict losses. The format of the plan. airconditioning etc. etc. ambulance. The Emergency Action team would deal with the disaster situation. The main part of the Disaster Recovery Plan would provide for the procedures for recommencing the office activities. Then the Emergency Management Team springs into action and retrieves whatever is left of the assets.DAT.) even a day of systems failure might spell a disaster. Hotel chains. The Recovery Plan restores the office to normalcy to facilitate commencement of business. alongwith instruction. fire fighting equipment etc. backup programs. It would lay down the procedure to reach the material and resources like backup data. In our bank..g. As a basis for the preparation of the plan. bankers. including a list of persons who would be involved in confronting the disaster. It deals with the steps to be taken to restore a system to normalcy when a calamity or disaster takes place. power supply. If the place of work is damaged it would identify an alternate site where the work could be carried out. Then the Back-up Plan deals with the procurement of required materials. The Contingency Plan is prepared for achieving this objective. is available in computerised branches in Bank Master under the Head-Manuals in the file named DRPM. documents. standby equipment. hospitals. It would also provide where to get cash if required. It is a tool of operational risk management. software. 69 l l Disaster Recovery Plan (DRP) covers the three stages of action that follow when a disaster occurs. airlines. the computerised branches are expected to draft a Disaster Recovery Plan and get them approved by C&C Department.

watch transactions of suspicious nature beyond a threshold limit. Know Your Customer (KYC). The four areas identified in the meeting are: l l l To establish processes and procedures to monitor high value transactions and transactions of suspicious nature in accounts To establish systems for conducting due diligence and reporting of such transactions. to monitor high value transactions and transactions of suspicious nature. monitor cash transactions above Rs. the principal means of identifying the customer. and for scrutiny and monitoring of large value transactions. Reserve Bank of India has come out with comprehensive guidelines. l l l The Governors of supervising bodies of G 10 countries. at a meeting held in Basel.through account (and not cash). is the platform on which banking system operates to control financial frauds. The guidelines are also applicable to foreign currency accounts/ transactions. route all remittances above Rs. 1. reiterating and consolidating the extant instructions on KYC norms and cash transactions. OBJECTIVES: l (ii) The Board of Directors of the banks should have in place adequate policies that establish procedures to verify the bonafide identification of individual/corporates opening an account. l Customer Identification Compliance with laws Co-operation with law enforcement agencies Adherence to statement KYC Policy (i) l Besides Money laundering. “Know Your Customer” procedures for existing customers Banks are expected to have adopted due diligence and appropriate KYC norms at the time of opening of accounts in respect of existing 70 To establish procedures to verify the bonafide identification of individuals/ corporates opening an account.50000/. The Board should also have in place policies that establish processes and procedures to monitor transactions of suspicious nature in accounts and have systems of conducting due diligence and reporting of such transactions. identify money laundering and suspicious activities. Banking Briefs (For private circulation only) . financial frauds are committed with frightening regularity using a variety of means and more often banks end up losing heavily in the process. Switzerland evolved a set of principles to effectively curb money laundering so that banks can protect themselves against it.RBI GUIDELINES ON KNOW YOUR CUSTOMER (KYC) NORMS AND CASH TRANSACTIONS l Issued by RBI in August 02 to protect banks against financial frauds and money laundering Objective: To properly identify individuals/Corporates.10 lac. “Know Your Customer” (KYC) procedure should be the key principle for identification of an individual/corporate opening an account. and establish procedure for due diligence and reporting of such transactions Key provisions: Open account with proper introduction/identification. The customer identification should entail verification through an introductory reference from an existing account holder/ a person known to the bank or on the basis of documents provided by the customer.

e. 2.00 lakhs. Internal Control Systems Terrorism Finance Internal Audit / Inspection Identification and Reporting of Suspicious Transactions Adherence to Foreign Contribution Regulation Act (FCRA).10.10. Threshold Limit: At the time of opening the account based on customer ’s profile. 4. a certificate to the effect that the organization is registered with the GOI to adhere to Foreign Contributions Regulation Act (FCRA 1976) has to be obtained at the time of opening of accounts. a threshold limit of transactions is to be determined. Properly followed. The threshold limit should be 25% of the annual income in case of individuals and one months turnover in the case of business enterprise. KYC guidelines would provide sufficient protection to banks against financial frauds and money laundering. under no circumstances.10 lakhs and above as well as transactions of suspicious nature with full details in fortnightly statements to their controlling offices. in case of any omission.20. Besides. which have been reported to the controlling authorities under suspicious transactions list. However. the requisite KYC procedures for customer identification should be got completed at the earliest.000 should affix their PAN on the application forms. 5. Money laundering done through bank would not only affect its image but also the officials who were used as instruments in the process. among other documents. the threshold limit should exceed the limit of Rs. The applicants for these transactions for amount exceeding Rs. 71 Banking Briefs (For private circulation only) . c. controlling offices are also required to appraise their Head offices regarding transactions of suspicious nature. b. we need to ensure adherence to KYC guidelines without inconveniencing the customer and by convincing them that these are well intended in their long-term interests. However. 6.customers in terms of extant instructions. Transactions of suspicious nature and Reporting Branches of banks are required to report all cash transactions of Rs. 3.50.50. Conclusion: The KYC guidelines impose greater responsibility on different functionaries in the bank. Internal Control System: l l l l l l Ensure to train all the staff of KYC norms Strengthening the internal audit system Controllers should periodically monitor the implementation levels of KYC norms. Issuance of travellers cheques. should be retained for atleast 10 years after the date of transaction.00 lakhs and above to the controlling authorities. Repayment of deposits of Rs.000/ and above should be through the accounts or crossed DD/Cheques. d. The guidelines apart from laying emphasis on record keeping. cash credit or overdraft accounts and keep record of details of these large cash transactions in a separate register.10 lakhs and above in deposit.000 and above only by debit to customers’ accounts or against cheques and not against cash. Training of Staff and Management for strict adherence to KYC norms also stipulates Banks to lay down a policy for adherence to the above requirements comprising: 7. As it is proposed to report all the transactions of Rs. In case of foreign organizations. Record Keeping: All financial records. 1976 monitoring of cash The banks are required to keep a close watch of cash withdrawals and deposits for Rs. demand drafts and telegraphic transfers for Rs.Ceiling and transactions l a.

It will. both in banks and at supervisory level. Initially. which offers a new set of standards for establishing minimum capital requirements for banking operations. are capital adequacy. however. trading position in derivatives and derivatives entered into for hedging trading book exposures. The apex bank would consult banks on improving ways of mitigating various risks and lay the road map for putting in place the new norms that will bring Indian banks at par with the best foreign banks. “some banks may be allowed to migrate to internal ratingbased approach (IRB). sequential and co-ordinated manner. be necessary for each bank to take RBI’s approval before exercising its option for moving to advance IRB approach. The second accord was prepared by the Basel Committee on banking supervision. In the second phase. which developed the first standard in 1988. open foreign exchange position. 2005.5 per cent for market risk on the entire securities portfolio. The path. banks would have to make enough capital for market risks on securities included in the available for sale category by March 31. 2007. pace and processes for moving towards Basel-II norms will depend on consultations and feedback received from the banks. After adequate skills were developed. open gold position. the banks would have to set aside capital for market risks on securities included in the trading category. The three pillars of Basel-II. Banks have now been advised to maintain capital charge for market risks as per the standardised duration approach of Basel capital accord in a phased manner over two years. By March 31. RBI will follow a consultative process while implementing Basel-II norms and move in a gradual. banks were required to assign a risk weight of 2.” she said. Banking Briefs 72 (For private circulation only) . a group of central banks and the bank supervisory authorities in the G-10 countries. Initially all banks would have to at least adopt a standardised approach for credit risk and basic indicator approach for operational risk. and 100 per cent on foreign exchange position. supervisory review and market discipline.RBI PANEL FOR BASEL-II NORMS FOR BANKS Reserve Bank will set up a “steering committee” to implement the new stringent international Basel-II norms on capital adequacy by 2006. including government papers. The steering committee which in turn will have a smaller focused sub-groups for each of the three pillars of Basel-II with members representing interests of all stakeholders.

Permissible activities of institutions that are licensed and subject to supervision as a bank must be clearly defined. The licensing authority must have the right to set criteria and reject applications for establishments that do not meet the prescribed standards. information requirements. Russia. should consist of an assessment of the banking organisation’s ownership structure. these requirements must not be 73 l l The need to strengthen financial systems has attracted growing international concern particularly after the emergence of financial crisis in Mexico. In addition to the Principles. information requirements. prudential regulation and requirements. The reason being weaknesses in the banking system of a country can threaten financial stability both within that country and internationally the Basle Committee on Banking Supervision. The Core Principles listed by the committee comprise twenty-five basic principles that need to be in place for a supervisory system to be effective. The Basle Core Principles are intended to serve as a basic framework reference for supervisory and other public authorities in all countries. methods of ongoing banking supervision. has come out with a set of Core Principles for effective banking supervision. prudential regulation and requirements. and its projected financial condition. The licensing process. The banking supervisors must have powers to set prudent and appropriate minimum capital adequacy requirements for all banks. methods of supervision. its operating plan and international controls. the document contains explanations of the various methods supervisors can use to implement them. and cross-border banking. bearing in mind their ability to absorb losses. It is laid down by the Basle Committee on Banking Supervision and applicable to all countries Some broad principles relate to: licensing and structure. the Principles relate to: preconditions for effective banking supervision. formal powers of supervisors. Each such agency Banking Briefs (For private circulation only) . An effective system of banking supervision should have clear responsibilities and objectives for each agency involved in the supervision of banking organizations. It is also necessary that banking supervisors possesses the authority to establish criteria for reviewing major acquisitions or investments by a bank and ensuring that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision. At least for internationally active banks. including its capital base. and must define the components of capital.CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION l l Core Principles of supervision are intended to ensure financial stability of banks It states the essential principles of supervision and also the methods of implementing them. Banking supervisors must have the authority to review and reject any proposals to transfer significant ownership or controlling interests in existing banks to other parties. should possess operational independence and adequate resources. South East Asian countries. directors and senior management. and other parts of the world. licensing and structure. A suitable legal framework for banking supervision is also necessary. Broadly. at a minimum. Such requirements should reflect the risks that the banks undertake. which is working in this field for many years.

the banking supervisors should ensure that banks have put in place proper management information systems.less than those established in the Basle Capital Accord. RBI Act and executive instructions issued by RBI. when there are regulatory violations. An essential part of any supervisory system is the evaluation of a bank’s policies. joint ventures and subsidiaries. the Committee mentions that banking supervisors must practice global consolidated supervision and adequate monitoring and application of prudential norms to all aspect of the business conducted by these banking organisation worldwide. primarily at their foreign branches. With regard to cross-border banking. Banking Briefs 74 (For private circulation only) . practices and procedures related to the granting of loans and making of investments and the ongoing management of the loan and investment portfolios. In extreme circumstances. Banking supervisors should satisfy that banks establish and adhere to adequate policy practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and loan loss reserves. a majority of core principles of Banking Supervision is already covered as legal provisions in the Banking Regulations Act. this should include the ability to revoke the banking licence or recommend its revocation. In India. The Core Principles clearly mention that banking supervisors must have adequate supervisory powers to bring about timely corrective action when banks fail to meet prudential requirements (such as minimum capital adequacy ratio). In order to restrict bank exposures to single borrowers or groups of related borrowers. or where depositors are threatened in any other way.

5% of their deposits as at the end of each year. It was stipulated by the Reserve Bank of India that for Indian Banks which have branches abroad. incorporating both On-Balance Sheet and Off-Balance sheet exposures of a bank into its capital ratio according to the level of perceived risk would encourage the banks to be more risksensitive and to structure their Balance Sheets in a more prudent manner. statutory reserves and other disclosed free reserves. revaluation reserves. statutory reserves. Capital Funds Tier 1 Capital in the case of Indian banks would mean paid-up capital. Capital is divided into two tiers: Tier I and Tier II Tier I: Paid up capital. by 31st March 2005. general provisions. Equity investments in subsidiaries. in any case. Tier 2 Capital This will consist of the following: 1. various groups of banks are at present subject to different minimum capital requirements as prescribed in the Statutes under which they have been set up. will be deducted from Tier 1 capital. disclosed free reserves and capital reserves arising out of sale of assets.25% of risk weighted assets. the Balance Sheet Assets. intangible assets. Tier II: Undisclosed reserves. the norm of 12% should be achieved as early as possible and. 2. Essentially under the proposed system. Capital reserves representing surplus arising out of sale proceeds of assets will also be reckoned for this purpose. non-funded items and other off-Balance Sheet exposures would be assigned weights according to the prescribed risk weights and banks have to maintain unimpaired minimum capital funds equivalent to the prescribed ratio of the aggregate of the risk weighted assets and other exposures on an ongoing basis. such an approach. In the long run. Foreign banks operating in India should have foreign funds deployed in Indian business equivalent to 3. The risk weighted assets ratio approach to capital adequacy measurement is more equitable as it requires those institutions with 3. Banking Briefs 75 . hybrid debt capital instrument and subordinated debt Risk Adjusted Asset: Assets assigned risk weight from 0-100 based on their risk Minimum CAR now is 9% higher risk assets profile to maintain a higher level of capital funds. (For private circulation only) l l l In April 1992 Reserve Bank of India advised banks of the need for adopting capital adequacy measures in accordance with the agreed framework on international convergence of capital measures and capital standards as laid down by the Basle Committee. if any. It was considered prudent to consider revaluation reserves at a discount of 50% when determining their value for inclusion in Tier 2. and losses in the current period and those brought forward from previous periods. General provisions and loss reserves. Undisclosed reserves and cumulative perpetual preference shares. Revaluation reserves. This will be restricted up to a maximum of 1. In India.NORMS FOR CAPITAL ADEQUACY l l l l l Introduced in 1992 Capital Adequacy Ratio is the ratio of Capital to Risk Adjusted Asset Objective: To strengthen the financial stability of banks.

subordinated to the claims of other creditors. In another important measure announced. However. The instrument should be fully paid up. loans granted to Banking Briefs 76 (For private circulation only) . the Reserve Bank of India has stipulated that the risk weight for government guaranteed advances to be the same as for other advances. Reserve Bank of India has announced that banks should assign a risk weight of 5 percent for government/approved securities. So also loans guaranteed by Central/state Governments. Subordinated debt instruments will be limited to 50% of Tier 1 Capital. Forex open position to have 100% weight The Reserve Bank has hiked the risk weight assigned to banks foreign exchange open positions to 100 percent. free of restrictive clauses. Subordinated debt. Reserve bank has also announced a 20 percent risk weight to be assigned to the securities of government undertakings which do not form part of the approved market borrowing programme. Staff loans should be assigned 100% risk weight. investment in Government and other trustee securities as well as claims on other banks such as Certificate of Deposits carry 0 risk weight. 5. balances with RBI. balances with other banks’. money at call and short notice.4. and should not be redeemable at the initiative of the holder or without the consent of the bank’s supervisory authorities. Hybrid debt capital instruments. Risk Weights in India Cash. Central/state Governments public sector undertakings as well as other assets carry 100 % risk weight. Instruments with an initial maturity of less than 5 years or with a remaining maturity of one year should not be included. unsecured.

former Chairman of Indian Overseas Bank. Liquidity and Systems (For foreign banks it is CACS. Earnings performance. Management. banks create economic value by attracting savings to finance investment. for the purpose of examination. With regard to Foreign Banks operating in India the committee considered that some parameters like management. the committee suggested that supervisory examina­tions should be discriminating as between banks.e.S. depend­ing on the known and reported condition of the banks in financial. that needs annual supervision. Asset quality. other. It was recommended that intervals between examinations in respect of banks without known or reported problems be wid­ened. For evaluation and rating of Indian Banks. manage­ment and systems.“CAMELS” RATINGS FOR BANKS l l l Recommended by Padmanabhan Committee. The Padmanabhan committee has suggested that banks be placed in the following two categories. managerial and operational (related mainly to risk management and internal control systems) systems. operational and management and compliance terms: 1) 2) those that need to be examined on an annual cycle and those that may be examined on a wider time scale say within two years from the date of last examination. Padmanabhan. In cases of mismanagement and misallocation of their resources. an additional parameter of “systems” has been added to the CAMEL in India. liquidity are not of much significance and are clearly of lesser concern in regard to branch operations 77 l · l During the normal course of conducting its business. If the risks are controlled properly. Liquidity and Systems (CAMELS — Acronym). Asset Quality. banks fail.A. Banks to be classified into two: One. based on defined parameters of soundness — financial. III effects of bank failures are rapidly transferred through the entire financial system of the economy. Ratings on a scale of A to E In other words. banks assume risks — notably credit and liquidity risks. Management. on a larger time scale. This is on the lines of rating model (CAMEL) em­ployed by the Supervisory Authorities in U. The system of inspection of banks by the RBI was reviewed in 1991 by a Working Group chaired by Shri S. while the weaker banks may be subjected to frequent exami­nations by lessening the intervals between two examinations. Presently banks are subjected to Annual Financial Inspections (AFI) by RBI with main accent on the assessment of the bank’s financial position and senior offi­cials of the RBI’s Department of Supervision (DoS) to look into the non-financial aspects i. earnings. Considering growing supervisory concerns on the need for adequate systems of risk management and operational controls in banks operating in India. Classification based on key parameters: Capital adequacy. Deals with supervision of banks by RBI. Banking Briefs (For private circulation only) . especially with the increase of market risk in bank port­folios. the committee has suggested six key parameters viz Capital Adequacy. Earnings performance.second “C” stands for Compliance with regulatory guidelines).

Composite rating is not determined by calculating an average of the separate components but rather based on an independent judgement of the overall condition of the bank.from the view point of a host country supervision and excluded these factors for the evaluation purpose. the commit­tee. Composite Ratings Once the component ratings are determined. recommended to include “compliance (Regulatory compliance)” factor for inclusion for evaluation. Banking Briefs 78 (For private circulation only) . Component Ratings Each of the six components in CAMELS (for Indian Banks) or four components in CACS (for foreign banks operating in India) are assigned a rating on a scale of 1 to 5 in order of performance. On the other hand. Composite ratings are assigned on a scale of A to E. Composite rating of A indicates that an institution is of least supervisory concern while composite rating of E indicates an institution to be a most supervisory concern. for foreign banks operating in India the factors for examination would be 1) Capital Adequacy 2) Asset Quality 3) Compliance and 4) Systems (CACSAcronym). a COMPOSITE (CAMELS or CACS) rating is assigned as a summary and is used by the supervisors as the prime indicator of bank condition. keeping in mind the serious aberrations that surfaced in the operations of some foreign banks in the recent past. Therefore.

h. Any private sector bank including foreign bank with presence in India. b) c) d) d. Foreign Institutional (For private circulation only) l l Recognizing the need to introduce greater competition which can lead to higher productivity and efficiency in the banking system. e. Large industrial houses will not be allowed to set up a bank. The shares of the bank should be listed on stock exchanges. The minimum net worth should be Rs. they avoid the shortcomings.300. The new bank will not be allowed to have as a director any person who is a director of any other banking company. Aggregate foreign investment in private banks from all sources i. such as unfair preemption and concentration of credit. the Reserve Bank of India has allowed opening of new private sector banks.00 crores. efficient and low cost financial intermediation services to the society: they are financially viable.NORMS FOR NEW PRIVATE BANKS l Preference in license for banks with their headquarters in a place where no other bank has its Head Office. Banking Briefs .e. f. monopolization of economic power. directly or indirectly to a maximum of 10% of the paid up capital of that bank Voting rights of an individual shareholder will be governed by the ceiling of one percent of the total voting rights as stipulated by Section 12(2) of the Banking Regulation (BR) Act. or of companies which among themselves are entitled to exercise voting rights in excess of 20 percent of the total voting rights of all the shareholders of the banking company. b. While granting a licence. not 79 g. A single entity or a group of related entities shall have shareholding control. preference may be given to those banks the headquarters of which are proposed to be located in a center which does not have the headquarters of any other bank. they result in upgradation of technology in the banking sector. 1949.. 100 crore. and freedom of entry in the banking sector is managed carefully and judiciously. exceeding 10% of the paid up capital of that bank. Foreign Direct Investment (FDI). but would be permitted to acquire stake in private sector banks. While permitting new private banks.. e) Some of the guidelines issued by RBI in this regard are : a. as laid down in the Banking Regulation Act. The minimum paid-up capital for such a bank should be Rs. c. which beset the private sector banks prior to nationalization. etc. i. crossholdings with industrial groups. RBI prescribed the following: a) Private Banks sub-serve the underlying goals of financial sector reforms which are to provide competitive. Relaxations in priority sector norms for first 3 years Free to open branches without prior RBI approval. will be allowed to hold shares in any other private sector bank only upto 5%.

Investors (FIIs) and non resident Indians (NRIs) should not exceed 74%. The bank will have to observe priority sector lending targets as applicable to other domestic banks. l vii) Such other conditions as the RBI may prescribe from time to time. However to avoid over-concentration of their branches in metropolitan areas and cities. computer. such a bank may be issued an authorized dealer’s licence to deal in foreign exchange. Such a bank will make full use of modern infrastructural facilities in office equipments. To facilitate this. In order to provide good customer service. telecommunications. vi) The minimum capital raised to Rs. as may be laid down by the RBI. the bank should have a high powered customer grievances cell to handle customer complaints. They are : l v) Such a bank will have to lay down its loan policy within the overall policy guidelines of RBI. in recognition of the fact that new entrants may require some time to lend to all categories of the priority sector. A new bank will not be allowed to set up a subsidiary or mutual fund for at least three years after its establishment. However. etc. ii) iii) iv) Banking Briefs 80 (For private circulation only) . As regards equity holding by these banks in other companies the existing provisions will be applicable.100. From November 2000. Opening of Branches Branch opening in the case of new banks will be governed by the existing policy on branch opening. These banks are free to open branches at various centers including urban/metropolitan centers without prior approval of the RBI provided they satisfy the capital adequacy and prudential accounting norms. The Banks which do not have the revised capital shall bring additional capital within a period of next 3 years.00 crores. Minimum capital adequacy of 10% to be maintained Private Sector Banks to achieve priority sector target of 40% of net bank credit. Promoter’s contribution shall be a minimum of 40% of the paid up capital with lock-in period of 5 years. a new bank will be required to open rural and semi-urban branches also. certain changes have been made in the licensing of new generation private sector banks. when applied for. l l Operations i) Such a bank will also have to comply with such directions of the RBI as are applicable to existing banks in the matter of export credit. some modification in the composition of this sector may be considered by the RBI for an initial period of three years.

it will be customer unfriendly. Because narrow banks’ assets will be of low risk. such as commercial paper). Even if we do not take into account the inherent extreme scope in the idea itself-there can be various other issues which are quite daunting and present a strong case against the model: a. businesses. no bank functions under this model banking to cope with the potential problems of banking is analogous to reducing automobile accidents by limiting automobile speeds to zero. This can be practised by weak banks which cannot manage credit and which cannot absorb a credit risk. Narrow banking was earlier advocated by the Tarapore Committee on Capital Account Convertibility. and (such a bank) should concentrate on investment in Government securities on the asset side. The concept can be promoted to reduce intermediation cost and to avoid the incidence of NPAs. the Bank will accept deposits like any other banks but will invest the funds entirely in government securities or low risk assets Anticipated problems: Fall in yield in government securities and market risk At present. the probability of their insolvency would be substantially reduced. While the concept of narrow banking may seem good for individual banks. such as government securities (or high-grade. the lower the incremental credit-deposit ratio... Adverse effect on the margins due to reliance on the yields on government securities while on the deposit side they will have to compete with the regular banks for the same deposits. cutting the lending function will adversely affect the functioning of banks. c. Banking Briefs 81 .a bank which is weak should taper down its incremental credit-deposit-ratio. d.. privately issued debt.NARROW BANKING l l l Recommended by Tarapore Committee and later by Narasimham Committee Objective: To provide a new business model for weak banks. “. The very idea of narrow banking is extreme in its scope. Narrow Banking does not solve the problem of bad assets or accounts: It merely shifts it to another set of institutions.. and governments. The Narrow bank concept is based on a faulty analysis of the causes of the growth in NPAs in the banking system and the emerging problems of the cost of recapitalisation of these banks.. Vulnerable to market risk due to interest fluctuation of securities. Narrow banks would then invest these deposits in low-risk financial assets. Banks known for accepting deposits and lending will find it difficult if one of its function is stopped. Using narrow b.. As per this. For the financially weaker banks. In a competitive environment when banks are adding new range of products/ services. it has suggested that narrow banking may be tried and if even this is unviable the banks concerned can be shut down. the weaker the bank. (For private circulation only) l l The Narasimham Committee II in its report has revived the idea of narrow banking. Narrow banks’ investments will generally be of short and medium-term maturity to match the maturity of their deposits.” These banks will accept checkable deposits and savings accounts from individuals. Hence. The narrow banking concept eliminates the role of banking itself while trying to reform the financial system. it is not advisable to practice narrow banking.

Partly integrated financial conglomerates: One which offers range 82 iv. and the definition of universal banks is yet to be established clearly/ conclusively. One is Germantype in which the big banks carry comprehensive banking activities including commercial banking as well as other services such as securities related services and insurance. including investment banking and insurance. Bank subsidiary structure: one which focuses essentially on commercial banking and other functions. According to one school of thought there are four different types of universal banks in the world: i. brokerage. Banking Briefs (For private circulation only) . venture capital. subsidiary may be adopted Indian banks already are moving towards universal banking. mortgage banking. At the other extreme. The other is British . Bank holding company structure: One financial holding company owns both banking and non-banking subsidiaries that are legally separate and individually capitalised in so far as financial services other than banking are permitted by law. Perhaps. which in the Anglo-Saxon tradition would be handled by different types of banking institutions. fall in interest income and the wider business opportunities Different models of universal banking such as holding company. in accordance with change of financial environment. At one extreme. which are carried out through legally separate subsidiaries of the Bank. leasing and insurance) are provided through wholly owned or partially owned subsidiaries. universal bank is a name given to banks engaged in diverse kind of banking business. ii.UNIVERSAL BANKING l l l l Recommended by Narasimham and Khan Committees Universal Banking means provision of all financial services by a bank under one umbrella It is diametrically opposite to narrow banking Examples of financial services include: Long-term loans to industries. but some of the range (for example. there are countries with a financial model in which banks play a predominant role in supporting the economic activities. the concept of universal banks is based on two financial models. pursue diversification in securities and investments. of services. In general. iii. this is the reason that there is no consensus among the researchers in the financial world about which countries have universal banking system. Generally. insurance Facilitating factors: Deregulation. underwriting.American -type in which specialised banks. there are a few countries in which capital markets have a greater weight in supporting economic activities. Fully integrated universal bank: One institutional entity offering the complete range of services. corporate advisory services. l l l Introduction Banks decide on their strategy in accordance with their own resources and financial model chosen by the country.

corporate advisory services. insurance. savings. the banks became very vulnerable to interest income i. But with the introduction of deregulation in most of the developed countries in 1980s and the increasing disintermediation in both the domestic as well as international capital markets. The recommendations of Narasimham and Khan Committees encourage evolution of universal banking.e. l l l l l l l Banking Briefs 83 (For private circulation only) . practice of making loans and advances on a longer term : for example financing of fixed investment in industrial enterprises. advisory services and recently insurance market. prudential regulations and investors protection regulations) and resources (such as size. venture capital. Due to this banks started placing more emphasis on new sources of non . Why Universal Banking ? The studies conducted so far reveal that. The combination of these two factors had by and large a positive impact on the performance of banks.e. and (ii) technical and economic barriers to entry like ownership and minimum equity restrictions. consumer finance. This led to the diversification in activities in financial sector undertaken by the existing as well new players. intermediation in domestic and international financial markets through new financial innovations in loan and liability products induced by the customer derivatives.) undertaking all financial services under one cover. stability and liquidity) act as important factors which influence procedure to diversification and improvement of performance. money and capital. the Indian banks are already moving in the direction of Universal Banking (i. brokerage. intermediation income. Some of these players later came to be known as universal banks and their activities included activities like : l In a nutshell the characteristics of universal banks heavily depend on two factors: first : country’s diversification rules and second: the strengths of individual banks in enlarging the scope of activities in the various segments of financial industry. Therefore. holding equity of non-financial firms in the bank’s portfolio. This situation existed on account of two reasons: (i) restrictions in the regulatory framework. At present our banks are engaged in credit.Rise of Universal Banking Earlier clear demarcation lines used to exist between the functions of different institutions within the financial system. diversification guarantees a higher performance and that is consistent regardless of size and nationality Regulations (such as structural regulations. underwriting new debt and equity issues.interest income. including mergers and acquisition advice.

location and plant & machinery.00 lacs irrespective of the location.00 lacs. 20% of the total credit to SSI should go to SSI units with investment in plant & machinery between Rs. 10 lacs of which working capital not to exceed Rs.00 lacs. They include units engaged in mining/quarying. 5 lacs.10. the excess will not be reckoned for 18% target).Advances not exceeding Rs. artisans.25. In respect of ancilliary units also. tiny industries with investment in plant and machinery up to Rs.00 lacs. e) Direct – Lent directly to agriculturists for the purposes of crop production.PRIORITY SECTOR l l l l l l l l l Agriculture-both direct and indirect SSI –(Investment in plant and machinery up to Rs.15 lacs Produce loans for agriculturists up to Rs. allied activities & other investment credit.00 lac in fixed assets.5. b) SSI – Units engaged in manufacture.00 lacs. 10 lacs granted to private retail traders (other than those dealing in essential commodities (fair price shops) and consumer cooperative stores. In respect of (For private circulation only) Priority Sector Advances consist of a) Agriculture (Direct and Indirect) .25. Indirect – Lent to an intermediary agency for onlending or agriculture service providers.100.1 Crore) Retail Trade Advances to Business Enterprises and Professional and self employed RTO s up to 10 vehicles Housing in rural and semi urban areas up to Rs. excluding land and buildings. 100. processing or preservation of goods whose Investment in Plant and Machinery does not exceed Rs. original investment should not exceed Rs. 10 lacs or less. servicing & repairing of machinery. advances to NBFCs for onlending to SRWTOs and portfolio purchases(purchase of HP receivables from NBFCs.00 lacs and remaining 40% goes to other SSI units with investments over Rs. Advances to Business Enterprises established mainly for providing any service other than professional services whose original cost price of the equipment used for the purpose of business does not exceed Rs. irrespective of their size of operations.18% of advances (Lending under Indirect category not to exceed 4. h) i) Banking Briefs 84 . The aggregate of TL & WC should not exceed Rs. Small Road & Water transport operators – SRWTOs owning a fleet of vehicles not exceeding ten including the one proposed to be financed. 2 lac. f) g) Sub-Target : 40% of SSI advances should be granted to cottage industries. KVIC Sector – All advances to KVIC sector. Khadi and village industries. Advances to professionals and self employed.20. 20 lacs with working capital limit of Rs. Retail Trade . If it exceeds.5% of advances.5 lacs Overall target: 40% of net bank credit and sub-target of 10% to weaker sections Priority sector target for foreign banks is 32% d) Small Scale Service & Business Enterprises – Industry related services & business enterprises with investment upto Rs. c) Tiny Industries – SSIs whose investment in plant & machinery is upto Rs. Total borrowing not to exceed Rs.25.00 lacs to Rs.

1. Education Loans – to individuals under GOI’s education loan scheme.80 crore in RIDF will earn interest @ 4% only. 1993. Artisans. coffee. Considering that foreign banks do not have a rural branch network. s) Apart from advances granted for development of sericulture. village & cottage industries. which is managed by NABARD.000/-. loans up to Rs. beneficiaries of SGSY. banks having a shortfall in their lending to the priority sector and/or agriculture as on the last Friday of March every year are required to invest the shortfall in Rural Infrastructure Development fund (RIDF). t) u) k) l) v) Priority Sector Advances by Foreign Banks With effect from July 1. tea.25..000/. excluding loans granted by banks for their employees. j) Housing Loans – upto Rs. rubber and spices) upto 20 acres irrespective of whether they have their own processing facility or not. of which minimum 40% to SC/STs and atleast 2/3 through rural and semi-urban branches.50000/. Under this overall target for priority sector lending. n) Weaker Sections – Small & marginal farmers with land holdings of 5 acres or less. whose individual credit limits do no exceed Rs. land less labourers. desirous of acquiring or construction of new dwelling units and upto Rs.15 lacs irrespective of area for individuals..5. advances granted for drainages under sericulture are now released as agricultural advances under the priority sector.for upgradation or major repairs to the existing units in rural areas under special housing scheme of NHB. Micro Credit to SHGs either directly or through an intermediary agency (NGO). o) p) q) r) Banking Briefs (For private circulation only) .15.for repair of houses to individuals. advances by foreign banks to the SSI sector and export credit should each be not less than 10 percent of net bank credit. SJSRY. As at the end of March 2004 SBI had a shortfall of 5. A minimum of 1% of the total lendings in the previous year should be covered under the scheme. poultry feed etc. the borrowing limits should not exceed Rs. Any shortfall in achieving the sub-target in respect of advances to the SSI Sector would have to be made good by depositing with the (SIDBI).e. tenant farmers and share croppers. SLRS and SHGs.21% in lending to agriculture vis-à-vis the benchmark of 18%. 85 m) DIR advances provided at concessional rate of interest to select low-income groups for productive purposes.professionally qualified medical practitioners setting up of practice in Semiurban & rural areas. Short term advances to cultivators of traditional plantations (i. Advances upto Rs. under agricultural advances. Consequently our investment of Rs 3069.3.00 lacs for working capital. 25 lacs granted for financing distribution of inputs such as cattle feed.00 lacs with a subceiling of Rs. leading to substantial loss of income. it has also been decided to enlarge the definition of priority sector lending by foreign banks so as to include export finance in the target. the target for foreign banks in regard to priority sector advances is 32%. The entire amount of refinance provided by sponsor bank to their RRBs for the purpose of onward lending. Pure consumption Loans granted under the consumption credit scheme Software industry with credit limits upto Rs. Securitised assets relating to SSIs.50. are eligible for inclusion under the priority sector. 5 lacs to farmers against pledge/ hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months where the farmers were given crop loans may be included under the priority sector. DIR. loans upto Rs. Shortfall in Lending to Priority Sector: According to Government guidelines.00 granted to individuals.00 crore Advances upto Rs. the amount equivalent to the shortfall.

Our bank’s loan portfolio is diverse in terms of nature and size of the units financed . SMA. Such a/cs may be identified as SMA subject to special monitoring Like putting them on cash flow watch. reported and corrective actions initiated where necessary. we may consider non-payment of interest for 30 days Banking Briefs 86 (For private circulation only) . Our Annual policy guidelines emphasise the urgent need to prevent . as the threshold time limits for pro-active measures. category. For own monitoring and follow up in lines with the international practice of SMAs.In this connection .it has been decided to designate the following three categories of accounts as SMAs. geographical areas covered and delivery points. loan products is important that the branch concerned monitor SMAs very closely to prevent future shocks in terms of unplanned provision. which throws up warning signals and all borrowal accounts rated SB6/SBTL 6 & above.The goal is to contain gross NPAs to a level of 6% and net NPAs to 2% by March’05. in view of the 90-days IRAC norms. Category-2 Advances not in default. Category-1 As per the 90 days NPA norms.SPECIAL MENTION ACCOUNTS (SMA) (Erstwhile Potential NPA Concept) These are a new category of accounts between Standard and Sub-standard.e. Introduced by RBI on the lines of international practice to monitor and follow up accounts which show warning signals of impairment No provisioning is required for these accounts Has three categories namely. effective response to early warning signals. Would need to be taken within a maximum period of 3 months from the date of first report by the branch. accounts where there is non-payment of interest (on application after 30 days). these accounts would be identified.and increasing competition. Category-3 All borrowal accounts rated SB 6/SBTL 6 and below. RBI have advised the banks to introduce a new asset category between ‘standard’ and ‘sub standard’ i. l l l l The changing environment has exposed banks to a variety of risks. but throwing warning signals in business operation or borrowers credit discipline may be brought under SMA.contain and manage NPAs. The results is an alarming increase in NPAs. in due course consider provisioning on SMAs as part of the IRAC norms . Banks are also under pressure to increase the volumes of their business on account of the thinning spreads . a decision to rehabilitate or call up a problem loan/SMA. As RBI may. Bank has framed a policy for management of NPAs which lays stress on early identification of problem loans. reviewed. Lacunae in the country’s legal system for enforcement of contracts and recovery of loans compound the Bank’s difficulties.

While companies in India are governed by the accounting standards laid down by ASB. the Accounting Standard Board (ASB) was set up in 1977 by the Institute of Chartered Accountants of India to lay down accounting standards. In recent times. Indian companies need not adopt US GAAP for reporting. Why US GAAP As mentioned earlier. access US capital market and enhance transparency in reporting. the following areas: l Provision for NPAs Banking Briefs 87 (For private circulation only) . The Financial Accounting Standards Board (FASB) in US primarily establishes GAAP. companies adopt US GAAP mainly to tap resources from US market where large funds are available. which is an independent agency like the Institute of Chartered Accountants in India (ICAI). standards and procedures for reporting financial information. reporting under US GAAP would impact. What is the position in India In India. there is a growing convergence between Indian Accounting Standard and US GAAP. many companies across the world are adopting US GAAP to tap funds from US market. Since US GAAP has stringent standards. Despite this. conventions.US GAAP – ACCOUNTING STANDARDS l l l l US GAAP stands for Generally Accepted Accounting Practices followed in United States It is accepted as a global accounting standard Adoption of US GAAP is not mandatory in India US GAAP would help our bank in transforming to a global bank. is a set of rules. The ASB has so far formulated 28 accounting standards to be complied with by companies in India. SBI has decided to adopt US GAAP mainly for the following reasons: l What is US GAAP US GAAP-Generally Accepted Accounting Principles in the United States. we need to speak a global language. The ASB has continuously introduced new Accounting Standards (AS) to ensure greater disclosure and transparency in the accounting system. Under US GAAP revaluation of fixed asset to reflect current market value is not permitted l l As regards our Bank. It would help us in tapping funds in US capital markets. Adhering to US GAAP would be a step forward in our endeavour to transform into a worldclass bank. the reporting under US GAAP is optional. Increasingly. mainly. To become a global player. its adoption would help in increased transparency resulting in increased credibility Wider acceptance amongst international investors/analysts as this provides a comparable base for benchmarking l l l Indian Accounting Standards (AS) Vs US GAAP Some instances of varying accounting treatment under Indian and US GAAP are given below: l The disclosure requirements are more under US GAAP The determination of goodwill and its subsequent accounting are substantially different under Indian and US GAAP.

but ignored in case of profits. Under US GAAP: Unrealised loss or gain in the investment portfolio should form part of income statement in some cases. What needs to be done We need to rework our assets and liabilities based on Financial Accounting Standards (FAS) laid down under US GAAP.l l l l l l Consolidation of accounts of subsidiaries Valuation of investments Depreciation Foreign Currency translations (changes) Retirement benefits Leases valuation of the leave encashment liability every year. in the current practice. The balance sheet to be drawn as per the requirement of US GAAP would that be of the consolidated State Bank Group. Excess provision for depreciation is written back while unrealized gains are ignored. A separate team for implementation of US GAAP. Retirement Benefits. Since it is mandatory to report the accounts in Indian standard. To elaborate further. Depreciation Current Practice: Depreciation is provided at rates prescribed by IT rules. This requires a lot of effort in branches and group companies for proper statement of our assets and liabilities. All our subsidiaries. we debit charges account only when the leave encashment is availed. valuation of fixed assets and retirement benefits. investments. Under US GAAP: Bank has to estimate the useful life of each asset and depreciate it in such a manner that the cost of the asset is allocated over the useful life thereof. Foreign Currency Translations Current Practice: Differences due to exchange fluctuations are accounted in case of losses. Pricewater coopers(PwC) is identified as the auditor for the purpose. This will require provisioning based on actuarial Banking Briefs 88 (For private circulation only) . Some of the important items to be reworked are loans. Under US GAAP: Differences in exchange fluctuations are to be accounted as expense/ income in the year it is incurred.Leave encashment Current Practice: Accounted for on cash basis Under US GAAP: The current service cost should be recognised as expense in the current period. associates and RRBs (49 in number) are to be US GAAP compliant and hence their accounting system has to be reworked. Current Practice Vs US GAAP in our Bank Advances : Current Practice: Provisioning is made as per RBI norms Under US GAAP: A stratified approach to provisioning for large loans and other loans should be adopted. though the liability to pay the employee accrues every year. 1962. Investments : Current Practice: Entire investment portfolio is treated as “Current” and all unrealized losses are provided for. Unrealized gains/losses do not form part of income statement. the bank’s financial statements would appear both as per Indian and US standards. US GAAP expects the bank to account for this accrual every year in their profit and loss statement. deferred tax.

CRAR of 9 % prescribed with effect from March 31. enforcement and recovery more effective.5% to 25% and CRR progressively reduced to 5. Deregulation of interest rates – All lending rates except for lending to small borrowers and a part of export finance have been deregulated. initiated since 1992 in the first phase has provided necessary platform to the banking sector to operate on the basis of operational flexibility and functional autonomy. The salient features of these reforms include: l l l Phasing out of statutory pre-emption – The SLR requirement have been brought down from 38.00%. thereby enhancing efficiencazy. 2000. l l l l Banking Briefs 89 (For private circulation only) . Comprehensive amendment in the Act has been made to make the provisions for adjudication. Return on Assets. restructuring and recapitalisation of banks and have increased the competitive element in the market. Transparency in financial statements – Banks have been advised to disclose certain key parameters such as CRAR. NPA percentage. asset classification and provisioning norms has been made applicable. net value of investment. ROA. provisions for NPAs. Interest on all deposits are determined by banks except on savings deposits. percentage of NPAs. profit per employee and interest income as percentage to working funds. transparent. Asset Classification and provisioning norms introduced Debt Recovery Tribunal is set up. introduced transparency in reporting procedures. Debt Recovery Tribunals – 22 DRTs and 5 DRATs have already been set up and 7 more DRTs will be set up during the current financial year.5% to 25% CRR progressively reduced to 5% Interest rate for all advances above Rs. objective. uniform and designed to avoid subjectivity. eased external constraints in their working. Entry of new private sector banks – 9 new private sector banks have been set up with a view to induce greater competition and for improving operational efficiency of the banking system. profit per employee and interest income as percentage of working funds Entry of Private Sector Banks Other prudential norms – Income recognition. Capital adequacy . productivity and profitability. l l l l l The banking sector reforms in India.2 lacs and deposits other than savings bank deregularised Capital Adequacy norm introduced with present ratio at 9% Other prudential norms such as Income Recognition.BANKING SECTOR REFORMS . The provisioning norms are more prudent. The reforms brought out structural changes in the financial sector. Securitisation ordinance promulgated Transparency in financial statements introduced with banks required to report key ratios such as CRAR.A REPORT CARD l l l SLR requirement brought down from 38.

India has made significant progress in payment systems by introducing modern payment media viz. For declaration of dividends a Bank should have a minimum CRAR of 11% for preceding 2 years.l Functional autonomy – The minimum prescribed Government equity was brought to 51%. Promulgation of Securitisation Ordinance : Securitisation Ordinance aimed to enable banks and FIs to recover the NPAs by taking possession of securities without the intervention of the court was enacted in June 2002. e banking. l Banking Briefs (For private circulation only) . Hiving off of regulatory and supervisory control – Board for financial supervision was set up under the RBI in 1994 bifurcating the regulatory and supervisory functions. The need for further refinements in our regulatory and supervisory practices has been recognized and steps are being taken by RBI to move 90 l l towards the goal in a phased manner without destabilising the system. Bank’s Boards have been given more powers in operational matters such as rationalization of branches. The dividend pay out ratio should not exceed 33. should have complied wigth RBI regulations on provision for NPAs. RBI would soon put in place Real Time Gross settlement System (RTGS) to facilitate efficient funds management and mitigating settlement risks. net NPA of less than 3%.33% and should be paid out of current year’s profit. credit delivery and recruitment of staff.. Imaginative corporate planning combined with organisational restructuring is a necessary pre-requisite to achieve desired results. smart/credit cards. The prudential norms. l OTHER MAJOR DEVELOPMENTS l There are 196 RRBs functioning in 26 States (including 3 newly creates states) covering 495 districts with a network of 14311 branches.2855 crores from the market during 1994-2001. Success of the second phase of reforms will depend primarily on the organisational effectiveness of banks. staff retirement benefit and investment fluctuation reserve. debit/credit clearing. Indian banking has made significant progress in recent years. etc. electronic funds transfer. Banks need to address urgently the task of organisational and financial restructuring for achieving greater efficiency. for which the initiatives will have to come from banks themselves. etc. are keeping pace with global standards. accounting and disclosure standards and risk management practices. The financial soundness and enduring supervisory practices as evident in our level of compliance with the Basle Committee’s Core Principles for Effective Banking Supervision have made our banking system resilient to global shocks. Nine nationalised banks raised Rs.

and empower banks and financial institutions to take possession of securities mortgaged / hypothecated to them and sell them without the intervention of the court. 66% of which were contributed by banks alone. Securitisation & Reconstruction of Financial Assets and Enforcement of Security Interest Act – 2002 puts in place a legal system for securitisation . The Act essentially deals with three issues: l Settting up an Asset Reconstruction Company: Asset Reconstruction Company can * * Acquire assets for Securitisation Acquire assets Reconstruction for Asset * * * l Act as an agent for recovery Act as Manager Act as receiver of court/tribunal. the asset goes out of the books of the originator. Unlike international banks. Thus the problem of NPAs is a serious issue for the banking industry. ARCIL has been set up in August 2003. The act deals with securitization of assets. The reduction in Net NPA of banks is achieved more by provisioning than by absolute reductions. an Securitisation Company (SC) or Reconstruction Company (RC) from any originator (the party which offers the asset for sale). On sale. Ever since the introduction of Income Recognition and Asset Classification (IRAC) norms in 1993. consequent to the act. OTS etc. 89000 Crores ( as on Mar 2002) . the Gross NPAs of banks have only grown over time. setting up of an asset reconstruction company and enforcement of securities. The present legal system including the specially created institutions such as BIFR. l l l GENESIS The gross NPAs of all banks and financial institutions aggregated to a whopping Rs. the addition in NPAs every year more than offset the reductions achieved through write offs. The asset may be NPAs SMA(Special Mention Accounts) or standard. In a way.SARFAESI ACT ( 2002) l l The Act was passed in 2002. Indian banks and financial institutions do not enjoy the powers to take possession of securities and sell them. The act empowers the Banks and FIs to take possession of securities and sell them without the intervention of the Courts. Enforcement of securities: This provision entails a secured creditor to take the following actions without the intervention of the court: * * Take possession of the secured asset Take over the management of the secured asset Appoint manager Recover dues from the debtor of the borrower * * Securitisation of assets: Securitisation means acquisition of Financial assets by 91 The Act was enacted based on the recommendation of the Narasimham (For private circulation only) Banking Briefs . Lok Adalats and Debt Recovery Triibunals have not kept pace with changing commercial practices and financial sector reforms and with the result the record of recovery have remained poor.

There is also a provision to set up a central registry by the central government for registration of transactions relating to securitisation. manage problems of liquidity and asset-liability mismatches. The Act. loans against agricultural property (For private circulation only) Banking Briefs . loans not exceeding one lakh. including taking over of management. 1 lac. which is the Appellate authority. The Act also empowers banks and financial institutions to takeover the management of companies in the event of default without the intervention of the court. How does the provision operate The Act is a boon to the banks and FIs who until now were saddled with the problem of poor recovery of NPAs crippling the entire credit system in the country. asset reconstruction and creation of security interest. (This provision is struck down by the Supreme court in the Mardia Chemicals Case). Shortcomings of the Act l The Act enables banks and financial institutions to realize assets by selling or leasing them. The Act is initially applicable to banks and financial institutions though it empowers the central government to extend it to non-banking financial companies and other entities. however. Where not applicable : The Act will not be applicable to security interests in agricultural lands. To contest the enforcement a borrower has to deposit 75% of the amount due with the DRT. In case the amount realized through the sale of assets is insufficient the creditors have the right to approach DRT for the realization of the residual dues. Andhyarjuna Committee recommended a new law granting statutory powers directly to banks and financial institutions for possession and sale of security. the bank is empowered to proceed with the sale or lease of asset. lease or transfer of the assets referred in the notice without the lender’s consent. The DRT has the power to waive the entire or part of the deposit amount. loans with outstanding below Rs. The Act also provides for taking action against cases which are pending before BIFR. within 45 days of the notice. It strengthens the confidence of the creditors and seeks to remove the helplessness that characterized the banks and FIs.R. The bank can issue the notice calling for payment. If the borrower fails to act within 60 days of the notice. l retail loans and loans given to partnership firms. the creditors namely the banks and FIs can issue a notice immediately after the assets are classified as Non-performing loans. covers 92 l l l l Limited Coverage: The act excludes unsecured advances. an asset becomes nonperforming if the interest/instalment remains unpaid for 90 days. The Act also provides for appeal against action of any bank or financial institution to the concerned DRT and second appeal to the appellate DRT (DRAT). and improve recovery without the intervention of the court. to realize its dues without the intervention of the court.Andhyarjuna Committee. While Narasimham Committee suggested setting up of Asset Reconstruction Company to solve the problems of mounting NPAs. the Act besides empowering the banks and FIs to directly enforce their right against the debtor reduces the time required for enforcement of security. and cases where 80% of the loans are repaid by the borrower. At present. The Act opens a new option for recovering the dues instead of just relying on the good intentions of the borrowers. Benefits under the Act. As per the Act. In effect. and in case of failure to initiate action as provided by the ordinance. Once the borrower receives the notice he is prevented from sale.Committee on financial sector reforms (1998) and the T.

570.553 defaulting borrowers during 03-04.35 Cr during 03-04.5% of the share capital. HC and SC in case of grievance and thus can delay and render the Act ineffective. 379. l Structural deficiencies l Absence of specialized agencies to enforce security Absence of Bankruptcy Courts. IDBI ( 24. The Bank recovered an amount of Rs. involving dues of Rs. The Company’s initial capital is Rs. received offers for Rs.3% capital each). Absence of market for Non performing Loans and underlying assets Inter-Creditor issues in case of large loans Absence of adequate credit information on borrowers. thereby reducing NPAs by Rs.14 Cr.l Limited to Enforcement of security interest. Abuse of notice period: Though the Act prohibits transfer of assets when notice is served. 5.5% capital each). 100 Cr. l l l l THE BENEFITS OF THE ACT FOR NPA MANAGEMENT IN SBI l The first Asset Reconstruction Company was set up in Aug 03 with SBI holding 24. l l The Bank sold 76 financial assets worth Rs.21 Cr and recording reversal of Assets Under Collection Account (AUCA) to the tune of Rs. The Company is jointly promoted by SBI. ICICI Bank. HDFC. Federal Bank and IDBI Bank (5. DRAT. 10 Cr which RBI has suggested to increase to Rs. It is limited to the extent of the security interest available and hence does not focus on loan recovery as such. 348 Cr under Onetime-settlement of dues. SIB. since there are no punitive provisions unscrupulous borrowers can still transfer assets and make the position of financiers vulnerable. 130 Cr and 93 l Banking Briefs (For private circulation only) . Dilatory system of appeals: The borrower can go to DRT.114 Cr and seized assets in respect of 381 cases. The Bank issued notices under the Act to 12. HDFC Bank. 191.

CONSUMER PROTECTION ACT. 20 lacs-1 crore in State and above Rs.20 lacs in district. or services so as to protect the consumer against unfair trade practices.00 crore. the State Commission. or the National Commission shall not admit a complaint unless 94 l l The Consumer Protection Act was enacted in 1986 with the object of better protection of the consumers and for the settlement of consumer disputes. 1986 (COPRA) l l l Enacted in 1986 Deals with complaints regarding deficiency in service Act provides three tier quasi judicial redressal machinery: District. Act 1860 or the Companies Act. the right to be heard and to be assured that consumers interests will receive due consideration at appropriate forums. and the right to consumer education. is less than Rs. (ii) Voluntary Organizations (Regd.00 crore. Limitation period for filing of Complaint Section 24A provides that the District Forum. quantity. purity. The District Forum has jurisdiction to entertain complaints where the value of goods/services complained against and the compensation. 1. the right to be assured. paid Banking Briefs (For private circulation only) . Objects of the Consumer Protection Act. standard and price of goods. 1. and the National Commission for claims exceeding Rs. b) c) d) e) f) The Act defines a consumer as : One who buys any goods for consideration. State and National levels for redressal of consumer disputes and grievances. It includes any one who hires any service for a consideration under terms mentioned above and any beneficiary of such service other than the one who actually hires the service for consideration and such services are availed with the approval of such person. State and National Tribunal with limits upto Rs.1 crore in national forum Complaint to be filed in 2 years and appeal in 30 days Penalty upto 3 years imprisonment partly or in full or promised to be paid partly or in full or under any system of deferred payment. the right to be informed about the quality. 20 lakhs. under the Societies Regn. the State Commission for claims exceeding Rs. if any claimed. Complaints can be filed by (i) Consumer(s). 1986 The basic rights of consumers that are sought to be promoted and protected are:a) the right to be protected against marketing of goods and services which are hazardous to life and property. the right to seek redressal against unfair trade practices or restrictive trade practices of unscrupulous exploitation of consumers. potency. where possible. 1956 or under any other law for the time being in force (iii) Central or State Government or Union Territory Administrations and (iv) Petty traders Redressal Machinery under the Act The Act provides for a three-tier quasi-judicial redressal machinery at the District. of access to variety of goods and services at competitive prices. 20 lakhs but not exceeding Rs.

replacing defective goods with new goods. 10. to provide for adequate costs to parties. providing costs to parties and issuing prohibitory orders directing the discontinuance of unfair trade practice. Additional Remedy The provisions of the Consumer Protection Act are in addition to and not in derogation of any other law for the time being in force. to return to the complainant the price. to pay such amount as may be awarded by it as compensation to the consumer for any loss or injury suffered by the consumer due to the negligence of the opposite party. payment of compensation for loss or damage suffered.000 or with both. Procedure for filing an appeal under the Act Appeal can be filed within 30 days against the decision of a l District Forum Commission. where the goods complained against suffer from any of the defects specified in the complaint or any of the allegations contained in the complaint about the services are proved. to discontinue the unfair trade practice or the restrictive trade practice or not to repeat them. the redressal agencies have not been granted power to order injunctions. to withdraw the hazardous goods from being offered for sale. is filed within two years from the date on which the cause of action has arisen. However. where the complainant satisfies the Forum/ Commission as the case may be. State Commission or the National Commission shall be punishable with imprisonment for a term which shall not be less than one month but which may extend to three years. or. Nature and scope of remedies under the Act Under Section 14(1) of the Act. a) to remove the defects pointed out by the appropriate laboratory from the goods in question. d) e) f) g) h) The remedies that can be granted by the redressal agencies are therefore wide enough Banking Briefs 95 (For private circulation only) . refunding price/charges paid by the complainant. as the case may be. or with fine of not less than Rs. to replace the goods with new goods of similar description which shall be free from any defect. to remove the defects or deficiencies in the services in question. that he had sufficient cause for not filing the complaint within two years such complaint may be entertained by it after recording the reasons for condoning the delay. Penalties Failure or omission by a trader or other person against whom a complaint is made or the complainant to comply with any order of the District Forum. 2. It has not taken away the jurisdiction of the Civil Courts. sale of hazardous goods etc. the District Forum/State Commission/National Commission may pass one or more of the following orders.000 but which may extend to Rs. before the State l State commission before the National Commission and National Commission before the Supreme Court l b) c) The appellate authority may entertain an appeal after the laid down period of 30 days if it is satisfied that there was sufficient cause for not filing it within the stipulated period. to cover removal of defects/deficiency in goods/ services. the charges paid by the complainant.

i) ii) non payment/inordinate delay in the payment or collection of cheques. His authority also includes matters referring to all complaints concerning. Powers of the Banking Ombudsman He has the powers to receive complaints relating to the provision of banking services and to consider such complaints and facilitate their satisfaction or settlement by agreements by making a recommendation or award in accordance with this scheme. the ombudsman calls for a meeting with both the parties and endeavours to promote a settlement 96 Banking Briefs (For private circulation only) . non acceptance.BANKING OMBUDSMAN SCHEME l l l Scheme effective from June 95 and recently amended in 2002 Covers scheduled commercial banks. without sufficient cause. Finally. non observance of RBI instructions regarding time schedule for disposal of loan applications. 1995 and amended recently in 2002 provides an opportunity to the public to approach Banking Ombudsman for grievances against a bank which are not resolved within a period of two months provided their complaints pertain to any of the matters specified in the scheme. a banking ombudsman may require the bank named in the complaint to provide information or furnish copies of any document relating to the complaint. iv) v) vi) Procedure for Redressal The complaint has to be in writing duly signed by the complainant or his authorised representative containing name and address of the complainant and name and address of the bank against which the complaint is made. failure to honour LC/guarantee commitments. RRBs and co-operative banks Deals with: Delayed collection of cheques. interest rate disputes. non-issue of drafts. it should also mention about the relief sought from the ombudsman. Upon scrutinizing the relevant particulars. It should also contain facts giving rise to the complaint supported by documents where necessary. of small denomination notes tendered for any purpose. Regional Rural Banks and all scheduled primary cooperative banks having a place of business in India whether incorporated in India or outside India. which came into effect from June 14. delay in disposal of loan application It promotes settlement through conciliation iii) non issue of drafts to customers and others and non adherence to prescribed working hours. l The scheme. complaints pertaining to operations in SB/ CA/NRI accounts and interest rates. The scheme is not a substitution for Consumer Protection Act but an additional grievance settlement mechanism available to the banks’ consumers. Action by the Ombudsman For the purpose of carrying out his duties under this scheme. failure to honour guarantee/letter of credit commitments by banks. The scheme covers all scheduled commercial banks.

A copy of this recommendation will also be forwarded to the bank. Otherwise it should inform the ombudsman within two weeks. the bank has to comply with it and intimate the banking ombudsman. The bank will have 2 weeks time to accept the recommendations. An award is not binding on the bank against which it is passed unless the complainant furnished to it within a period of one month from the date of the award. If that is not achieved within a period of one month from the date of the complaint. The ombudsman can award compensation for an amount upto Rs. 10 lacs. he makes a recommendation to the complainant and the bank concerned. the ombudsman will pass an award after affording both the complainant and the bank reasonable opportunity to present their case.through conciliation or mediation. Banks can seek review of the Award before Deputy Governor of RBI. Banking Briefs 97 (For private circulation only) . a letter of acceptance of the award in full and final settlement. Within 15 days of the receipt of the acceptance of the award by the complainant. The recommendations of the ombudsman will be open for acceptance by the complainant only if he accepts all terms in full and final settlement of his claim within 2 weeks from the date of receipt of the recommendations. If the complaint is not settled by agreement or recommendation within a period of two months from the date of receipt of complaint.

large enough to dwarf the G. the money will appear to have been acquired utterly lawfully. the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to reappear as legitimate income. accountants. And finally. Common Factors There are four factors common to all money laundering operations. To begin with. Some Methods As already stated. ‘Smurfing’ is one way of minimising the risk of getting caught and this occurs when the sum to be laundered is broken up into smaller amounts and introduced into the legitimate system in this way. investment by offshore companies and trusts. To do this.P. at the simplest level by placing the illicit funds to purchase goods and Banking Briefs (For private circulation only) . The object of this stage is to prevent the tracing of illegal proceeds by disrupting any paper trail that may have been started at the placement stage.D. the trail left by the process is obscured so as to make it difficult to follow the money from beginning to end. constant control is maintained over the money.MONEY LAUNDERING l As the term implies. At the end of this stage. The last stage of making. Thirdly. It is done.Some of the basic kinds of suspicious 98 l l l Money laundering can be described as the process of transforming illegitimate money into legitimate money. It is the means by which the criminal enjoys the proceeds of his crimes. The next is the layering or agitation stage. the integration process achieves the appearance of total legitimacy for the funds. of many nations and destroy their economies. The British Banker ’s Association has made an attempt to list out the most basic ways by which money may be laundered. The launderers change the form of the proceeds in order to shrink the huge volume of cash generated by the initial unlawful activity. or dirty money is put through a cycle of transactions. there is no one method of laundering money. thereby ensuring safety from enquiry as to their true source. It is stated that the amount laundered through western financial markets is estimated to be anywhere between US $750 Action to a trillion dollars. or clean. opening of benami accounts are some examples Money Laundering Act 2002 seeks to contain the menace services for the criminal. so that it comes out at the other end as legal. The placement stage is the first introduction of dirty money into the legitimate world. financial advisors and bankers. money. Three Stages of the Process The money laundering process can be divided into three stages. The facilitators of money laundering are often lawyers. or washed. Next. Money laundering is a process of converting (or cleaning) dirty/ illegal money into clean/legal money This is done by using various channels to hide the source of income Under/Over invoicing. Some methods used are under and overinvoicing and investments by offshore companies and trusts in the international markets. the dirty money clean is generally referred to as integration and this occurs when placement and layering have been successfully achieved. Money laundering is called what it is because that perfectly describes what takes place-illegal. the true ownership and the real source of the money is concealed. More sophisticated placement involves using the banking and financial system but this will involve disguise of true depositor. large transactions in cash. In other words. the form it takes is changed.

It is also stated in the Act that the abovesaid records shall be maintained for a period of five years from the date of cessation of the transactions between the clients and the banking company. Frequent exchange of cash into other currencies. Whoever acquires. Five lakh. or from an account which has just received an unexpected large credit from abroad. Customers who deposit cash by means of numerous credit slips so that the total of each deposit is unremarkable but the total of all the credits is significant. Any apparently unnecessary use of an intermediary in the transaction. and where such series of transactions take place within a month.. Offence of money-laundering has been defined in an exhaustive manner in the Act. Use of letters of credit and other methods of trade finance to move money between countries where such trade is not consistent with the usual business of the customer. Customers who appear to have accounts with several banks within the same locality. possesses or transfers any proceeds of crime. or conceals or aids in the concealment of the proceeds of crime will be treated as committing the offence of moneylaundering. The Act has made it obligatory for Banking Companies. the nature and value of which may be prescribed. Frequent paying in of travellers cheques or foreign currency drafts particularly if originating from overseas. confiscation of proceeds of crime. disclosure of such transactions by financial institutions. In certain cases even higher rigorous punishment has been proposed. Customers transferring large sums of money to or from overseas locations with instructions for payment in cash. setting up agencies and mechanisms for co-ordinating measures necessary for controlling money laundering and the like. Banks should make reasonable efforts to determine the customer’s true identity and have effective procedure for verifying the bonafides of new customers. or knowingly enters into any transaction which is related to proceeds of crime either directly or indirectly. more particularly those dealing with foreign exchange. Large cash withdrawals from previously dormant or inactive account. Financial Institutions and Intermediaries to maintain a record of all transactions. whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other. Initiative The prevention of Money Laundering Act 2002 has the following provisions : The Act aims at prevention and punishment of offences relating to money laundering and connected activities. These institutions are required to furnish information of transactions referred above to an agency within such time as may be prescribed. Customers who seek to exchange large quantities of low denomination notes for those of higher denomination. l l l l l l l l l l How Banks can Prevent it In order to arrest money laundering. It will be obligatory on the part of Banks/FIs/Intermediaries to verify and maintain the records of the identity of all its clients. owns. Large number of individuals making payments into the same account without an adequate explanation.transactions are:l Govt. Banking Briefs 99 (For private circulation only) . where banks are mostly used in the process. it is imperative that banks should know its customers. Building up of large balances not consistent with the known turnover of the business of the customer. Strict punishment for offence of money-laundering has been proposed viz. rigorous imprisonment for a period of not less than 3 years and not more than 7 years and fine up to Rs. and subsequent transfer to accounts held overseas.

Sale and Lease Back Arrangement : Under this. l l l l In a hirepurchase contract the owner undertakes to hire the goods to the customer for a fixed term and to transfer the property to the latter when all instalments of hire have been duly paid. Hirepurchase is a conditional sale.HIRE PURCHASE AND LEASING l Hire Purchase is a conditional sale. relate to the ownership and accounting treatment. the equipment to which it already has title and which has a reasonable remaining useful life. while lease assets would appear in the books of the lessor as assets. the ownership in the case Hire Purchase goes to the person making use of the equipment only at the end of the contract period and when the last instalment is paid by him. the amounts receivable on items sold on hire-purchase are treated as stocks on hire (i. The lessor then leases the equipment back to the user. The legal ownership continues to vest with the leasing company (lessor). tax efficient. leasing is a method of financing the acquisition of capital equipment where the user (lessee) of the equipment selects the equipment and is allowed to use the equipment during the period of lease by paying a pre-determined lease rental. on payment of last instalment. That is. (For private circulation only) l l l Types of leasing : l l l Saving of Capital : Leasing covers the full 100 Banking Briefs . Operational lease : The lessee uses the asset for as little as for six months or as long as he requires but pays much higher rentals since he has the right to terminate the lease just by giving a month’s notice. the ownership always remains with the lessor The equipment is shown as Fixed Asset in the books of lessor in the case of lease. shown as F. in full. And in the books of the purchaser. Tax efficient : Lease rentals are generally fully tax deductible as operating expenses. the lessee pays the full value of the asset together with the interest charged within a period of 5 to 7 years. current assets) in the books of the hire-purchase company. Similarly. Advantage of leasing : l Payment terms of rentals : The lease rentals can be worked out as per cash flow requirements of the lessee.e. who then becomes the lessee. a business retains use of equipment while disposing of ownership. Again. the ownership of the equipment always remains with the leasing company (the lessor). The ownership in the goods continues to vest with the owner till agreed price is paid. Thus. equipment user sells to a leasing company. in this arrangement. payment of rentals as per cash flow cost of equipment.A in the books of buyer in the case of Hire purchase Advantages of Lease: Savings on capital. Financial lease : In this lease. Off balance sheet direct accounting : A lease contract is outside the assets and liabilities structure of the lessee company. Main difference between Hire Purchase and Leasing. More liquid : Leasing helps lessee having liquidity problems as he can sell the equipment after revaluing it and obtain the same on lease. While in the case of a lease. they are treated as ‘Fixed assets’ and are therefore eligible for depreciation. Thus. the ownership of the equipment will be transferred to the buyer In leasing. off balance sheet accounting.

4. Operate and Transfer: (Eg: Madhya Pradesh Tools Ltd. escrow. In the event of (For private circulation only) Banking Briefs 101 . BOLT. (MPTL)’s iii) iv) v) Structured Financing Option Structured Financing Option (SFO) generally assumes two forms: (a) Non-recourse financing and (b) limited recourse financing. funding of India’s first private sector road project).000 . the provision of infrastructure services in India is largely in the Government sector. cash flow. purchased by private parties. So far. BOOT.: i) BOT-Build. Rakesh Mohan).Build.4. · l l l Need for efficient infrastructure services is increasingly recognised as a sine qua non of high and sustainable economic growth. ii) BOLT . development and financing of infrastructure was opened up to private/foreign participation. (ii) Structured Financing Option.Build. As budgetary resources to support capacity additions have become scarce.800 crore elevated light rail transit system (ELRTS) in Bangalore is to be run on a BOOT basis). Operate and Sell: (Better from the view point of risk reduction as well as equitable distribution of risks). Operate and Transfer: (Eg: The proposed Rs.500 billion. BOOS Structure option: non-recourse. Operate.Build. BOO. Own. subordinated debt and take out finance. in its report submitted in June 1996. the debt instrument is secured by the cash-flows generated by the project or the collateral value of the specified assets financed by the instrument.Build. limited. Budgetary allocation has been the principal source of financing capacity additions in infrastructure. BOOT .INFRASTRUCTURE FINANCING l l l Infrastructure financing implies lending to sectors such as power and transportation India needs more than 800000 Crores of investment in this area Rakesh Mohan Committee recommended measures for commercialization of infrastructure projects Two options to finance infrastructure: Concession and Structure option Concession option: BOT.4. viz. is leased to the Railway on fixed rental). i) Non-recourse financing: Under this option. the concessionaire builds the project which is thereafter granted a franchise period during which the costs and returns can be recovered. currently in operation in the Indian Railways. Lease and Transfer: (Eg: The “Own Your Wagon” scheme. Own. There are various modes of financing under this option. BOOS . recourse. The new approaches to finance infrastructure projects can be broadly classified as (i) Concession Approach and. The Concession Approach In the concession approach. BOO . The Expert Group on the Commercialisation of infrastructure Projects (Chairman: Dr. (for more details please see under “committees”) has argued that the total fund requirement of the infrastructure sector over the next five years is expected to be of the order of Rs. Own and Operate: (Eg: Paradip Port Trust’s planned construction of floating dry-dock at Paradip in Orissa). is a variant of BOLT under which a set of wagons.

Infrastructure. in addition to project assets.5%. Under the arrangements banks financing the infrastructure projects will have an arrangement with IDFC or any other financial institution for transfering to the latter the outstandings in their books on a pre-determined basis. ii) Limited Recourse Financing: Under this variant. the outstanding bank finance for infrastructure (power.default on the structured instrument. This is done by having some identified revenues being passed through a separate account called the escrow account to which the lenders also have a right to appropriate the funds in case the SEB defaults in making payments. and Bank Participation Another way out could be the government issuing long-dated bonds at subsidised rates to fund infrastructure.64. Though these loans will be more expensive than secured debt. provided it also takes a funding share in the project. Banking Briefs 102 (For private circulation only) . Take-out Financing Take-out financing structure is essentially a mechanism designed to enable banks to avoid asset liability maturity mismatches that may arise out of extending long term loans to infrastructure projects. Under the revised norms. the debt holders’ recourse would be limited to the underlying assets only and would not extend to general reserves and assets of the company. the lenders estimate the cash flows of a project over its lifetime to see what kind of debt burdens it can support and at what rates. This gives added comfort to the lender and allows the IPP to raise financial assistance. Cash Flow Financing In cash-flow financing. the amount allowed for guarantee by the bank should not exceed twice the funding share assumed by it. This helps both the lender and the project promoter. Further. it ensures that out of the revenues of the SEB. the debt obligations of the financing institutions will be paid first. the parent company attaches other assets/ revenue-streams for servicing the instrument to improve its credit-worthiness. Subordinated debt financing Institutions have also talked about funding infrastructure projects through a quasi-equity instrument called subordinated debt which may have flexible maturity and payment terms. 19655 Cr out of Rs. Banks have been permitted to issue guarantees to loans provided by other banks and lending institutions to infrastructure projects subject to certain conditions. Escrow mechanism The escrow mechanism has been developed for independent power projects (IPP) which are built by private parties out of private funds and electricity supplied to state electricity boards (SEB). financing rate and the way of repayments can be tailored to fit the cash flows of the project. The government may consider classifying these securities as approved securities for the statutory liquidity ratio (SLR) purposes. Roads and Ports) were Rs. require innovative financial solutions to tackle them. Thus lenders have limited recourse to the assets of a company sponsoring the project. Govt. Panvel (Mumbai) By-Pass is the first example of SFO in India. Then.383 Crores of outstanding bank credit representing 2. they will at least ensure that a project starts up. Essentially. being long gestation projects with considerable risks. Status of infrastructure financing As at Mar 19th. the amount of debt. telecommunication. a bank would be permitted to issue the guarantee in favour of loans extended by other banks or financial institutions. 7. 2004.

Advantages of syndicated loans Abroad. management fees. Syndicated loans are arranged by a syndicator who brings together the lenders. Banking Briefs 103 . we refer to these facilities to two specific ways of lending. the lender who takes the maximum share in the consortium finance acts as the Lead Manager. Syndicated loans also provide the lenders scope for innovations and flexibilities in loan structuring to suit borrowers’ needs. the lenders are responsible only upto their share of lending i. In the syndicated loans. It is a convenient mode of raising long term funds. The mechanism relieves the borrower from running around to all banks for the loan.e.. They further provide scope for fee based income to banks in their roles as arrangers/agents. On the basis of the memorandum and on their own independent economic and financial evaluation the lending banks take a view on the proposal. These banks undertake common appraisal and common documentation. This is attributable more to the user-friendliness of consortium finance. it is seen that the terms. Traditionally. cost of credit etc. The arranger. Credit syndication while popular in large foreign currency term loans has not made much headway in other areas. Credit Policy for the first half of 1997-98 gave a push to launching the syndicated finance in India. does it for a fee. whereafter the agent takes over. They normally carry a common interest rate being charged by all the lenders. on the other hand are arranged by a syndicator who is the interface for the borrower till documentation. consortium advances are given by the coming together of several banks to lend larger advances. will take care of that duty at a fee. The ‘arranger ’. the role for arranger ends. The loan agreement is signed by all participating banks. The mandate spells out the terms of the loan and the mandated bank’s rights and responsibilities. though in India. (For private circulation only) l l l A syndicated credit is an agreement between two or more lending institutions to provide a borrower a credit facility using common loan documentation. though option to charge floating rate of interest is retained. are used interchangeably. The arranger prepares an information memorandum and circulates it among prospective lender banks soliciting their participation in the loan. It is used more in arranging foreign currency term loans. as well as control and finalises deal timing. The arranger convenes a meeting to discuss the syndication strategy relating to coordination. Hence it is hassle-free and less expensive for the borrowers. borrowers need not run around negotiating with all the lending banks.CREDIT SYNDICATION l Credit Syndication means arrangement of loans from different banks for a borrower by an intermediary called arranger. Normally. from the arranging to the documentation stage and the agent thereafter. consortium finance and syndicated credit facility. who is generally a banker. At this point of time. Syndicated loans. and the role of the ‘agent’ commences. The agent performs his duty as expressed in the syndication agreement which is basically on the lines of a trustee between the lending banks and the borrower. basis of lending is ‘several’. In syndication. The Process The process of Syndicated Credit facility goes as under : The borrower mandates a banker as lead manager (or arranger) of his choice to arrange a loan for him.

Advantageous to SSI and medium scale units . the unique selling proposition of a factor lies in its strength in handling and collecting receivables — in a more efficient. collection of debt and risk assumption. on whose behalf this service is undertaken. The Factor sends copy of invoice and notice of assignment to buyer (customer) and makes a prepayment of say. the Company. l The term ‘factor’ has its origin in the Latin word ‘Facere’ meaning ‘to make or do’. A factoring transaction takes place along the following lines: Upon a sale taking place. Factoring includes other functions such as account . Beneficial to client operating in buyer’s market. but unlike a bank. to get things done. A factor is thus another financial intermediary between the seller and the buyer. In effect. Under factoring. gets cash payment immediately from a third party called ‘ factor’. 2) 3) Banking Briefs 104 (For private circulation only) . i. whereby the factor purchases the client’s book debts (accounts receivables) with or without recourse to the client — thereby controlling the credit extended to the customer and also undertaking to administer the sales ledgers relevant to the transaction”. the seller (client) forwards invoices on buyer (customer) to factor. margin on book debts is high. Factoring business is characterised by low margin and high risk. 75 to 80 percent of invoice value to the seller and the balance is retained as margin. On the due date. (2) Maintenance of Accounts. Factoring has also been defined “as a continuous relationship between a financial institution (the factor) and a business concern selling goods and/or providing service (the client) to a trade customer (customer) on an open account basis. The need for factoring arose on account of the inordinate delays faced by suppliers for realising their bills from their customers. While with recourse factoring is like our usual bill discounting facility where the money is recovered on the return of the bill..FACTORING l l Factoring involves purchase of receivables of the company for payment of cash.e. effective and purposive manner. which sells its goods on credit. the buyer (customer) makes payment to the factor who settles the account and releases the margin retained by him — after recovery of all other charges/out of pocket expenses. The International Institute for the Unification of Private Law in 1988 defined “Factoring means an arrangement between a Factor and his Client which includes at least two of the following services to be provided by the Factor: (1) Finance. Benefits 1) Normally. Factoring refers to management of receivables of a company by a financial intermediary (factor) for a fee.delayed payments by large scale industries can be got over and cash flow will improve. Factoring could be with or without recourse to the supplier.maintenance. (3) Collection of Debts and (4) Protection against Credit Risks”. such margins could get reduced and availability of funds will increase. in without recourse factoring the factor takes the risk of non-payment of bills.

purchase bill factoring and factoring of usance bills under LC.4) 5) Clients can concentrate on production and selling activities. The Factoring Services however has not been picking up in India. SBI Factors and Commercial Services Ltd which was incorporated in February.25 crores.8.64 crores and a profit ( before tax and provisions) at Rs. It introduced new product variants like without recourse factoring. SBI has a subsidiary viz. 1991.. Time and cost of collection of debts are reduced. It is jointly promoted by SBI. Banking Briefs 105 (For private circulation only) . It declared a dividend of 5% after a gap of 4 years. SBI factors had a business turnover of Rs. State Bank of Indore. For the year ended March 2004. SIDBI and Union Bank of India. State Bank of Saurashtra.731.

5. 9. In a forfaiting transaction. similar to factoring. at a discount. Indian exporter initiates negotiation with the foreign importer. if any. It helps in upfront realization of credit sale. Exporter finalises the contract with the foreign buyer. (For private circulation only) l l The term forfaiting has been drawn from French language and means “give up our right”. Exporter approaches Exim Bank to obtain indicative quote from a forfaiting agency. Exim Bank obtains the firm quote and conveys the terms and conditions of the forfaiting agency and asks for exporter’s acceptance. As a result. 7. without recourse. The Discount fee. an exporter in India can convert a credit sale into a cash sale. Forfaiting was introduced in India by EXIM Bank in 1994. reluctance on the part of the banks to promote forfaiting (as it obviates the need for postshipment credit) are some of the reasons why this method of realisation of export proceeds has not picked up in India. Despite the obvious advantages forfaiting has not caught up in India. Exim Bank is informed of the final contract and the exporter requests the Exim Bank to obtain a firm quote from the forfaiting agency. perhaps. The operating mechanism for an Indian Exporter in a forfaiting transaction. on a fixed rate basis (discount) upto 100 per cent of the contract value. documentation fee. 12. Commitment fee should also be passed on to the overseas buyer to the extent possible. and any other costs levied by a forfaiter must be passed on to the overseas buyer. 6. Contract is finalised with the forfaiting agency. in forfaiting. the forfaiting agency presents the instruments to the aval (Importer’s Bank) for payment. 1. in return for immediate cash payment from a forfaiter. Lack of awareness. Banking Briefs 106 . and communicates these to the exporter. his rights to claim for payment on goods delivered to an importer. Simply put. the forfaiting agency has no recourse to the seller in case of payment default by the buyer. Bills of Exchange or Promissory Notes backed by co-acceptance (or ‘avalisation) from the buyer’s bank are endorsed by the exporter. is as follows. Exim Bank obtains indicative quotes of discount. 2. It has not caught up much in India. Exporter ships the goods/sends the bills of exchange. On maturity of the Bill of Exchange/ Promissory Note. Exporter endorses the avalised bills/ Promissory Notes in favour of the forfaiting agency without recourse to him. 11. with no recourse to him or to his banker. It is a mechanism of financing of exports by discounting export receivables evidenced by bills of exchange or promissory note. the exporter surrenders. unwillingness on the part of exporters to pay for risk. The forfaiting agency effects the payment of the discounted value. 8. Unlike factoring. 10. 4. 3.FORFAITING l l Forfaiting. without recourse to him. It helps the exporters to concentrate on the export front without bothering about collection of export bills. In a forfaiting transaction. forfaiting is the non-recourse discounting of export receivables. without recourse to the seller (exporter). involves discounting of export receivables. in favour of the forfaiting agency in exchange for discounted cash proceeds. commitment fees and documentation fees. The overseas buyer accepts the bills of exchange and sends it to exporter.

Thus. This instrument was introduced in India in 1990 so as to enable the highly rated corporate borrowers of commercial banks to diversify their sources of short-term borrowings. The prescription for minimum credit rating is P-2 in the case of CRISIL or such equivalent rating by other agencies. The borrowal account of the company is classified as a ‘Standard Asset’ by the financing banks/institutions. Commercial paper issued by corporates was initially marketed as a privately placed instrument. (TNW is the aggregate of Capital & Free Reserves less intangible assets.5 lakh or in multiples. the amount invested by a single investor should not be less than Rs. these agencies include CRISIL. CARE and the FITCH Ratings India Pvt. these ratings should be the current ones and not due for review. The maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid. The difference is substantial and many of the large corporates with a good credit rating take advantage of this situation. l l The issuing company has to obtain beforehand the specified minimum credit rating for issuance of Commercial Paper from Credit rating agencies identified by the Reserve Bank of India. it was an additional instrument for investment provided to the investing community. Presently. The company has been sanctioned working capital limit by commercial banks / financial institutions. Commercial papers may be issued in denominations of Rs. as per the latest audited balance sheet. The Credit rating agencies also specify the size of the CP proposed to be issued. if any). Ltd. the instrument received a wider connotation from the point of view of both the issuers as well as the investors. It is transferable by endorsement and delivery. The Tangible Net Worth of the company. One of the main reasons for the growing popularity of CP as an instrument of financing working capital requirements is that the rate of interest underlying a CP transaction is substantially lower than the interest charged by commercial banks against fund based working capital limits provided by them. ICRA. Subsequently. It can be issued for period ranging from 7 days to One year. A company is eligible to issue commercial paper if it satisfies the following condition : l Commercial Paper Commercial Paper has emerged as a popular instrument for financing working capital requirements of corporate borrowers of commercial banks. Besides. is not less than Rs.4 Cr.COMMERCIAL PAPER l l l l CP is an instrument issued by companies to borrow short-term finance from the market. CPs can be issued for maturities between a minimum of 7 days and a maximum upto one year from the date of issue. (For private circulation only) Banking Briefs 107 . The CP market is largely controlled by FIMMDA (Fixed Income Money Market and Derivatives Association of India) which has also laid down standard procedures in this regard in consonance with the standard best practices and the RBI guidelines. Generally blue chip companies are major players. Besides. Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.5 lakh (face value).

the issuing company then makes arrangements for crediting the CP to the investor’s account with a depository (this is equivalent to issue of a physical certificate by the company). An initial investor in CP pays the discounted value of the amount of CP subscribed by him. The effective FBWC credit limit available to the borrowing company is reduced correspondingly. The commercial bank then makes its own assessment about the FBWC requirements of the company and the extent to which the CP issue is linked with the credit limit provided by the bank. When the CP limit is carved out of the FBWC limit provided by a lending bank. CPs issued on different dates but pertaining to the same issue should have the same date of maturity. In terms of the revised guidelines issued by RBI. it is necessary for a company to appoint a scheduled commercial bank to act as an Issuing and Paying Agent (IPA) for the issue.Commercial Papers are now issued only in the dematerialized form. so that the segregated limit can be utilised at the time of redemption of CPs. In view of this. the maximum period for subscription to an issue of CP is two weeks from the date of opening of the issue. Before issuing CP. This exercise should not be considered as an enhancement of the limit. it is making a promise to redeem the amounts covered under the CP issued by the company. However. This is similar to a situation where an LC or DPG has been issued on behalf of the company but the bills against these have not reached the company for payment. restoration of the credit limit after redemption of the CP is usually a routine affair. This ensures that even after redemption of CP. In a dematerialised environment. Banking Briefs 108 (For private circulation only) . A credit analyst should view the unredeemed portion of the CP against which a limit has already been carved out. it is necessary that extra caution is exercised in such cases and the facility should be made available to the corporate borrowers with the highest credit ratings awarded. After the agreement is reached between the bank and the issuing company. While acting as IPA. as a contingent liability in the financial statements of the issuing company. a commercial bank may provide for CP without necessarily carving out the CP limit from the FBWC limit. lending banks generally carve an amount equal to the CP size out of the FBWC credit limit. there is no increase in the overall short-term borrowing facilities provided to the company. CPs may be issued on a single date or in parts on different dates. Further. The amount of Commercial Paper issued by a company can be adjusted either against the cash credit or the loan component or both the components taken together. the potential investors are given a copy of the IPA certificate. Commercial Paper may now also be issued as a stand-alone product. When a commercial bank agrees to act the role of an IPA.

By potentially reducing capital requirements and greatly easing back office administrative burdens. note. portfolio diversification. credit derivatives are powerful. it is a financial contract derived from the performance of underlying securities. trade receivables. such as LIBOR. are limited and fail to fully protect the creditor. l l l A credit derivative is a financial contract outlining an exchange of payments in which at least one leg of the cash flows is linked to the performance of a specified underlying credit-sensitive asset or liability. swap. hedging objectives. Users of Credit Derivatives The universe of potential users of credit derivatives is as vast as the number of institutions that are exposed to or that seek exposure to credit risk. all. with the exception of the outright sale. Popular methods to hedge credit risk have typically been the incorporation of covenants into the agreements. if any. The universe includes commercial banks. mutual funds. corporations. or the outright sale of the underlying exposure. on-or off-balance-sheet means of attaining or hedging credit risk. money managers. Swaps. emerging market and municipal debt. credit derivatives are often a more efficient. lower cost alternative to the underlying cash markets for the banks. For example. The underlying markets or reference assets include bank lo ans. collateralization. and convertible securities. As in other more traditional derivative markets.CREDIT DERIVATIVES l As the term indicates. These institutions may use the innovative products for either investment or risk management applications. and option-based products form the foundation for all credit derivative products. hedge funds. While effective to varying degrees. Why Use Credit Derivatives? Credit derivatives provide users such as banks or other financial institutions with an efficient. that best suits their particular investment and risk management style. options and notes are some of the methods in derivative trade. Users also can choose the degree of leverage. as well as the credit exposure generated from other derivatives-linked activities. Credit derivatives can also take the form of financial swaps in which counter-party exchanges the total return of a certain in return for some spread over a specified benchmark. and pension funds. Credit derivatives represent the first broadbased products designed specifically for the management of credit risk. insurance companies. It is a hedging mechanism. tailor-made. From a hedging standpoint. a credit option or credit-linked note can be structured to pay the purchaser in the event of default or credit downgrade. innovative credit risk management tools. corporate debt. The performance of such credit reflects perceived risk and the cost of a potential default. It helps in risk management. Credit derivatives offer tremendous flexibility in terms of tailoring a structure to meet end users’ individual specifications. thereby enabling users to overcome a variety of market and non-market impediments and achieve their investment and Banking Briefs 109 (For private circulation only) .

accommodative accounting treatment with respect to hedging transactions. as well as increased leverage potential. Because credit derivative structures encompass a variety of markets. These derivatives. Banking Briefs 110 (For private circulation only) . notes or options. whether in the form of swaps. they will almost certainly continue to develop rapidly for the foreseeable future. if desired. its long-term prospects hinge on the development in terms of capital requirements. credit derivatives offer the portfolio credit manager powerful new hedging tools that are capable of isolating credit risk from other market risks.Conclusion The credit derivatives market provides clean. In addition. and a better understanding among participants of the advantages and versatility of these products. provide banks with a more cost-effective means of reaching their investment goals through reduced cash and capital and back office requirements. efficient access to underlying credit-sensitive markets. thereby providing an effective means by which users can attain their investment and risk management objectives. However.

Ideally. money from owners of credit cards. according to the Concise Oxford Dictionary. which is sold Securitisation Act provides legal framework to securitisation the enactment of a new Securitisation Bill that would provide the legal framework for securitisation. (For private circulation only) l l l Securitisation means “to convert (an asset. Securitisation is done by suitably ‘repackaging’ the cash flows or the free cash generated by the firm that’s issuing these bonds. there should be historical data on the portfolio’s performance and that of the issuing company with regard to credit quality and repayment speed. Securitisation works well if the securitised asset (say. it has an impact on its debt: equity ratio. suggested 2. The assets securitized will go out of the books of the finance company once they are securitized and the risk from its books are removed. Moreover. How is it beneficial to the Issuer? 1. the pool of car loans) is homogenous (the same kind) with regard to credit risk (how sound the borrower is) and maturity. the participation of the banks and financial institutions in the securitisation activity. It helps in raising immediate funds against future cash. However. with a fixed rate of return. 3. airline ticket sales. but for a few major players. picking up. total collections from roads or bridges. The process of securitisation allows the borrower to raise funds against future cash flows rather than existing assets. What can be securitised? All assets that generate funds over time can be securitised. It helps the issuer to reduce its exposure in the intended asset. typically for the purpose of raising cash”. Over the last 20 years. These include repayments under car loans. Securitisation allows the company to get cash upfront which can be put to productive use in the business. The Committee which submitted its recommendations in February 2000. In India. ministry of law and ICICI. is very minimal. A high-powered. specially a loan) into marketable securities. and sales of petroleum based products from oil refineries. securitisation transactions have been taking place for some time now. Securitisation has emerged globally as an important technique of debt financing. The issuer can raise funds of longer maturities than he would have been able to through the conventional routes such as bonds or term loans. Banking Briefs 111 . This activity is however. Securitising as a means of raising funds does not have any impact on the debt: equity ratio as the assets are taken out of the issuer’s books.SECURITISATION l Securitisation means converting future cash inflows as securities and selling them in the market. such as bonds. securitisation has become one of the largest sources of debt financing in the US and is enjoying a very strong growth across Europe and Asia. if a company decides to raise a conventional loan. Securitisation is a process by which the forecast future income (the money that is due to come in) of an entity is transformed and sold as debt instruments. Andhyarujina Committee was constituted to suggest changes in banking laws comprising of officials from RBI. ministry of finance.

The servicer is an entity that will manage the asset portfolio and ensure that payments are made in time. the servicer (which manages the portfolio on behalf of the special purpose vehicle and ensures timely payments). Other entities involved are credit enhancement providers and the investors. What is the role of each of these players? The originator is the party which has a pool of assets which it can offer for securitisation and is in need of immediate cash. this is in the form of a trust. the trustee and the credit rating agency. The Special Purpose Vehicle (SPV) is the entity that will own the assets once they are securitised. Usually. For example. The credit enhancer can be any party which provides a reassurance to the investors that it will pay in the event of a default.What are the components of a securitisation transaction? The entities involved in the securitisation transaction are the originator or the seller (the entity raising funds). the originator may transfer a proportionate share of loan (including right to receive both interest and principal). which meets the ‘true-sale’ criterion. in such a way that the originator and the SPV will share all future cash flows from the loan in the agreed ratio. A second way of transferring a part of a financial asset arises where the asset comprises the rights to two or more benefit streams. whereas the remaining part should continue to be recognised in the books. should be derecognised in the books. Partial Securitisation: An originator may transfer only a part of the asset in a securitisation transaction instead of transferring the complete asset. Banking Briefs 112 (For private circulation only) . This could take the form of a bank guarantee also. For example. It is necessary that the assets should be held by the SPV as this would ensure that the investors’ interest is secure even if the originator goes bankrupt. the originator may securitise the principal strip of the loan while retaining the interest strip and servicing asset. One way is where a proportionate share of the asset is transferred. In case the asset comprises the rights to two or more benefit streams and one or more of such benefit streams are transferred while retaining the others. the carrying amount of such financial asset should be apportioned between the part(s) transferred and the part(s) retained on the basis of their relative fair values as on the date of transfer. and the originator transfers one or more of such benefit streams while retaining the others. If the originator transfers a part of a financial asset while retaining the other part. the issuer (special purpose vehicle which issues the securities). Such transfer may occur in two ways. the part of the original asset.

rapid growth in volumes of CSs . has particularly contributed to deregulation of international markets. Legal and administrative costs. l l l DISADVANTAGES l l Possible capital adequacy requirements to be imposed in the near future. fully locking-in or hedging a future stream of cash-flows denominated in a currency other than the currency used for accounting purposes. and then currency swaps US$ into Sterling at a saving versus direct access to the UK financial markets. a borrower uses his borrowing strengths to advantage. Off-balance sheet financing/lack of publicity. but would suffer adverse borrowing terms as it is little known in Europe. via a swap. Currency Swap usually generate a larger exposure than interest rate movements. Efficient management of currency exposure and cash flows l Banking Briefs 113 (For private circulation only) . Indirect access to a market.CURRENCY SWAPS l l l l Currency swap is the exchange of one currency for the other. These are: l Facility to re-structure debt capital to align with prevailing market views/conditions. l As with interest-rate swaps. The US company therefore borrows US dollars domestically. can be cheaper than the direct borrowing route where no borrowing advantage is available. ADVANTAGES l CONCLUSION As with interest rate swaps. semi annually. It has helped in greater use of foreign exchange in short and long term asset liability management. Unknown extent of counterpart’s liability to other swaps with regard to default possibilities. Flexibility allows the swap to accommodate any desired structure. Market depth and liquidity facilities swap of the cornerstones of global banking. and wishes to remove all future foreign exchange exposure by locking-in the current exchange rate for the life of the income stream. With recent global volatility of exchange rates. where it enjoys favourable borrowing conditions. a well-known US company would like to raise funds in the UK. An example might be where a UK company receives a fixed return in Swiss franc. for funding in less accessible preferred markets and types of debt. It helps in efficient management of currency exposure and cash flows l There are two main applications of a currency swap. It is used as a hedging mechanism to guard against adverse currency fluctuations It is also used to obtain cheaper borrowings.

but not the obligation. The Reserve Bank has issued certain instructions to Authorised Dealers for offering currency options to their customers. The PREMIUM is the price paid for the option by the buyer of an option to the seller (the option writer). The EXPIRY DATE is the final date on which the option may be exercised.CURRENCY OPTIONS l Currency option means the option to buy or sell a specific quantity of currency at an agreed rate. Banking Briefs 114 (For private circulation only) . The option holder could then buy or sell the required currency in the spot market at this better rate. l l l ADs can sell options only on a fully covered basis. This would mean that when the customer buys an option the second time for the same exposure (after cancelling the first option). forward exchange contract. The party to the contract pays a premium upfront for the purpose. ADs can buy currency options from customers only if it is in cancellation of the original currency option sold by the AD. A PUT gives the holder the right to sell a specified quantity of a currency at an agreed rate over a given period. ADs can only sell currency options to their customers. such as the (zero-cost) Customers are allowed to cancel currency options only once in respect of a particular forex exposure. to buy or sell a specific quantity of a currency at an agreed rate. Currency options might be a suitable method of hedging a currency exposure for the option buyer who can (i) lock in a worst possible exchange rate to avoid the risk of an adverse rate movement and at the same time (ii) benefit from any favourable rate movement by choosing not to exercise the option and instead buying or selling the currency at the spot rate on expiry. l l l l l If currency options are bought to hedge a currency exposure. he has a choice of exercising the option or allowing it to expire. A EUROPEAN option can be exercised only on the expiry date whereas an AMERICAN option can be exercised on any date before and including the expiry date (These terms have no geographical connotation). Important among those are l l l l A foreign exchange (or currency) option gives the buyer the right. In the options market l The option buyer becomes the HOLDER and the option seller is called the WRITER. allowing the option to lapse. A CALL gives the holder the right to buy a specified quantity of a currency at an agreed rate over a given period. It is usually paid up-front. It is better than forward contract since the decision to buy or sell is optional Banks in India can write options. The advantage of an option over a forward contract lies in the choice of not exercising the option if the spot exchange rate moves in the holder’s favour before the exercise date. and for a specified period. Currency options could be made available only against cross currencies. The option buyer pays the seller a premium for the privilege of being able to buy or sell the currency at a fixed price without actually being committed to do so. The amount of the premium for an option will depend on the option writer’s perception of the risk of making a loss and a higher premium is charged when the risk seems greater. the buyer must feel that the risk reduction justifies the premium cost and that an option is preferable despite its cost compared to other alternatives.

The seller of a sterling future is contracting to sell sterling in exchange for dollars. and can be used to hedge currency exposures. If the market price subsequently goes up before the March delivery date. when the currencies are exchanged. the largest being the International Monetary Market division (IMM) of the Chicago Mercantile Exchange (CME). a seller of a future can unwind the position by purchasing a future for the same delivery date. Swiss franc and French francs. taking a cash gain or loss on the difference between the buying and selling price. the seller of the future will gain. Although currency futures can be held until delivery date. futures positions are normally unwound before delivery. For example. Such hedging usually involves the purchase or sale of futures to cover a future currency transaction and unwinding the futures position when the transaction occurs and buying or selling the currency at the spot rate.Similarly. When a futures contract is bought and sold. If the market price falls. when X buys a March sterling future from Y at $ 1. A buyer of a future can unwind his position by selling a future for the same delivery date. They are bought and sold on a futures exchange. Canadian dollars. On the CME. this rate is both the agreed rate for the exchange of sterling into dollars in March and also an expression of the current market price of the futures contract. there are futures contracts in Sterling. the buyer of the future will benefit. Deutsche Marks. Banking Briefs 115 (For private circulation only) . and for delivery at a specified future time. A buyer of a sterling future is contracting to buy sterling in exchange for dollars. Australian dollars. Yen. Futures can be used for hedging currency exposures. l l l A currency future is a contract for the sale or purchase of a standard quantity of one currency in exchange for another currency at a specified rate of exchange. the price is the agreed exchange rate. as an alternative to a forward contract.CURRENCY FUTURES l Currency future is a contract to buy or sell a standard quantity of one currency in exchange for the other The rate of exchange and the future date of delivery are agreed at the time of contract It is a hedging as well as a speculative mechanism.75000. taking a cash gain or loss on the difference between the selling and buying price. Most currency futures are for a major currency against the US dollar.

but re-structures the interest rate flows of existing assets and liabilities. Zero-coupon swaps for tax purposes. the adjusted value shall be multiplied by the risk weightage allotted to the counterparty. The RBI Guidelines does not lay down any restriction on the minimum or maximum size of the “notional principal” amounts of FRAs and IRS. The following are the advantages/disadvantages of interest rates swaps. This is done to align debt exposure with prevailing market conditions. A simple example would be moving over to floating rate of interest in the place of fixed rate of interest (and vice versa) during the currency of the loan. The swap involves no exchange of principal. IRS) in different time buckets and fix prudential limits on individual gaps. Interest rate swaps are commonly used as a means of converting fixed-rate to floating rate debt and vice versa. contractually agreed. DISADVANTAGES Possible capital adequacy requirements. Interest rate swap involves the exchange of interest rates between two parties. The guidelines stipulate separate capital adequacy norms for banks/FIs and PDs. ADVANTAGES Indirect access to a market. In case of banks and FIs. The ‘fixed to floating’ or ‘vanilla’ swap still remains Banking Briefs 116 . Expensive debt swaps designed to reduce interest expense on highinterest debt. (For private circulation only) l Definition An interest rate swap is the transfer.INTEREST RATE SWAPS l l l Swap is simply an exchange of one for the other. facility to re-structure debt capital to align with prevailing market views/conditions. For banks/FIs. the risk weightage is 20 per cent and for all others (except Governments) it is 100 per cent. The RBI has allowed the market to evolve the benchmark rate for Forward Rate Agreements (FRAs) and Interest Rate Swaps (IRS). transparent and mutually acceptable to counterparties. via a swap. FIs and PDs should exercise due diligence to ensure that the corporates are undertaking FRAs/IRS only for hedging their own balance sheet exposures. ability to overcome balance sheet restrictions are some of the advantages. the exposure on FRAs/ IRS together with other credit exposures should be within single/group borrower/counterparty limits prescribed by RBI. SWAP APPLICATIONS Interest rate swaps have been adapted and applied in a number of ways including Commercial Paper. the most commonly transacted of the interest rate swap product range because of its simplicity and flexibility. can be cheaper than the direct borrowing route where no borrowing advantage is available. While dealing with corporates. banks. unknown extent of counterparty’s liability to other swaps with regard to default possibilities and legal and administrative costs. Banks will have to place various components of assets. Efficient management of interest-rate exposure and cash flows. Second. liabilities and off-balance sheet positions (including FRAs. between two counterparties of their respective interest rate obligations. The RBI believes the financial players should not over extend themselves and there is need to put a limit on open swap positions. primary dealers and FIs are free to adopt any domestic money or debt market rate for FRAs and IRS provided the computing of the rate is objective. Banks.

Enforcement process. fair or high Banks with lower risks will have longer supervisory cycle and lesser supervisory intervention based on their risk exposures. management and Compliance risk The overall risk of bank will be assessed as low. Control risks are four and are: Internal control. Risk Based Supervision announced by RBI in its monetary and credit policy statement in 200001 is a new and additional initiative in the direction of strengthening the supervisory processes of banks by RBI. Indian banking scene has witnessed progressive deregulation. and role of external auditors Risk profiling of banks will be done for Business risks and Control risks. business strategy and environment. Pricewaterhouse Coopers (PwC). market. asset quality.RISK BASED SUPERVISION OF BANKS l First phase of implementation to commence from the last quarter of the financial year 2002-03 Objectives: Optimise utilization of supervisory resources and minimise impact of crisis situation in the financial system Key elements: Risk profiling of banks. CURRENT APPROACH l l l l l l l l BACKGROUND With globalisation and liberalization the stability of the financial system has become the central challenge to bank regulators and supervisors all over the world. The growing diversities and complexities in banking business. supervisory cycle. London was engaged by RBI for introduction of RBS. liquidity and systems. management aspects. and control) (For private circulation only) l l l l Banking Briefs 117 . Over a period of time RBI has consistently tightened the exposure and prudential norms of banks and enhanced the disclosure standards in phases in order to strengthen the efficiency of its supervisory processes. In the last decade. The on-site inspections are conducted to a large extent with reference to audited balance sheet dates. The process of inspection is based on CAMELS/CALCS (Capital adequacy. institution of prudential norm and an emulation of international supervisory best practices. Monitorable Action Plan. moderate.e direct inspection of bank branches by RBI) supplemented by off-site monitoring. operational and group risks. The current move of RBS approach represents a further stage in the regulation and supervision of banks in the light of earlier Padmanabhan and Narasimham Committee reports. the spate of product innovation. the “Contagion effects” that a crisis can spread to the entire financial systems are causing pressures on supervisory resources and calls for further streamlining of supervisory processes. Business risks are eight and are: Capital. earnings. organisation. Supervisory follow-up commences with the detailed findings of annual financial inspection. credit. Put simply. earnings. RBS is the approach to the supervision of banks by RBI Supervisory process is applied uniformly to all supervised institutions It is essentially on-site inspection driven (i. liquidity.

soundness of systems and technology. Risk Profiling of banks Supervisory cycle Supervisory programme Inspection process Review. Earnings. manpower and efficiency of RBI’s supervision) And Minimise impact of crisis situation in the financial system. supporting human resources and organizational back-up. appropriateness of risk control mechanism. ADVANTAGES OF RBS APPROACH OVER THE PRESENT CAMELS APPROACH l Effective use of supervisory resources Systemic improvement Cushion against risks Flexibility of timing the on-site inspections Reduction of vulnerabilities by varying inspection cycles Focused attention on weak banks Improvement in quality of internal audit Focused follow up l l l l l l l MAJOR ELEMENTS OF RBS APPROACH 1. banks also are expected to assess the direction of the risk based on past trend and current judgment. Change Management implications Risk Profiling of banks: Risk Profile is a document. Monitorable Action Plan (MAP) Supervisory organisation Enforcement process and incentive framework Role of external auditors in banking supervision Optimise utilization of supervisory resources (i. l 10. RBI has identified two classes of risks namely Business risk and Control risk. 7. This assessment will be based on construction of a “Risk Matrix” for each institution. fair or high and the direction of risk is increasing. Finally. operational risk and Group risk. The efficiency of the RBS would clearly depend on banks’ preparedness in certain critical areas such as quality and reliability of data. 4. Management risk and Compliance risk. which would contain various kinds of financial and non-financial risks faced by a banking institution. Business risks are those risks that are considered inherent in the activities undertaken by a bank irrespective of whether the controls are in place or not. Organisation risk. Banks have to make an assessment of the risk against all the 12 areas( 8 under Business and 4 under control risk) by means of identifying positive and negative factors. 3. Besides assessing the risk. Control risks arise out of inadequacy in the control system. banks have to determine whether the overall level of risk is low. 8. The assessment areas of Control risks are four in number and are: Internal control risks. Business strategy and environment risk. 9. Risk profiling is the backbone of RBS system. decreasing or stable. absence of controls or possibility of failures/breakdowns in the existing control process.e the time. The assessment areas of Business risk are eight in number and they are : Capital. Market risk.RBS. Credit risk. banks) in relation to their business strategy and exposures. ASSESSMENT AREA: CREDIT RISK MAJOR COMPONENT Negative factors Positive factors RBS process essentially involves continuous monitoring and evaluation of the risk profiles of the supervised institutions (i. Liquidity risk. evaluation and follow-up Banking Briefs 118 (For private circulation only) .e. moderate. 5. 2.THE NEW APPROACH The objectives of RBS are two fold: l 6.

The transaction testing would also be done though the extent would vary depending on the need. Key individuals at the bank would be made accountable for each of the action points. Supervisory Cycle: The supervisory process would commence with the preparation of the bank risk profile and on the data from other sources. sanctions applied etc. sanctions and penalties. The incentive is longer supervisory cycle and lesser supervisory intervention. Review. The disincentives are more frequent supervisory examination and higher supervisory intervention including directions. RBI would consider imposing sanctions and penalties to banks for not meeting the MAP. Besides this. Inspection process: The inspection procedure would focus on identified high-risk areas to evaluate the effectiveness of the bank’s mechanism in capturing. besides using CAMEL rating. monitoring and controlling various risks. there would be a focal point of contacts for all banks at the Central office of RBI and its Regional Offices. on-site findings. The formal assessment of the risk profile of each bank would be done on a regular basis. evaluation and follow-up: The evaluation. The supervisory cycle would normally be 12 months and may be shorter or longer depending upon whether the bank is of low or high-risk. RBI would set out the improvements required in the areas identified during the current on-site and off-site supervisory process. This. Supervisory Programme: The supervisory programme would be tailor made to suit individual banks depending upon their risk profile and would focus on high-risk areas. which external auditors perform at present. review and follow up would attempt to ensure whether supervisory programme has indeed been completed and whether it has improved the risk profile of the bank concerned. for the purpose of risk profiling. Change management implications: In order to ensure a smooth change over to RBS banks should have clearly defined standards of corporate governance and documented policies in place. Monitorable Action Plan (MAP): In the MAP. Enforcement process and incentive framework: A system of incentives and disincentives has been contemplated under the RBS to serve attainment of RBS objectives. Some of the organizational issues and preparations that banks have to make are given below: l Setting up of risk management architecture Adoption of Risk focused internal audit l Banking Briefs 119 (For private circulation only) . country risk. Supervisory Organisation: Under RBS. Role of external auditors in banking supervision: RBI would look forward to make more use of external auditors as a supervisory tool by widening the range of tasks and activities. trading book Adequacy of provisions DIRECTION OF RISK A specimen of Risk Assessment template for a sample assessment area is furnished below for understanding: RBI. market intelligence reports. measuring. ad-hoc data from external and internal auditors.COMPOSITION OF CREDIT PORTFOLIO Credit concentration Credit quality Other credit risk-off balance sheet items. information from other domestic and overseas supervisors. would draw upon a range of sources of information such as off-site surveillance and monitoring (OSMOS). it would arrange on entering into dialogue with the Institute of Chartered Accountants of India and the bank management.

Banking Briefs 120 (For private circulation only) . skill formation and placements in appropriate positions. which will be implemented by 2007. Banks have to undertake suitable change initiatives to ensure smooth transition to RBS. As mentioned earlier.l Strengthening of Management Information System and Information Technology Addressing HRD issues such as reorientation of staff. creation of dedicated risk management team. Setting up of compliance unit headed by a Chief Compliance Officer of the rank of not less than a General Manager who will be accountable for timeliness and accuracy of compliance l l CONCLUSION : Adoption of RBS would enable banks to be ready for implementation of the Second Capital Accord of Basel Committee on Banking Supervision.

The Accord is proposed to be implemented by 2006. explicit charge for operational and interest rate risk Three pillars: Minimum capital requirement. liquidity. By Mar 05. The present accord provides a Banking Briefs 121 . Besides this. banks have to set aside capital for market risks on securities included in the trading category. open gold position.e the present) Basel Accord in July 1988 which was to be adopted by internationally active banks by end-1992. international rating agencies and financial institutions watch for the adoption of the standards set by the Basel Committee for evaluating the financial strengths of banks. legal and reputational risks. Besides this. supervisory review and effective use of market discipline Impact of the accord: Upto 150% risk weight in certain cases. (For private circulation only) l l l l l Introduction The Basel Committee on Banking Supervision (BCBS). 50% risk weight (increased from present 20%) for banks. In view of this. PRESENT ACCORD The Basel Committee published the First (i. open forex position. on a common definition of capital. framework for fair and reasonable degree of consistency in the application of capital standards in different countries. A second consultative document was circulated in Jan 2001. The accord was further amended in 1996 to include market risk. its standards are taken as a benchmark by IMF and World Bank for assessment of the banking system of a country. provides broad policy guidelines that each country’s supervisors can use to determine their own supervisory policies. PROPOSED ACCORD RATIONALE: The present accord mainly focuses on credit risk and market risk and fails to explicitly address other risks such as interest rate risk in the banking book. Though the Committee does not have global supervisory authority and hence has no legal force. additional 20% risk weight on minimum capital required for operational risk It will increase the minimum capital required from the present level Initially all banks to adopt at least standardized approach for credit risk and basic indicator approach for operational risk. BACKGROUND: In order to further refine the Capital Adequacy standards Basel Committee circulated a consultative paper on a” A New Capital Adequacy Framework” in June 1999. a Committee of central banks and bank supervisors/regulators from major industrialized countries. operational. financial innovation and growing complexity of financial transactions over a period of time have called for a review of the existing capital adequacy framework. The new framework is expected to be more broad-based and flexible to adequately address the emerging challenges in strengthening the financial infrastructure. supervisors over 140 countries including India have adapted the Basel Committee standards for all banks (though the standards are applicable only for internationally active banks).SECOND BASEL ACCORD l l Proposed to be implemented in 2006 Main features: Better alignment of regulatory capital with underlying risks.

ESTIMATING OPERATIONAL DIFFERENT APPROACHES RISK- It is designed to promote more effectively the stability and soundness of the financial system It calls for better alignment of regulatory capital with underlying risks It seeks to replace the current “Broadbrush” approach with “preferential risk weighting”. The 1988 accord has not provided any such explicit charge for operational risk. For estimating the capital required for credit risks range of approaches such as standardized. In the case of foundation IRB approach.e Banking Briefs 122 (For private circulation only) . foundation IRB and advanced IRB for estimating the capital required for Credit risk. Effective use of market discipline as a lever to strengthen disclosure and encourage safe and sound banking practices. the Committee has suggested three approaches namely Standardised. which seeks to develop and expand on the standardized rules set forth in the 1988 Accord Supervisory Review of a bank’s capital adequacy and internal assessment process. the additional capital required for operational risk is 20 % of minimum regulatory capital (i. banks would be allowed to use their own estimates of LGD and EAD. RBI would be required to set rules for estimating the value of Loss Given Default (LGD) and Exposure At Default (EAD) while under advanced IRB. l l l THREE PILLAR APPROACH The proposed accord seeks to achieve its objectives namely strengthening the international financial architecture using a threepillar approach and they are: l Minimum Capital requirement. ESTIMATING CREDIT RISK-DIFFERENT APPROACHES As mentioned earlier. foundation Internal Rating Based (IRB) and advanced IRB are suggested. three approaches namely Basic indicator. preferential risk weights ranging from 0% to 150% would be assigned to assets based on ratings of external credit rating agencies approved by national supervisors in accordance with the criteria defined by the Committee. For this purpose. The Committee has suggested IRB approach for retail loan portfolio and Project finance. banks would be allowed to estimate their own Probability of Default (PD) instead of the standard percentages such as 20%. Internal Rating Based (IRB) approach Under IRB. 100% etc.MAIN FEATURES: The major features of the proposed accord are: l standardized and internal measurement have been provided. which cover capital requirements for market. two approaches namely foundation IRB and advanced IRB are suggested. standardized and internal measurement for providing capital for operational risk. 50%. It provides explicit capital charge for other risks viz. The Committee has proposed three approaches namely basic indicator. l Under the Basic indicator approach. credit and operational risks. Under the standardized approach. operational risk and interest rate risk. For operation risk.Minimum Capital Requirement The minimum capital adequacy ratio would continue to be 8% of the risk-weighted assets. l l PILLAR I.

it has recommended disclosure on semi-annual basis and for internationally active banks on a quarterly basis. Indian banks operating overseas would be required to assign risk weights ranging between 20% and 150 % on their claims on countries for the investments which are funded by currencies other than domestic currencies. The Committee also has emphasized the importance of timeliness of information. which adopt basic indicator approach need to have additional capital of 1. The Committee recommends that all sophisticated internationally active banks should make the full range of core and supplementary information publicly available. Claims on certain high-risk exposures such as Venture capital and private equity are required to be assigned a higher risk weight of 150%.8% (i. retail banking. The Committee proposes two types of disclosures namely Core and Supplementary.SUPERVISORY REVIEW The supervisor should ensure that each bank has sound internal processes to assess the adequacy of capital based on underlying risks of various business lines. l l l l Banking Briefs 123 (For private circulation only) . Though the proposal contains a lower risk weight of 20% or 50 % for corporates. The investments in Central and State Government securities.8% of total risk weighted asset). The claims on corporates will have to be risk weighted in the range of 20% to 150% on the basis of external assessments. treasury etc.e 20% of 9%). The present CAR is 9%. most of the banks would be assigned a risk weight of 50% (increased from the present 20%). Generally. which are rated A or higher. As per the proposal. The capital charge for operational risk is arrived at based on fixed percentages for each business line. which are funded out of currencies other than Indian rupees would have 100% risk weight. Core disclosures are those which convey vital information for all institutions while Supplementary disclosures are those required for some. most of the corporates would continue to be risk weighted by 100%. the benefits for the bank may not be much since there are only a few rated companies in India and even among them fewer will be best rated. The risk weights of banks would go up from the present 20% to as high as 150% depending on the method adopted.EFFECTIVE USE OF MARKET DISCIPLINE Adequate disclosure of information to public brings in market discipline and in the process promotes safety and soundness in the financial system. PILLAR III. In general. banks. l IMPACT OF THE PROPOSED ACCORD l The standardized approach builds on the basic indicator approach. It divides the bank’s activities into a number of standardized industry business lines such as corporate finance. Significant investment above a threshold in financial entities (which are not now l l l PILLAR II. Supervisors are responsible for review and evaluation of bank’s internal capital adequacy assessment procedures and processes.20% of 9%= 1. Additional charge of 20% of the current capital requirement for operational risk. The Internal measurement approach allows individual banks to use their own data to determine capital required for operational risk. For the purpose. Other investment in Central and State Government securities would continue to carry 0% risk weight.

supervisory review and market discipline. a group of central banks and the bank supervisory authorities in the G-10 countries. 2005. The steering committee which in turn will have a smaller focused sub-groups for each of the three pillars of Basel-II with members representing interests of all stakeholders. and 100 per cent on foreign exchange position. After adequate skills were developed. however.” she said. which offers a new set of standards for establishing minimum capital requirements for banking operations. pace and processes for moving towards Basel- II norms will depend on consultations and feedback received from the banks. equal treatment of all PSUs etc. RBI will follow a consultative process while implementing Basel-II norms and move in a gradual. banks would have to make enough capital for market risks on securities included in the available for sale category by March 31. including government papers. Initially all banks would have to at least adopt a standardised approach for credit risk and basic indicator approach for operational risk. which developed the first standard in 1988. It will. Some of them relate to role of external rating agencies in risk weighting. be necessary for each bank to take RBI’s approval before exercising its option for moving to advance IRB approach. RBI has made a number of suggestions on the Accord for reviewing certain provisions. sequential and co-ordinated manner. would definitely enhance the minimum regulatory capital. RBI Panel For Basel-II Norms For Banks Reserve Bank will set up a “steering committee” to implement the new stringent international Basel-II norms on capital adequacy by 2006. Initially. Banking Briefs 124 (For private circulation only) . banks were required to assign a risk weight of 2. By March 31. trading position in derivatives and derivatives entered into for hedging trading book exposures. open gold position. both in banks and at supervisory level. The apex bank would consult banks on improving ways of mitigating various risks and lay the road map for putting in place the new norms that will bring Indian banks at par with the best foreign banks.deducted from capital) would be deducted from Capital under the New Accord. CONCLUSION The Second Basel Accord. 2007. “some banks may be allowed to migrate to internal rating-based approach (IRB). The path. Banks have now been advised to maintain capital charge for market risks as per the standardised duration approach of Basel capital accord in a phased manner over two years. The second accord was prepared by the Basel Committee on banking supervision. the banks would have to set aside capital for market risks on securities included in the trading category. linking of risk weighting of sovereigns with banks.5 per cent for market risk on the entire securities portfolio. The three pillars of Basel-II. open foreign exchange position. are capital adequacy. In the second phase.

These are similar to the general IRB approaches to corporate lending. Advanced and Foundation Internal Rating- All banks with cross-border business exceeding 20 to 25 per cent of their total business may be defined as internationally active banks. the methodology of Backtesting has now been developed. In this context. where those estimates are volatile over the economic cycle. (b) subscribe to the publicly disclosed OECD methodology. As an alternative to standard or own estimate haircuts for repo style transactions the method of Value at Risk (VaR) has been confirmed. The Basel Committee may consider prescribing a material limit (up to 10 per cent of the total capital) up to which crossholdings of capital and other regulatory investments could be permitted and any excess investments above the limit would be deducted a from total capital. LGDs that are appropriate for an economic downturn should be used. A minimum LGD value of 10 per cent is proposed for retail exposures secured by mortgages. except that a separate risk weight function is used. l The basic comments of the Reserve Bank on the CP3 are as follows: l Fully secured lending (by mortgages on residential property that is or will be occupied by the borrower) will now receive a 35 per cent risk weighting in the standardised approach instead of the earlier 40 per cent. (For private circulation only) l l l l Banking Briefs 125 . The CP3 document is a culmination of the comments received from more than 40 countries on the third Quantitative Impact Study (QIS3) held in October 2002. An alternative standard operational risk approach has been developed. If a bank estimates its own loss given defaults (LGDs). and (c) are recognised by national supervisors. l l The Basel Committee on Banking Supervision (BCBS) released the Third Consultative Paper (CP3) on the New Basel Capital Accord (Basel II) in July 2003. based (IRB) approaches are presently available for high volatility commercial real estate lending.THE THIRD CONSULTATIVE PAPER (CP3) ON THE NEW BASEL CAPITAL ACCORD AND COMMENTS OF THE RESERVE BANK l l l fully secured lending to have a 35% risk weighting alternative standard operational risk approach has been developed Banks with cross-border business exceeding 20-25% of their total business defined as internationally active banks Risk weighting to be de-linked from the credit rating of sovereigns in which they are incorporated. the following significant modifications have been proposed in the new Accord: l A revolving retail exposures risk weight curve has been recalibrated in the light of QIS3 results. (a) disclose publicly their risk scores. In response to the comments received from QIS3 technical guidance. Only those Export Credit Agencies (ECAs) would be eligible for use in assigning preferential risk weights which. In view of the aim of BCBS to finalise Basel II by end of 2003 with operationalisation expected by end-2006. rating’ process and procedure. CP3 is an important development.

The capital charge for specific risk in the banking and trading books should be consistent to avoid regulatory arbitrages. While internationally active banks in emerging economies may initially be required to follow the Standardised Approach. they may be allowed to use the internal ratings for assigning preferential risk weights on certain types of exposures after validation of the internal rating systems by national supervisors. It would be difficult for supervisors to take a view as to whether the External Credit. There is a strong case for revisiting the risk weights assigned to sovereign exposures when the exposures to are aggregated as a portfolio which enjoy the benefits of diversification similar to the approach adopted for retail procedures. Assessment Institutions (ECAIs) are using unsolicited ratings to put pressure on entities to obtain solicited ratings. Supervisors are neither equipped nor competent to identify such behaviour of rating agencies.l Risk weighting of banks should be de-linked from the credit rating of sovereigns in which they are incorporated. l l l l Banking Briefs 126 (For private circulation only) .

In Asset-Liability management (ALM). Across the world. settlement. existence of sound policies and risk management system. exchange rate. adequate liquidity. Information and Policies The primary objective of ALM is to ensure that there are asset-liability managers and an assetliability committee (ALCO) that manages the bank’s balance sheet in such a manner as to minimise volatility in its earnings. liquidity. The competitive environment in the banking system due to removal of various barriers in their operations has added pressure to the importance of financial management. the ALM objectives are to control the volatility of net interest income and net economic value of a bank. The information required for ALM are (1) historical. and transfer risks to maximise profit and minimise risks. In order to achieve these results. Also ALM function covers liquidity management and capital planning. the asset-liability managers or ALCO must be guided by policies that specifically address the bank’s overall asset- Banking Briefs 127 . maturities. and (4) changes in the bank’s (For private circulation only) l In liberalised financial markets. and repricing. essentially covering planning. It essentially focuses on managing risks caused by changes in liquidity. the information base in a bank has to be strong and sound. (2) interest rates and yields of its current and projected portfolios. The success of asset liability management depends on the effective existence of (1) Information and Policies. (3) market limitations on the banks’ ability to adjust its product prices. directing. liabilities and off-balance sheet risks. The banking industry. changes and mixes of the various balance sheet accounts. and effective control of financial risks. has to give utmost priority for managing and minimising risks inherent in banking operations. (2) information and scientific risk management techniques and (3) dedicated asset-liability managers or committee (ALCO). Asset-Liability Management Structure involves management of Assets and Liabilities. and controlling of the levels.ASSET-LIABILITY MANAGEMENT l l It involves management of bank’s assets and liabilities. 1. Asset-Liability management as a mean of risk management technique is an important function in a bank. and (2) Risk Management System. liability management goals and risk limits. to compete in a free market conditions. banks’ assets and liabilities variations are considerably influenced by interest rate and exchange rate volatility. (b) foreign exchange risk. interest rates and fluctuations in foreign currency rates Success of ALM depends on availability of information. optimal earnings. liquidity. Broadly. It primarily focuses on how various functions of the bank are adequately co-ordinated. a bank is strategically concerned with management of market risk consisting of (a) interest rate risk. To reach these objectives. Banks have to manage not only credit risk but a variety of other financial risks including interest rate. (c) equity price risk and (d) commodity price risk. current and projected data on the bank’s assets-liability portfolios. including any projected additions. The complexity of financial risks requires that a strong and dedicated risk management system is put in place covering: (1) assets. The financial management structure consists of managing balance sheet on the one side and income and expenditure on the other. it was observed that failure of risk management and control systems were significant factors for bank failures. and by information that relates directly to its assetliability positions. and equity to changes in market conditions as manifested in such results as stable net interest margins.

Another concept which is also used is the Value at Risk (VaR) model. A proper liquidity management would help the management in formulating business strategy. (For private circulation only) Banking Briefs 128 . It is well understood that every financial transaction or commitment has implications for a bank’s liquidity.g. the banks’ maturity/gaps. the treatment of assets and liabilities in multiple currencies adds yet another layer of complexity. and transfer their business to other banks that relates directly to its assetliability position. a) Measuring Risk Due to difficulty in measuring interest rate risks and also the controversies present in the understanding of the concept. A risk management process that includes measuring risks. ALCO is a most powerful body in the ALM framework. principal and interest) can be recovered by an asset holder including that of bank’s depositor. The concept can be used for all assets. It has been observed that banks’ risk exposure depends upon volatility of interest rates and asset prices in the financial market. interest risk management lays the foundation for a good ALM. For banks with an international presence. VaR estimates the maximum potential loss in a position over a given holding period for a given confidence level. Simulation Gap analysis is the most important basic technique used in analysing interest rate risk. better liquidity management becomes an important concern when banks undertake business in multi currency transactions. 2. banks should be able to accurately measure and adequately control market risk. Policy Issues Strengthening of information technology in commercial banks would be an important prerequisite to implement effectively ALM system in banks. b) Risk Analysis and Management Interest rate risk can be analysed in the following four methods: 1. In the management of banks’ assets and liabilities. Hence. A schedule of liquidity reviews with depth should be provided for. Banks should have in place a well-structured risk management system. Gap analysis 2. In the event of a disturbance. for taking business decision the boards of banks rely on ALCO reports. controlling risks ad monitoring risks will help banks to attain these goals. Value at Risk (VaR) 4. the duration and interest rate elasticity of its assets and liabilities and the ability of the management to measure and control the exposure. Hence. liabilities and off-balance sheet items. Although a bank may formulate robust policies and strategies for ALM. It measures the difference between a bank’s assets and liabilities and off-balance sheet positions which will be repriced or will mature within a predetermined period. witdraw their deposits before maturity. These reviews provide the opportunity to re-examine and refine a bank’s liquidity policies and practices in the light of a bank’s liquidity experience and developments in its business. measurement of interest rate risks assumes greater importance in the ALM function. a bank may not always be able to mobilise domestic liquidity to meet foreign currency funding requirements. unless the staff members are adequately trained and skilled the success of ALM would be limited. The data base of banks has to cover all operations of branches for a detailed analysis of assets and liabilities and for forecasting a comprehensive projection of liquidity conditions under various scenarios. The software packages used must be well tested and have extensive computing power to analyse the massive amount of Asset/Liability data under alternative interest rate scenarios. Risk Management System In view of the increasing market risks in banking operations. Duration analysis 3.balance sheet caused by customers’ decisions to prepay their loans. (Gap is the difference between rate-sensitive assets minus rate sensitive liabilities) The duration analysis estimates the average amount of time required before the discounted value or the present value of all cash flows (e.

Some of its role includes optimizing balance sheet size. Treasury management includes risk management and advising clients on risk exposures. On the external front. management of capital adequacy to transfer pricing. analysis of market changes and controls. Demand and supply forces have to be reckoned to determine the optimal balance sheet size and its growth rate. Quality of well diversified assets and optimal return are very critical for any bank. It has to work on arriving at an optimal size of the balance sheet. Similarly diversified liabilities imply raising funds from a variety of sources.TREASURY MANAGEMENT IN BANKS l l Treasury Management is concerned with efficient allocation of the bank’s resources. funds management. A balance sheet that is growing rapidly needs careful scrutiny to determine whether the liquidity of the bank is being adversely affected. Consumer deposits are often the most stable source of funds for a bank. using a variety of instruments and for a variety of tenors. Liquidity analysis involves an analysis of the maturity profile of existing assets and liabilities over which superimposed is the impact of transactions that are planned for the future. analysis of all major cash flows that arise in the bank as a result of asset and liability transactions and projecting these cash flows over the future. trading activities and offering hedge products. Liquidity Management Liquidity essentially means the ability to meet all contractual obligations as and when they arise. it has to provide active trading support to the market. Thus. Very often banks put up excessive assets in the form of cash credit lendings or investment in securities without having matching source of funds of similar tenors. as well as the ability to satisfy funds requirement to meet new business opportunities. interface with various liability and asset groups internally. liquidity management. Liquidity planning involves an Banking Briefs 129 . It requires continuous monitoring. the bank ends up funding long term assets through overnight borrowings on an ongoing basis. ensuring liquidity and matching the maturity profile of assets and liabilities. make two way prices. At the other end of (For private circulation only) l Treasury Management in banks involves an effective internal and external interface. give correct pricing signals keeping in mind the liquidity profile of the bank. the inter-bank call money markets. This mismatch in the maturities of assets and liabilities results in the bank being subjected to liquidity risk. because the bank starts depending chronically and excessively on the most easily accessible source of funds i. This implies that the balance sheet management should be a dynamic and proactive process. Balance Sheet Management The ongoing reforms have provided the banks freedom to price most of their assets and liabilities within a broad band specified by RBI. add to the liquidity and continuously strive to provide the customers with value added solutions to their specific financial needs. Funds Management Funds management by the treasury involves providing a balanced and well diversified liability base to fund the various assets in the balance sheet of the bank. risk management.e. Effective liquidity management requires careful attention to balance sheet growth and structure. reserves and investment. It performs a myriad of functions ranging from balance sheet management.

Along with this. to ensure that there is no excessive dependence on any single category. multi-currency environment and cater to the multiple needs of its customers. the recent changes in the regulations would. with return on assets being a key criterion for measuring the efficiency of deployment of funds. have to decide on an optimal mix of funds from various sources. short dated securities have low price risk but they also give lower returns. In fact. Since such a large proportion of funds is deployed in the form of statutory reserves. Even though the longer maturity securities offer the higher yields. The size of the balance sheet has now acquired great importance for a bank. they are also the most susceptible to fall in price due to changes in the yield curve. which can provide correct signal to various business groups as to their future asset and liability strategy. There will be pressure on the treasury to offer various rupee based and crosscurrency hedge products to their clients who have foreign currency exposures on their balance sheets. over a period of time. Therefore choice of an appropriate mix of maturity patterns in the SLR portfolio is a very important objective of the treasury manager. Benchmarking of rates provides a ready reference for business groups about the correct business strategy to adopt given the balance sheet structure of the bank as well as the conditions prevailing in the money markets and the treasury’s forecast about expected rate movements in the future. management of these reserves is a very important factor in the overall profitability of the bank. Capital Adequacy The treasury also has the responsibility for setting targets for balance sheet size and key ratios. the treasury departments of various banks would have to function in a multi-product. Asset and liability levels need to be monitored and managed periodically to iron out any structural imbalances. therefore. Banks. Banks should ideally take into account both liquidity as well as yield considerations. Therefore. almost half the asset base of a bank consists of statutory reserves. A bank cannot afford to be driven just by volume goals which aim at a certain percentage growth in credit and deposits year after year. the market risk of the portfolio as well as its price sensitivity to interest rate changes need to be quantified and periodically monitored by means of analytical tools such as duration analysis. in the light of capital adequacy guidelines. On the other hand. Transfer Pricing Treasury has to ensure that the funds of the bank are deployed in the most appropriate manner without sacrificing either yield or liquidity.the spectrum are the funds obtained from the inter-bank money market which are very short term in tenor and volatile with regard to rate and availability. Reserve Management & Investments In the Indian banking sector. The ALCO (Asset and Liability Committee) should meet at regular intervals for this aspect of strategic business planning. the focus has now to shift to the quality of assets. The treasury is ideally placed for this function since it has an idea of the bank’s overall funding needs as well as direct access to the external markets. (For private circulation only) Banking Briefs 130 . It is also advisable that the maturity profile of assets conforms broadly to that of the liabilities. in consultation with all business groups. This is because balance sheet growth will mean the requirement of additional capital in accordance with BIS guidelines. so that there is no large structural mismatch in the balance sheet that can lead to liquidity problems. This is done very effectively through the means of a transfer pricing mechanism administered by the treasury. Customer Needs With the growing liberalisation and the opening up of the economy to international financial markets and investors.

The two most important risks which it has to manage are liquidity risk and price risk in addition to counterparty risk and issuer risk. risk management. if any.e. And. these are not without inherent risk. their usage and excesses. should be generated by an independent system. Conclusion In conclusion it is worth reiterating that in today’s fast changing market environment. While these products provide the client with the much desired interest savings. Risk Management One of the major responsibilities of a successful treasury is to manage the risk arising out of the financial transactions entered into by the treasury. Banking Briefs 131 (For private circulation only) .ensure the convergence of local currency and foreign currency yield curves and enable the clients to manage their foreign currency assets and liabilities in a more profitable manner through the use of foreign exchange derivatives both in the area of currency and interest rates. it is these very fundamentals that make a successful treasury that can sustain efficient allocation of internal resources on one hand and accelerate the globalisation of our financial markets on the other. monitored and managed by technology and operations. treasury management is inevitably acquiring a greater degree of complexity and sophistication. independent back-office operations and first rate technology. The success of any treasury thus depends a great deal on strong risk management. This brings us to an important aspect of treasury i. It is imperative for the banks to clearly define and explain these risks to their corporate clients and to help them effectively manage these risks keeping in mind the dynamic nature of the foreign exchange markets. These become all the more important as profitability and commercial viability become key criteria for assessing performance. These risks should be evaluated by an independent risk manager and the reports highlighting the limits.

accounting or general management.keeping. The client entrusts certain sum of money to the Portfolio Manager (PM) who manages the fund in accordance with the mutual agreement between the client and the PM. imposed by the client with regard to the (For private circulation only) l l l l Banking Briefs 132 . while Non. There should be mutual agreement between the client and the PM regarding their mutual rights and obligations. The applicant should be a body corporate with the Principal officer having qualifications in finance. In such a market. The service besides offering opportunities for fee-based income helps to retain loyalty of high networth customers through specialized services. which have got the professional expertise in this business. HNIs expect banks to increase their wealth and those banks. SEBI has mandated certain Capital requirements and other infrastructure availability for eligibility. Discretionary PMs will independently manage the funds in accordance with the needs The minimum amount required for Portfolio Management per client as stipulated by SEBI is Rs. The agreement between the client and the Portfolio Managers should contain the following: the investment objectives and the services to be provided areas of investment and restrictions. For example. Discretionary managers exercise their discretion in investment Portfolio Managers are to be registered with SEBI. 50 lac. customers are park their money in the bank for safe. 5 lacs.discretionary PMs shall manage the funds in accordance with the directions of the client.Discretionary and non-discretionary. There are two types of portfolio managers. Many banks in India are offering Portfolio Management services as a high-end product. As per SEBI directive. 5 lacs. The readers besides reading books on Portfolio Management can enroll in courses offered by professional institutions in India on Certified Portfolio Managers (CPM). No longer. are highly sought after. Obligations and Responsibilities of Portfolio Managers l l l l Portfolio Management is one of the emerging opportunities for tapping the business of High Networth Individuals (HNIs).PORTFOLIO MANAGEMENT l It is management of the clients’ fund in accordance with their needs based on mutual agreement for a fee It helps to tap the funds of High networth individuals who expect the banks to multiply their wealth. Registration of Portfolio Managers Portfolio Managers are registered by SEBI as per the guidelines framed by it. the minimum capital requirement is Rs. of the client. if any. there is a need for the functionaries of our bank to develop expertise in this area. Kinds of Portfolio Managers Portfolio Managers are of two types namely discretionary and Non-discretionary Portfolio Managers. the minimum fund per client is Rs. What is Portfolio Management It is the management of the funds of each client in accordance with the needs of the client.

funds or securities worth less than five lacs rupees. l l l l l l l l l l l l l l l l l Banking Briefs 133 (For private circulation only) . In case of a discretionary portfolio manager a condition that the liability of a client shall not exceed his investment with the portfolio manager. if any Amount to be invested subject to the restrictions provided under these regulations Procedure of settling client’s account including form of repayment on maturity or early termination of contract Fees payable to the portfolio manager The quantum and manner of fees payable by the client for each activity for which service is rendered by the portfolio manager directly or indirectly (where such service is out sourced) Custody of securities. The terms of accounts and audit and furnishing of the reports to the clients as per the provisions of these regulations. and Other terms of portfolio investment subject to these regulations. The portfolio manager shall not lend securities held on behalf of clients to a third person except as provided under these regulations The portfolio manager shall ensure proper and timely handling of complaints from his clients and take appropriate action immediately. The portfolio manager shall not borrow funds or securities on behalf of the client. The portfolio manager shall keep the funds of all clients in a separate account to be maintained by it in a Scheduled Commercial Bank. l l The portfolio manager shall not accept from the client. The portfolio manager shall not derive any direct or indirect benefit out of the client’s funds or securities.investment in a particular company or industry l General Responsibilities of Portfolio Manager Portfolio Managers have to discharge the following responsibilities: l Type of instruments and proportion of exposure Tenure of portfolio investments Terms for early withdrawal of funds or securities by the clients Attendant risks involved in the management of the portfolio Period of the contract and provision of early termination. 1934 (2 of 1934). The portfolio manager shall transact in securities within the limitation placed by the client himself with regard to dealing in securities under the provisions of the Reserve Bank of India Act. The portfolio manager shall act in a fiduciary capacity with regard to the client’s funds.

•Risks in banks comprise Balance sheet risks. In a competitive market environment. Prudent banking lies in identifying. the prices of various instruments may react differently from one another. (c) Instruments Risks: The nature of instrument creates risks for the investor. These risks can be broadly classified into three categories. A more sophisticated example is an interest rate swap. As a financial intermediary. etc. viz. and 3) Foreign Exchange Risk. RISK MANAGEMENT : OBJECTIVES The objectives of risk management for any (For private circulation only) Banking Briefs 134 . and (III) Operating and Liquidity risks.RISK MANAGEMENT SYSTEMS IN BANKS •Risk is the potential loss of an asset due to different factors. A simple example for this would be acceptance of deposits. RISKS IN BANKING Risks in banking are many. transaction risks. (d) Changes in commodity prices. The factors contributing to price risks are: (a) Market Liquidity Risk: This is the risk of lack of liquidity of an instrument or asset or the loss one is likely incur while liquidating the assets in the market due to the fluctuations in prices. measurement and control of risks. a bank’s rate of return will be greatly influenced by its risk management skills. assessing and minimising these risks. maturity and interest rate structure of assets and Liquidities resulting in. With many hybrid instruments in the market. The Operating and Liquidity encompasses two types of risks. (b) Issuer Risk: The financial strength and standing of the institution/sovereign that has issued the instrument can affect price as well as reliability. (ii) PRICE RISKS which include the risks of loss due to change in value of Assets and Liabilities. and operating and liquidity risks Risk is inherent and absolutely unavoidable in banking. (II) Transaction risks. 1) Interest Rate mismatch risk 2) Liquidity Risk. and with fluctuation in market conditions. bank assumes or restructures risks for its clients. (i) Risk Risk of loss due to technical failure to execute or settle a transaction. They are: (I) Balance sheet risks. They are:(i) CREDIT RISK which is the risk of loss on lending/investment. The risk involved with the instruments issued by corporate bodies would be an ideal example in this context. The Balance Sheet Risks generally arise out of the mismatch between the currency. due to counter party default. has to face various types of risks associated with those transactions. •Risk management is concerned with identification.. The Transaction Risks essentially involve two types of risks. interest rates and exchange rates may affect the realisable value or yield of many assets when transactions take place. Risk is the potential loss an asset or a portfolio is likely to suffer due to a variety of reasons. A bank while operating on behalf of the customers as well as on its own behalf. and (ii) Risk of loss due to adverse changes in the cash flows of transactions.

The risk evaluation should also include total exposure. Banking Briefs 135 . The process of risk management has three clearly identifiable steps. swapped funds. RBI Guidelines on Risk Management System in Banks The Reserve Bank of India has issued detailed guidelines for risk management system in banks. Efficiency in Operations. Good risk management is good banking. etc. especially call fundings. measure. RISK CONTROL After identification and assessment of risk factors.organisation can be summarised as under: a) b) c) d) e) f) g) Survival of the organisation. Risk identification. The guidelines broadly cover management of credit. As regards off-balance sheet exposures. Risk measurement and Risk Control. Uninterrupted operations. monitor and control various items of risks associated with bank’s position and transaction. To manage liquidity risk. The proposals for investment should be subjected to the same degree of credit risk analysis as loan proposals. including investments. core deposits to core assets. According to the guidelines the management of credit risk should receive the prime attention of the top management. The activities of asset-liability management committee and credit policy committee for management of credit and market risks need to be integrated. Banks should evolve a suitable framework to provide a centralised overview of the aggregate exposure on other banks. The banks should put in place the loan policy. off-balance sheet commitments. A professional approach to identification. viz.. the current and potential credit exposures may be measured on a daily basis. Earnings stability. It is also described at times as the responsibility of the management to identify. Banks should also evolve comprehensive risk rating system that serves as a single point indicator of diverse risk factors of counterparties in relation to credit and investment decisions. measurement and control of risk will safeguard the interests of the banking institution in the long run. The major alternatives available in risk control are: i) ii) iii) iv) v) Avoid the exposure Reduce the impact by reducing frequency of severity Avoid concentration in risky area Transfer the risk to another party Employ risk management instruments to cover the risks. Continued growth. approved by the board of directors covering the methodologies for measurement. banks have been asked to consider putting in place prudential limits on inter-bank borrowings. endeavour to develop an internal matrix that reckons the counterparty and country risks. The broad framework for management of liquidity and interest rate risks were covered by the guidelines on Asset-Liability Management (ALM) system. market and operational risks. (For private circulation only) RISK MANAGEMENT: COMPONENTS Risk management may be defined as the process of identifying and controlling risk. and Preservation of reputation. the next step involved is risk control. Identifying and achieving acceptable levels of worry. Banks should evaluate portfolio quality on an ongoing basis rather than near about balance sheet date. And good banking is essential for profitable survival of the institution. monitoring and control of credit risk.

They have also been asked to prepare contingency plans to measure the ability to withstand sudden adverse swings in liquidity conditions. The risk management guidelines also require banks to constitute a high-level credit policy committee to deal with issues pertaining to credit sanction. market perception and the existing level of capital. The Reserve Bank has further asked banks to concurrently set up an independent credit risk management department to enforce and monitor compliance of the risk parameters and prudential limits set by the board/credit policy committee. stated that due to the diversity and varying size of balance sheet items between banks. Banks operating in international markets have been asked to develop suitable methodologies for estimating and maintaining economic capital. Banking Briefs 136 (For private circulation only) . disbursement and follow-up procedures and to manage and control credit risk on a whole bank basis. The design of risk management framework should therefore be oriented towards the bank’s own requirement dictated by the size and complexity of business. The Reserve Bank has. They have. The guidelines on risk management have placed the primary responsibility of laying down risk parameters and establishing the risk management and control system on the board of directors. stated that the implementation of the integrated risk management could be assigned to a risk management committee or a committee of top executives that reports to the board. monitoring and control of operational risk that is emerging in the wake of phenomenal increase in the volume of financial transactions. In other words. however. The other banks have been asked to formulate a mediumterm strategy to comply with these requirements. it may neither be possible nor necessary to adopt uniform risk management system. however. Banks have been asked to fix a definite timeframe for moving over to value at risk (VaR) and duration approaches for measurement of interest rate risk. banks can evolve their own systems compatible with the type and size of operations as well as risk perception.Banks have been asked to evaluate liquidity profile under bank-specific and market crisis scenarios. Banks should also adopt proper systems for measurement. risk philosophy. The guidelines also mention that it would be desirable to adopt international standards on providing explicit capital cushion for the market risk to which banks are exposed.

There is the unexpected loss under adverse conditions which cannot be predicted. expected. and the chance of it exceeding Rs. unexpected and stress loss. For measuring VaR one relies on a model of random changes in the prices of underlying instruments .000 implies that the unexpected loss will be a maximum of Rs. Normally VaR is measured for a specific time duration at a given level of confidence VaR ( 99%. forms part of banks’ cost of operation. and so on. It is normally computed using a global database of Market Factor Volatility and Correlations or from any other reliable source. The expected loss is always insurable by the myriad hedges and therefore. It is usually known as potential loss amount or the estimated potential for loss-making for a set of assets in an organisation. that is not Banking Briefs 137 . Market factors include interest and foreign exchange rates fixed income bonds. changes in foreign exchange rates etc.1 lac can happen only in 1% of the occasion (100-99) Some methods of measurement: Correlation Aggregation. equity and commodity prices. which is any price or rate used directly to value financial instrument. foreign currency positions. In all these. an awareness of the risks of the basket of assets is relevant for decision-making as well as in correcting any over-exposure. financial derivatives. loan portfolios. (For private circulation only) l l l l The phrase. are dealt with in an organisation. 1 Week)= Rs.00. It is the measure of risk to be applied to all the products/assets in the portfolio. What is value at risk? On the myriad balance-sheet risks that banks face today credit and interest rate risks mostly account for their business risks.1. resulting from fluctuation in a market for a day is calculated and the value at risk is the expression of the worst loss at a confidence level of percentage (usually above 95 per cent) as may be decided in an organisation. 1 week) is equal to the loss amount. comparisons such as these are specific to a time horizon and the confidence level with which VaR is chosen. such as the risk of one portfolio relative to another etc. Banks cover expected loss through hedging while stress loss rarely occurs VaR is the measure (amount) of unexpected loss by the bank. accumulated over one week. ‘VaR (99 percent. For example.interest rate changes. Value at Risk Value at risk technically is defined as the “Loss amount. and all their implied volatility. It is this unexpected loss that is defined as value at risk (VaR). is of fairly recent origin and the science behind it owes largely to the excellent developments in IT.VALUE AT RISK (VaR) l The assets of the bank are subjected to expected. The first is the identification of market factor. These and other risks expose a bank’s business to certain potential losses. one has to remember that ‘A VaR measure is merely a benchmark for relative judgments. It is called stress loss. value at risk. accumulated over a certain period that is not exceeded in more than a certain percentage of all time”. Even if accurate. Then there is also a third type of loss the bank may be prepared to face under extreme conditions which occur rarely but possibly. The distribution of profits and losses of a portfolio. historical simulation and Monte Carlo Simulation exceeded in more than one percent of all time.and a model for computing sensitivity of derivatives prices relative to the prices of underlying instruments.1 lac in a duration of 1 week. unexpected and stress loss. such as securities shares. . When several assets of fluctuating value.. These losses are of three types viz.

While it is normally 100 days for simulations. it provides a first hand estimation where there has been no previous study of estimate of VaR. taking decisions based on VaR calculations would be similar to getting into a pond of water on knowing the average depth. For instance. But even definite price-based nonoption products too do not have normal distribution functions thus limiting the technique’s applicability despite its simplicity. Correlated aggregation: Also known as the variance and covariance method. the hypothetical profit and loss portfolio of current positions is estimated for every day in the data sample. From the P&L values series so arrived at. The value at risk is obtained by multiplying factor sensitivity by the defeasance factor. based on historical volatility). VaR is evidently a probability of occurrence expressed mathematically and quantified in rupees for the total portfolio of trading assets at a given time. as in the previous two cases. (For private circulation only) Banking Briefs 138 . Monte-Carlo simulation does not have the problems of covariance analysis for options. will be used. as it deviates from the co-variance approach and tends towards the historical approach when it comes to question of patterns. as relevant to the total portfolio of the individual organisation accounting for risk at value. It can be a guide for decision-making and provide a figurative insight into risk. Once the particular distribution is identified. A constant vigil on market movements and a good grasp of market sentiment is vital for efficient decision-making in financial derivatives and other assets and portfolios. and applies the standard deviation estimates. Nonetheless. Probability methods There are three broad approaches asset managers use. The method is flexible and has the best of the techniques narrated earlier. Management tool Management accounting is a tool and VaR is a sharper one in the kit. The advantage of using this technique is that the distribution is not assumed to be following a set pattern (such as the bell-shaped normal distribution or the pattern of past 100 days). the biggest gain and the worst loss limits are determined to fix values for the desired percentage in a day in the historical sample of 100 days. factor sensitivity limits are also fixed depending on the policy of risk-bearing capacity assessed by a conscious decision making process. As the next step. This is also Known as the ‘fat tail’ phenomenon in technical analysis. This is effective when there is a ‘normal distribution function. In the historical simulation approach.Against one unit of change for each of these market factors. Monte-Carlo simulation This is the most popular method. Depending on the products and the system in vogue. It will vary in magnitude depending on the methodology. the simulation can take care of the scientific treatment. Monto-Carlo can deal with any pattern of market movements be they humps or kinks or tails. the factor sensitivity is calculated for the positions taken for various assets in the portfolio and the defeasance factor worked out (again. It is used for blind-landing and hence has applicability even in the case of rocket firing. 100 or more trading days’ data is used. The correlation among the exposures and the volatility are implicit in the historical price movements. there are always interesting debates and much depends on the particular product and the market. Easy historical simulation This technique applies the historical price movements directly. The observed behaviour of market variables normally begin in the following patterns: Greater frequency of small changes occurring within a standard deviation of the mean: Lower frequency of changes that are quite manifest between the two standard deviations of the mean: Greater frequency of changes that measure more than the two standard deviations from the mean that elude road-rolling and averaging assumptions in respect of market movements. Hence its higher efficacy.

DRT and other legal proceedings. each member is bound by an Inter. Countries like U. It should be noted that CDR is purely a voluntary mechanism and there is no compulsion on any bank/FI to join it. rehabilitation to reduce Non-performing assets. Under Category 1. However.K. On the recommendations of the Working Group headed by Shri Vepa Kamesam.CORPORATE DEBT RESTRUCTURING l l Introduced in Aug 01 Helps to restructure Corporate debts which are viable and financed by multiple banks/ FIs Provides a timely and transparent mechanism to restructure corporate debts outside the legal mechanism. the then Deputy Governor of RBI. Objective l l l Background Since the introduction of Narasimham Committee recommendations on IRAC norms. Asset quality has become one of the primary concerns of all banks and Financial Institutions. l l Eligibility for restructuring l The scheme does not apply to loan accounts involving only one financial institution or one bank It covers only multiple banking accounts/ syndication/consortium accounts It covers both banks and Financial Institutions.Creditor Agreement (ICA). sub-standard and doubtful accounts are eligible have been further revised in Feb 2003. rephasing instalments or by converting irregularities into term loans. the speed and sufficiency of banks’ response to the problems of such potentially viable units were generally inadequate in large value cases particularly when more than one Bank/FI is involved. guidelines on CDR mechanism To ensure timely and transparent mechanism for restructuring the corporate debts of viable entities facing problems. Thailand and Korea have set up institutional mechanisms for restructuring corporate debts and are found to be successful. banks have taken a lot of measures such as compromises. 20 Crore and above. When corporates find themselves in financial difficulty due to factors beyond their control and also due to certain internal reasons banks help them by reducing the interest rates. One-time. 20 Crore and above. There are two categories of CDR System.Settlement. ‘Standard’ and ‘Sub (For private circulation only) l l l l Banking Briefs 139 . Over time. To preserve viable corporates affected by certain internal and external factors To minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme. Applies to outstanding exposure of Rs. The outstanding exposure should be Rs. which would be beneficial both for the corporates as well as banks and Financial Institutions. all creditors will have to undertake complete and timely restructuring of loans. once joined. However. In such cases. Standard. outside the purview of BIFR. Reserve Bank of India in response to the need for a similar mechanism in India and based on international experience issued guidelines on Corporate Debt Restructuring System in India in August 2001.

l l Representatives of the Group are at the Executive Director level to ensure that concerned banks/FIs abide by the necessary commitments including sacrifices made towards Corporate Debt Restructuring. both the debtor and creditors shall legally agree to ‘stand still’ whereby they commit themselves not to take any legal course during the ‘stand still’ period (normally 90 to 180 days). ICICI Bank Ltd. All references for Corporate Debt Restructuring by lenders or borrowers are made to this cell. the usual asset classification norms would continue to apply.Creditor Agreement (DCA) and Inter. For reference to CDR. CDR Core Group: It is a sub-committee of the CDR Standing Forum to assist the latter in convening the meetings and taking decisions on behalf of the standing forum on matters relating to policy. If 75% of the lenders by value agree to a restructuring package. PNB. IBA. By the concerned corporate. The Group should approve (or decide on) the restructuring package within 90 days or at best within 180 days of reference to it. However such an action will attract a penalty under Category 1 though not under Category 2. Debtor. Special Points for consideration l Who can make reference to CDR system? l Any one or more of the creditor having minimum 20% share in either working capital or term finance.C or T. and provides a platform for creditors and borrowers to evolve mutually beneficial policies. CDR is a voluntary. monitors the progress of Corporate Debt Restructuring.Creditor Agreement (ICA) provide the legal basis to the CDR mechanism. the same would be binding on remaining creditors. CDR Empowered Group: This Group decides individual cases of Corporate Debt restructuring. The forum lays down policies and guidelines. non-statutory mechanism. Deputy Chairman of IBA and a representative of RBI. Exit option: The creditors outside the minimum 75% ( and also those within 75% under certain cases) can exit the package by mutual agreement. all borrowers are required to execute the DCA.L l Structure CDR system will have a three tier structure namely CDR Standing Forum and its Core Group. CDR Empowered Group and CDR Cell. Any creditor outside the minimum 75% can choose not to provide additional finance for restructuring. CDR Cell: This Cell assists CDR Standing Forum and CDR Empowered Group in all their functions. l Only potentially viable accounts are eligible. if supported by a bank or FI having minimum 20% share in either W. SBI. CDR Standing Forum: A self-empowered general body having representatives of all FIs and banks participating in CDR system. BOI. Corporates indulging in willful default and fraud are not eligible. Accounts where recovery of suits have been filed are also eligible as per the conditions set out under the guidelines. During the pendency of the case with the CDR system. CDR Core Group would lay down the policies and guidelines to be followed by the CDR Empowered Group and CDR cell. It consists of CEOs of IDBI. (For private circulation only) l l l l Banking Briefs 140 . Stand-Still clause: Under this clause. BOB.standard’ accounts are eligible while under Category 2 “Doubtful” accounts are eligible.

To widen the spirit behind the CDR. Present Position As at the end of July 04. Empowered Group considered 141 proposals since inception with aggregate debt of Rs. 6. 2105. 20 Cr . 51 cases with an exposure of Rs. 2004. ICA have been signed by 63 FIs.84 Crores.749 Crores were referred under CDR scheme in our Bank. 64199. Until Mar 31. During 03-04 the aggregate amount of loan brought under CDR by our bank was Rs. our bank is extending the principles behind the CDR mechanism even to accounts where our exposure is less than Rs.895 Crores were approved and 20 cases with an exposure of Rs. 10 Cr from Rs. 73463. 1221 Crore were under process.48 Cr. Out of these. Presently. ARCIL & ACE have also joined the mechanism. So far. RBI is examining a proposal to reduce the exposure limit of eligible accounts to Rs. 83 cases with aggregate exposure of Rs. Banking Briefs 141 (For private circulation only) . CDR mechanism has been effective in resolving financial problems of potentially viable units while ensuring the asset quality of the banks and FIs. 20 Crores and we are sole bankers.l Banks should disclose in their published annual Balance Sheets under “Notes on accounts” information in respect of CDRs undertaken during the year. PSBs and Pvt Banks. Restructuring was approved in 97 cases with an aggregate debt of Rs.12 Crores. 4.

(II) Stance of Monetary Policy for the Second Half of 2004-05.4 per cent in US dollar terms during April-September 2004. Domestic Developments l India would remain among the faster growing economies in the world in 200405. 2004 .0 per cent during 2002-03. · · · · Banks may now extend direct finance to housing sector up to Rs.0 per cent. The policy documents of the Reserve Bank capture the rationale of monetary.5 percent as against the earlier expectation of 6. and (III) Financial Sector Reforms and Monetary Policy Measures.4 per cent as against 5. scheduled commercial banks’ investment in government and other approved securities was lower than the corresponding period of the previous year partly on account of pick-up in credit demand. In recent years. As at end-March 2004. l to 125 per cent for The annual policy Statements as well as midterm Reviews of RBI have been focusing on the structural and regulatory measures to strengthen the financial system. during the current year.5-7.2 per cent during 2003-04 as against 4.2.120 crore) up to October 1.0-6.MID-TERM REVIEW OF ANNUAL POLICY FOR THE YEAR 2004-05 Bank Rate kept unchanged at 6. Real GDP increased by 8.328 crore constituted 16.0 per cent. scheduled commercial banks’ investment in government and other approved securities has been much in excess of the required statutory liquidity ratio (SLR) of 25 per cent. such excess SLR securities at Rs. Notwithstanding this.7 per cent of NDTL for the banking system as a whole. India’s exports continue to remain buoyant and increased by 24. Composite loan limit for SSI entrepreneurs enhanced from Rs. The new system of BPLR imparts (For private circulation only) l l GDP growth projection for 2004-05 placed in the range of 6.1 crore. The data available for the first quarter of 2004-05 show that real GDP increased by 7.3 per cent in the first quarter of the previous year. structural and prudential measures introduced from time to time against the background of an assessment of macroeconomic and monetary developments.3 per cent of net demand and time liabilities (NDTL) of banks. Risk weight increased to 75 per cent for housing loans and consumer credit including personal loans and credit cards. continues to be high relative to the statutory minimum of 25 per cent. As indicated in the annual policy Statement. During 2004-05.95.15 lakh under priority sector lending. It consists of three parts: (I) Midterm Review of Macroeconomic and Monetary Developments in 2004-05. the effective SLR investment at 39. commercial banks have announced their benchmark prime lending rates (BPLRs) as advised by the Indian Banks’ Association (IBA). The minimum maturity period of CP is reduced to 7 days.67.50 lakh to Rs.3 per cent (Rs. scheduled commercial banks’ credit increased by 11. However. l l l Banking Briefs 142 .

while placing equal emphasis on price stability. Minimum tenor of retail domestic term deposits reduced to 7 days. 20 lakh to Rs.00 per cent in April to a range of 9. Repo Rate increased by 25 basis points to 4. RBI to pursue an interest rate environment that is conducive to macroeconomic and price stability.25 lakh to Rs.1 crore. Revised Liquidity Adjustment Facility to operate with overnight fixed rate repo and reverse repo. l l l l l l Stance of Monetary Policy l The overall stance of monetary policy for 2004-05 will be provision of appropriate liquidity to meet credit growth and support investment and export demand in the economy. Composite loan limit for SSI entrepreneurs enhanced from Rs.50 lakh to Rs.6 billion from US $ 113. however. and maintaining the momentum of growth. The BPLRs for private sector banks. Restrictive provisions of service area approach to be dispensed with except for government sponsored programme. (For private circulation only) l l Banks advised to prepare themselves to implement the capital charge for market risk as envisaged under Basel II norms in a phased manner by end-March 2006. targeting an annual growth rate of at least 20-25 per cent. respectively. l External Developments l Although global economic recovery is gaining strength. in response to evolving circumstances with a view to stabilising inflationary expectations.0 billion at end-March 2004 to US $ 120.50-13. there is some increase in downside risk primarily on account of persistence of uptrend in global oil prices.00-14.0 per cent. Foreign exchange reserves increased by US $ 7. Banks may fix the ceiling on interest rates on FCNR(B) deposits on monthly basis.9 billion. 2004.6 billion as on October 21. moved from a range of 10. Private sector banks are urged to formulate SACPs from the year 2005-06. To increase the limit on advances under priority sector for dealers in agricultural machinery from Rs.75-13. Banks to increase their disbursements to small and marginal farmers to 40 per cent of their direct advances under special agricultural credit plans (SACP) by March 2007.50 per cent and 11.40 lakh. Financial Sector Reforms and Monetary Policy Measures l Bank Rate kept unchanged at 6. l l RBI to consider measures in a calibrated manner. during April-September 2004. l l l l Banking Briefs 143 .75 per cent.30 lakh and for distribution of inputs for allied activities from Rs. the current account in the first quarter of 200405 also posting a surplus of US $ 1.25-11.85 per cent. The current account remained in surplus consecutively over the past three years.greater transparency in determination of lending rates while giving complete flexibility to banks to price their loan products either on fixed or floating basis. Ceiling on Interest Rates on NRE Deposits raised by 50 basis points over US dollar LIBOR/SWAP rates of corresponding maturities.00 per cent by September 2004. The BPLRs of public sector and foreign banks remained unchanged in the range of 10.

000 crore with total disbursement of Rs. Banks may finance distressed urban poor to prepay their debt to non-institutional lenders. Booking of forward contracts by exporters/ importers relaxed. Risk containment measures introduced and risk weight increased from 50 per cent to 75 per cent in the case of housing loans and from 100 per cent to 125 per cent in the case of consumer credit including personal loans and credit cards. Further move towards pure inter-bank call/ notice money market.000 crore. Srinivasan to formulate a mechanism for restructuring the debt of medium sector enterprises on the lines of the corporate debt restructuring (CDR).000 to Rs. The minimum maturity period of CP is reduced to 7 days. The growth of housing and consumer credit has been very strong. A Special Group constituted under Chairmanship of: Shri G. Banks to comply with prudential guidelines on non-SLR securities.80. Banks may now extend direct finance to housing sector up to Rs. To constitute a Working Group on conflicts of interest in the Indian financial services sector.000 crore. Non-banking Finance Companies encouraged to consider phasing out their l l l l l l l l l l l l l l l l l l l l l l l Banking Briefs 144 (For private circulation only) .8.l Investment by banks in securitised assets pertaining to SSI sector be treated under priority sector. l Automated value-free transfer of securities between market participants and the CCIL facilitated. Time limit for export realisation relaxed for EOUs. with members from SIDBI and commercial banks. RBI would prepare draft guidelines for implementation of Basel II norms and place them in the public domain. Temporary risk containment measures prescribed on housing and consumer loans. Capital Indexed Bonds to be introduced during the year 2005-06 in consultation with the Government.21. Settlement of OTC Derivatives through CCIL expected to be operationalised by March 2005.42.15 lakh under priority sector lending. IBA to look into the suggestions made by NCAER for the Kisan Credit Card scheme and take remedial action. IPAs to report issuance of CP on the NDS platform by the end of the day. The ceiling on MSS raised from Rs. The total allocation under RIDF (I to X) since its inception was Rs. Approaches for supervision of DFIs and large NBFCs proposed.60.Bank finance to NBFCs for second hand assets. A vision document for the future role of UCBs is being evolved. Guarantee by ADs for trade credit liberalised.742 crore. Dissemination of credit information by CIBIL for improving asset quality of banks. RIDF X has been established with a corpus of Rs.

A High Powered Committee constituted for streamlining the systems and procedures for transmission of data on excise duty and service tax. CBDT to grant refunds up to Rs. whichever is less.000 through Electronic Clearing System (ECS) facility at select centres. Working Group for regulatory mechanism for cards to be constituted. The national settlement system is expected to be operationalised in early 2005.public deposits consistent with international practice. To constitute a Working Group on risk mitigation for Indian retail payment system to submit its Report by November 2004. l Enhancement of Capital Base for Asset Reconstruction Companies to 15 per cent of assets acquired or Rs. 2004. 100 crore.25. l l l l l l Banking Briefs 145 (For private circulation only) . Existing per transaction limits for ECS and EFT being dispensed with effective November 1.

Sectoral cap for FDI to be raised from 49% to 74% in tele communuications. Fiscal deficit pegged at 4. up from Rs 1. if a satisfactory guarantee is provided on behalf of the student. l l l l l INDIRECT TAXES l Peak customs duty retained @ 20% (For private circulation only) Banking Briefs 146 . Transaction tax imposed. Investment commission to be established.5 lakhs but with a guarantee. Long-term capital gains from securities transactions to be replaced by a tax on transactions. Debtoriented MFs to be taxed. corporation tax. Equity oriented mutual funds will continue to be exempt from tax on dividends. Persons with taxable income of Rs. Banks with strong risk management to have greater freedom. IIMs and medical colleges. Service tax rate hiked from 8% to 10%. Nutritious mid-day meal and upgrading 500 ITIs to boost grass-root technical skills.7. Plan expenditure hiked to Rs 1. 2000 crore more.5 lakh. down from 4. 1 lakh will not have to pay income tax. short term capital gains tax slashed to 10%. Banks with strong risk management systems to be allowed greater latitude in their exposure to capital market.590 crore.4%. from 40% to 49% in civil aviation and from 26% to 49% in insurance. l l l DIRECT TAXES l l l 2% education cess imposed on income tax. Surcharge is for Primary education. tax slabs and rates unchanged for others. customs duties and service tax. excise duties. Thus. No collateral for education loans upto Rs. including courses in IITs.75 billion. tax net to include a host of new services. indirect tax changes to stay revenue neutral. GPF and special deposit scheme. Target to double the flow of credit to agriculture in 3 years .507 crore in the revised estimate for 2003-04. commercial banks have now agreed to waive the need for collateral for loans up to Rs.8% in 2003-04 revised estimates KEY FEATURES OF BUDGET 2004-2005 BANKING AND INVESTMENT l Task force to be appointed on reforms in the cooperative banking system.21. Civil aviation and Insurance.7. Direct taxes to yield Rs.45. Investment ceiling for FIIs in debt funds to be raised from $ 1 billion to $ 1.HIGHLIGHTS l l l l l Sectoral cap for FDI to be increased for Telecom. will be deprived of the opportunity to study because of lack of funds. l No change in interest rates on small savings including PPF. no student admitted to any professional course. Each sponsor bank squarely accountable for the performance of RRBs under its control.BUDGET 2004-2005. Double the flow of agricultural credit in three years. Short term capital gains tax reduced to 10%. l Government has targetted for 7 to 8 % GDP growth and to eliminate Revenue deficit by 200809.

down from 16% earlier. 77. 63. States to pay 9% interest on Govt. 3225 crore for Bihar through the Rashtriya Sam Vikas Yojana.000 crore for programmes such as food for work. poultry and fish to attract 8% excise.300 crore to Rs. Request of shipping industry for the levy of tonnage tax accepted. LPG gas stoves costing less than Rs. Rural Infrastructure Development Fund (RIDF) established by NABARD in 199495 to be revised. Special economic package of Rs. basic health care. Tractors.5%. 82. l l l l l l Small Scale Industry l Technology upgradation of SSI units is the most urgent requirement to do business in a competitive environment.000 crore.194 cr for healthy PSUs. 10. Government has decided to extend the National Agricultural Insurance Scheme which insures the yield or crops in operation to Kharif 2004 in order to assess its feasibility. Sarva Shiksha Abhiyan.227 crore. 650 crore from the central pool for specific projects and schemes. 2000 and footwear upto Rs. Of India loans as against 10. 2007 has been set for NABARD. New hospitals with 100 beds or more set up in rural areas to get tax benefit. North-eastern region gets Rs. India’s first de-salination plant at Chennai at cost of Rs 1.l Excise duty on steel up.758 crore to Rs.85 lakh SHGs during the period up to March 31. 250 to get excise relief. Computers to be fully exempted from excise duty. drinking water etc.8000 crore will be provided for RIDF during 2004-05. Banking Briefs 147 (For private circulation only) . Additional provision of Rs. SIDBI. Defence budget hiked from Rs. Pilot scheme for distributing food stamps to be introduced. 2. l l Antyodaya Anna Yojana to be extended to 2 crore families. dairy machinery and hand tools such as spades to be fully exempt from excise. An indicative target of credit linking 5. Equity support of Rs 14. Baglihar project and to switch over to RBI ways and means advance.000 cr. banks and other agencies. from Rs.800 crore provided for accelerated irrigation benefit programme. Automobile industry will be entitled to 150% deduction of expenditure on in-house R&D facilities. Make the procedures for registration and operations simpler and quicker for FIIs l l l l l l l l l l l l l OTHER REFORM MEASURES l l Rs. 65. States share of union taxes to increase by about 30%. Jammu and kashmir to get special assistance for a reasonable plan size. Agricultural Insurance Company (AIC) is introducing the scheme on a trial basis in 20 rain gauge stations in the current crop season. from 4% to 12% 85 items to be taken out of the reserve list for small scale sector. Rs. Preparation of meat.

(These 2 points are also mentioned under Banking and Investment) Create an alternative trading platform for small and medium enterprises (SMEs) to raise equity and debt from the capital market Steps to integrate the commodities markets and the securities markets.l Ceiling for loans under the Capital Subsidy Scheme raised from Rs.75 billion. A provision of Rs.1crore. The scope of the scheme will be enlarged by adding more sub-sectors and technologies eligible for assistance. Capital Markets l Raise the investment ceiling for FIIs in debt funds from US$ 1 billion to US$ 1. Allow banks with strong risk management systems greater latitude in their exposure to the capital market. and within that amount funds will be found for the Capital Subsidy Scheme.40 lakh to Rs. SSI units will be encouraged to obtain credit rating. The rate of subsidy will also be raised from 12 per cent to 15 per cent. l l l Banking Briefs 148 (For private circulation only) .24 crore has been made for “Promotion of SSI Schemes”.135.

No other event generates as much debate. Demands for grants . detailing revenue and capital expenditure. it is equivalent to borrowings from RBI. The Union Budget lays down the statement of the estimated receipts and expenditure of the government of India for the coming financial year. non-tax revenues and capital receipts Expenditure Budget. l l l The Budget is made up of three key documents. Receipts Budget .BUDGET l l It is a statement of proposed expenditure and the means of financing it. The Annual Financial Statement . The document details plan and non-plan outlays apart from the revenue. Purpose A Budget is a statement of financial position for a future period. These usually include. economists and others with a pathological affinity to numbers. Demand for Grants and The Finance Bill Budgetary Deficit is the excess of total expenditure over total receipts. analysis or comment as the proposals contained in the Budget. Explanatory Memorandum .detailing the requests for funds made by different government departments and ministries. primary and fiscal deficits. financial analysts. Fiscal Deficit: Total Expenditure – {(Total Receipts + market borrowings)}. How the Budget is made Its compilation is a process spanning several months before the key Budget documents are finally presented in Parliament. the Budget is not the preserve of accountants.detailing tax. The Budget tries (For private circulation only) l Banking Briefs 149 .containing the proposals for the levy of new taxes and modification of the existing tax structure.providing a detailed item-wise break-up of the receipts and expenditure. other documents are usually appended to them for easy comprehension of the Budget.setting out the estimated revenue and capital account of the government for the financial year. presented ministry -wise. the Budget at a glance and the explanatory Memoranda suffice for an understanding of the state of the government’s finances. l For the lay-person. In other words. setting out proposed expenditure and the means of financing it. As the Budget documents have to conform to certain legal and procedural requirements. Components l The Finance Bill . Yet. It is covered by borrowings from market and from RBI. l l l The presentation of the Union Budget is an annual exercise looked forward to with considerable anticipation by the financial community. It sets out exactly how the government proposes to allocate financial resources among the various agencies that make claims on it and how it proposes to raise the finances for this. Contains 3 key documents: The Annual Financial Statement. l Budget at a Glance .presenting a snapshot of the state of the governments finances for the year.

the estimate of the fiscal and revenue deficits for the budget year are arrived at. A discussion on the proposals. requiring the government to resign mid-term. Vote-on-account The Budget Season of Parliament starts with the finance Minister’s Budget Speech in the Lok Sabha. the Budget speech by the Finance Minister (the full text is usually published in leading newspapers) in Parliament can provide a bird’s eye view of the Budget. The Revised Estimates’ for the preceding financial year. To meet the day-to-day expenses of the government in the interim. The process of presentation of the Budget. such as the state of agricultural and industrial production. broken up into revenue/capital and plan/non-plan expenditure. capital receipts). Part A of the speech contains a review of the prevailing economic situation and summarizes the key objectives of the Budget. The receipts side of the Budget. The process may also be interrupted in the event of a noconfidence motion. the discussions that follow it and the passage of the Finance Bill can take considerable time. This is followed by a summing up of the state of the economy. Receipts and expenditure are compiled and presented under four heads. This is sought to be made up through additional taxation and/or borrowings. The Budget for 2005-2006 would present the actuals incurred for 2003-04(as proposed in the previous Budget). pending the completion of the procedure for voting on the Finance Bill and the demands for grants. Understanding the Budget For the lay-person. is the deficit. between the receipts and the expenditure forecast for the year. Key facets about the overall state of the government’s finances are presented in Part A of the Budget speech. (For private circulation only) Banking Briefs 150 . detailing the key proposals in the Budget. Part B of the Budget speech usually contains specific proposals on tax pertaining to the financial year. Proposals to raise additional revenues through taxation are formulated after considering representations from various industry associations. are touched on in this section. demands for grants and other facets follows. also made. The expenditure side of the Budget is compiled from the demands for grants presented by various government departments and ministries. The speech usually outlines the important proposals. the Lok Sabha is empowered by the Constitution to authorise an advance towards estimated expenditure for the coming financial year. The shortfall. if any. non-tax revenues. the revised Estimates’ for 2004-05 (estimated updated on the basis of actuals) and the Budget Estimates’ for 2005-06. Key macro-economic issues. The first three heads help gauge the extent to which the previous year’s receipts or expenditure overshot or fell short of what was forecast in the previous Budget. along with the estimated shortfall or excess vis-a-vis the Budget are presented. housing and infrastructure and the capital match the forecast expenditure for a particular year (based on the assessment of the funds required by various arms and departments) with receipts (from taxes. prepared by the finance Ministry estimates likely revenue receipts from direct and indirect taxes and capital receipts from recoveries of loans and government borrowings. The speech also sets out the target for deficit reduction. Each demand provides a detailed account of specific projects or purposes for which funds are being sought. The Budget forecast for the coming financial year.. Based on the taxation proposals for the Budget year. broken up as Plan and non plan expenditure and the expected receipts from taxes and non tax revenues. Charges in direct and indirect taxes and income tax form part of this section.

Revenue Expenditure: Expenditure incurred for the normal running of government departments. fees and other receipts from services rendered by the government.Budget speak l Revenue receipts: receipts by way of direct and indirect taxes. loans and advances to states. and subsidies expenditure which does not result in the creation of assets. Banking Briefs 151 (For private circulation only) . Revenue Deficits: Excess of government revenue expenditure over revenue receipts. borrowings from the RBI. Non-plan expenditure: Expenditure outside of that incurred in keeping with the programmes formulated under the five year plans. Capital Expenditure : Expenditure on acquisition of assets and investments. Plan Expenditure: Outlays on schemes and programmes formulated by various ministries under the five year plan. Capital receipts: Receipts by way of loans raised from the market. Budgetary deficits: Excess of total expenditure (capital and revenue) over total receipts. recoveries of loans and advances. external assistance from foreign governments. interest charges on debt. interest. Fisical Deficits: Excess of total expenditure over revenue receipts and capital receipts after excluding borrowings. government companies. dividends and profits from investments. bridged through borrowings from the market and the RBI. l l l l l l l l Primary Deficits: The fiscal deficits reduced by expenditure on interest payments.

Some of the measures were: l l l l What is Convertibility To the layman. And if rupees can be freely transformed into foreign currencies and vice versa for capital inflows and outflows the rupee can then be said to be convertible on capital account also. financial sector reforms were also undertaken through implementation of some of the important recommendations of the Narasimham Committee. all trade transactions (imports & exports) can be freely converted into rupees (and vice versa) at a market determined exchange rate. and country’s foreign currency assets dipped to a level of slightly under US $ 1 billion in July. market forces alone determine the flow of any currency through price mechanism. as and when desired and with no or near total absence of controls/restrictions. Move Towards to CAC India achieved convertibility on current account in August 1994 with the removal of almost all restrictions for transformation of rupees at (For private circulation only) Banking Briefs 152 . development of variety of hedging products. convertibility means a free and market-based transformation of the domestic currency into foreign currency and vice-versa. l l Concomitant to these measures. Controls. These led to a situation where the current account deficit reached a level of 3. There was a general decline in India’s credit rating. Measures taken Several far-reaching measures were taken to bring about opening up of the economy. then free transformation of the domestic currency into foreign currencies is permitted for invisible transactions as well along with trade-related transactions. alignment with global forex market and a rationalized tax structure. resulting out of implementation of rather inward looking industrial and economic policies over the years. Benefits of CAC: Widening and deepening of financial market. just sufficient to meet a fortnight’s imports. 1991. If a currency is convertible on the trade account.CONVERTIBILITY (Including the Tarapore Committee Recommendations) l Convertibility means a free conversion of the domestic currency into foreign currency and vice versa at the market determined rate Free conversion for trade and invisible transactions means current account convertibility Capital Account Convertibility (CAC) implies free conversion for capital flows both inward and outward. There were other disturbing macro-economic features also raising doubts in the minds of international community about India’s capability to meet its external financial obligations. regulations and protected environment were the characteristics of the economy till then. Background Indian economy in 1991 faced an unprecedented external payments crisis. attaching importance to Foreign Direct Investment (FDI). In a such scenario. If it is convertible on current account also. amendments to FERA to remove irritants to operations of companies having significant foreign equity holdings.2% of GDP If the list of industries reserved for public sector.

There is now general unanimity among the policy makers and economists that we should have capital account convertibility. Inflation target should be mandated by the parliament in the range of 3-5%. former Deputy Governor. l l l l l A committee under the chairmanship of Shri. RBI may impose higher CRR on them to moderate inflows. Debt service of the country should be brought down from 25% to 20%. Reserve requirements for non-resient deposits/liabilities should be on par with domestic obligations. To protect the weak banks from the dangers of over-growth they may be converted into ‘narrow banks’ with a stipulation that they should invest incremental deposits only in government securities. They are: 1. Having brought about current account convertibility. Interest rates should be fully deregulated. according to the committee. A comprehensive banking legislation may be put in place to remove inflexibilities and rigidities and deter defaulters.7% to 5%. if needed. l Banking Briefs 153 (For private circulation only) . Financial sector l NPA level of financial institutions should be brought down from 13. The committee opined that certain preconditions/ signposts are necessary for moving towards CAC. It is also expected to lead to widening and deepening of the markets and development of a variety of hedging products.S. CRR to come down from 9. it is time to move towards Capital Account Convertibility (CAC) as CAC is seen as the natural corollary of convertibility on current account. CAC is expected to fully integrate Indian financial system with the global financial system and can thereby attract higher foreign investment. l 2. CAC : Why and When? An open capital account is expected to bring several systemic weaknesses of the economy into sharper focus and consequently ensure a strong discipline from the financial system. Tarapore Committee Report on Capital Account Convertibility (CAC) l A consolidated sinking fund should be created for redeeming and gradual scaling down of the public debt. RBI to intervene to administer exchange rate only when exchange rate breaches 5% spread on either side of real effective exchange rate (REER). determined rate on all current account transactions.Tarapore. tech­nology and expertise which our country needs at the moment to supplement its own.3% to 3%. Only the timing of its introduction and several macro-economic prerequisites that go along with it are the issues for debate. Fiscal Consolidation l Implementation of CAC. is to be spread over a period of three years (3 phases). Reserve Bank of India was constituted to examine the feasibility of introducing CAC in India. Credit institutions to be equipped with greater degree of tech­nology to build strong risk management/information systems.

ensuring a measure of neutrality in taxation between goods and services The service tax is applicable to all parts of India except the State of Jammu and Kashmir The inclusion of all value added services in the tax net would yield a larger amount of revenue l l The objectives of levying a service tax are: (i) shrinking of the tax base as the share of industry in GDP decreases while that of services expands.410 crore in 1994-95 to Rs. the provisions of which were brought into force with effect from July 1. At present. The Union 8udget.4 per cent of the total tax receipts of the Centre (0.TAXATION OF SERVICES l Taxation of services improves the revenue system. The Union Budget. Collections from the service tax have shown a steady rise from Rs. Banking Briefs 154 (For private circulation only) . creating further distortions. however. service tax is levied on 58 items. The increase in the share of the services sector in GDP holds the key to larger revenue generation. they accounted for only 4. taxation of services assumes importance in the wake of the need for improving the revenue system. 1994. ensuring a measure of neutrality in taxation between goods and services and eventually helping to evolve an efficient system of domestic trade taxes. which encourages businesses to develop in-house services. 2003. and (iv) most of the services that are likely to become taxable are positively correlated with expenditure of high-income households and. The service tax is envisaged as the tax of the future. 2004-05 proposes to increase the service tax rate to 10 per cent. In the Indian context. The rate of service tax has been increased from 5 per cent to 8 per cent on all the taxable services with effect from May 14. (ii) failure to tax services distorts consumer choices and encourages spending on services at the expense of goods. service tax improves equity. The service tax was levied in India on the basis of the recommendations made by the Tax Reforms Committee (Chairman: Dr.300 crore in 2003-0~ (RE). (iii) untaxed service traders are unable to claim VAT on service inputs. The coverage has progressively widened over the years. 2004-05 proposes to extend the service tax to 13 additional services. therefore. The inclusion of all value added services in the tax net would yield a larger amount of revenue and make the existing tax structure more elastic.8. both at the Central and the State levels.3 per cent of GDP) in 2003-04. Raja Chelliah). The service tax is applicable to all parts of India except the State of Jammu and Kashmir and is livable on the gross amount charged by the service provider from the client.

Banks can extend the Smart Card/Debit Cards facility to those having saving bank account/current account/fixed deposit accounts with built-in liquidity features maintained by individuals. in particular at point of sale and such other places where a terminal/device for the use/access of the card is placed. However. Eligibility of Customers: The banks should issue the smart/debit card to its customers having good financial standing and who have maintained the accounts satisfactorily for at least six months. failure of the security mechanism shall be borne by the bank. some of which can be reloaded with further funds or one which can connect to the cardholder’s bank account (online) for payment through such account and which can be used for a range of purposes. the banks can issue on line debit cards to select customers Banking Briefs 155 . The withdrawing of bank notes. the payment of interest should be in accordance with the interest rate directives issued to banks from time to time under Sections 21 and 35A of the Banking Regulation Act. 1949. Banks shall keep for a sufficient period of time.RBI GUIDELINES FOR THE ISSUE OF SMART CARDS/DEBIT CARDS BY BANKS l l l l l Lays down guidelines on smart/debit cards No cash transaction at the point of sale Cards can be issued for SB/TD/CAs No interest for preloaded cash Cardholder to bear loss when card is stolen or lost with good financial standing even if they have maintained the accounts with the banks for less than six months. cash withdrawals or deposits should be offered at the Point of Sale. internal records to enable operations to be traced and errors to be rectified (taking into account the law of limitation for the time barred cases). The security of the smart card shall be the responsibility of the bank and the loses incurred by any party on account of breach of security. with the smart/debit cards under any facility. that is. the depositing of the bank notes and cheques and connected operations in electronic devices such as cash dispensing machines and ATMs. (For private circulation only) Coverage: The guidelines apply to the smart cards/cards encompassing all or any of the following operations: l Electronic payment involving the use of card. 1949. In case of debit cards or on line smart cards. Any card or a function of a card which contains real value in the form of electronic money which someone has paid for in advance. Security and other aspects: The bank shall ensure full security of the smart card. no interest may be paid on the balances transferred to the smart cards. without prior authorisation of RBI under section 23 of the Banking Regulation Act. No bank shall despatch a card to a customer unsolicited. corporate bodies and firms. except in the case where the card is a replacement for a card already held by the customer. l l Cash Withdrawals: No cash transaction. Payment of Interest: In case of smart cards having stored value (as in case of the off-line mode of operation of the smart card).

A period shall be specified after which time the cardholder would be deemed to have accepted the terms if he vi) l l l vii) The terms shall specify that the bank shall be responsible for direct losses incurred by a cardholder due to a system malfunction directly within the bank’s control. The terms shall specify a contact point to which such notification can be made. a set of contractual terms and conditions governing the issue and use of such a card. knowingly or with extreme negligence. except to the card holders. However. but sufficient notice of the change shall be given to the cardholder to enable him to withdraw if he so chooses. The terms shall specify the period within which the cardholder’s account would normally be debited. in any form that would be intelligible or otherwise accessible to any third party. The terms shall specify the basis of any charges. iv) v) Each bank shall make available to the cardholders in writing. Such notification can be made at any time of the day or night.The cardholder shall be provided with a written record of the transaction after he has completed it. the bank shall not be held liable for any loss caused by a technical breakdown of the payment system. ii) The terms shall put the cardholder under an obligation not to record the PIN or code. On receipt of notification of the loss. theft or copying of the card but only up to a certain limit (of fixed amount or a percentage of the transaction agreed upon in advance between the cardholder and the bank). but not necessarily the amount of charges at any point of time. l Banking Briefs 156 (For private circulation only) . The cardholder shall bear the loss sustained up to the time of notification to the bank of any loss. The terms shall be expressed clearly. The terms shall specify that the bank shall exercise care when issuing PINs or codes and shall be under an obligation not to disclose the cardholder’s PIN or code. Terms and Conditions for issue: The relationship between the bank and the card holder shall be contractual. The terms may be altered by the bank. theft or copying of their payment devices. either immediately in the form of receipt or within a reasonable period of time in another form such as the customary bank statement. the bank shall take all action open to it to stop any further use of the card. theft or copying of the card. The terms shall put the cardholder under an obligation not to countermand an order which he has given by means of his card. i) The terms shall put the cardholder under an obligation to take all appropriate steps to keep safe the card and the means (such as PIN) which enable it to be used. In this case: l had not withdrawn during the specified period. iii) The terms shall put the cardholder under an obligation to notify the bank immediately after becoming aware of theft or loss of the card. except where the cardholder acted fraudulently. These terms shall maintain a fair balance between the interests of the parties concerned. Each bank shall provide means whereby its customers may at any time of the day or night notify the loss.

It should be ensured that risks involved in insurance business do not get transferred to the bank and that the banking business does not get contaminated by any risks which may arise from insurance business. net profit for the last 3 years. In India too opening up of the insurance sector should be seen as a boon to the Indian banking industry because these banks. semi-urban and urban areas where insurance products may be sold.500 Crore.500 crore. The level of non-performing assets should be reasonable. l l l l The most important and vital economic bill passed by the parliament during the winter session. Our bank has already launched its insurance subsidiary – SBI Life in joint venture with Cardif of France. Cardif holds 26% share in the SBI Life Cardif is the wholly owned subsidiary of BNP Paribas – a leading international bank in Paris. In many foreign countries. banks have been prompted to sell insurance products through their branch network. The maximum equity contribution such a bank can hold in the joint venture company will be 50 per cent of the paid-up capital of the insurance company. Banks which satisfy the eligibility criteria given below are permitted to set up a joint venture company for undertaking insurance business. In many developed countries banks are successfully marketing/selling insurance products.225 Crores ii) iii) iv) v) The CRAR of the bank should not be less than 10 per cent. There should be ‘arms length’ relationship between the bank and the insurance outfit. The bank should have net profit for the last three continuous years. successful track record of subsidiary Banks to enter insurance through subsidiary Foreign partner share in Joint Venture not to exceed 26% SBI Life has JV with Cardif of France During 2003-04 SBI Life recorded a premium income of Rs. In cases where a foreign partner contributes 26 per cent of the equity with the approval of IRDA/ FIPB (Foreign Investment Promotion Board). (1999) was Insurance Regulatory and Development Authority Bill (IRDA). The first product was launched in June 2001. The track record of the performance of the subsidiaries. and per capita premium offers an excellent opportunity. Passing of the IRDA has paved the way for opening up of the insurance sector in India. reasonable level of NPA. any other ationalized bank or a private sector bank would be allowed to participate in the equity of the insurance joint venture. particularly public sector banks. of the concerned bank should be satisfactory. premium as a percentage of domestic savings and GDP. India with its low levels of insurance penetration.OPENING UP OF THE INSURANCE SECTOR l l Guideline for opening up of Insurance sector was issued in 2000 Eligibility norm: Net worth above Rs. which have a large network of retail outlets (branches) in rural. CRAR not less than 10%. BNP (For private circulation only) Banking Briefs 157 . if any. The eligibility criteria for joint venture participant are as under: i) The net worth of the bank should not be less than Rs.

Premium from Group business is nearly 1/5th of the premium income from new business. SBI Life is now selling its insurance products through 2400 branches of SBI Group.Mar 04. SBI and associate banks have become corporate agents of SBI Life. 16. 225 Crores for the year 2003-04 as against the premium receipt of Rs. All Private players (including SBI Life) moblised a total first year premium of Rs.5% of the new business premium collected.General Insurance Tata – AIG Bajaj – Allianz. enter into life insurance business as against General Insurance due to ease of operation and the prospects of huge market. HDFC. Birla Sun Life and HDFC Standard Life.Paribas and Banque National de Paris merged in May 2000 as BNP Paribas to become the largest bank in Paris and second largest in Europe. Performance of Insurance Industry Insurance penetration has increased in India with premium income touching 3. We have decided to Life Tata AIG SBI LIFE Kotak Mahindra – Old Mutual Prudential . it provides an additional opportunity to increase its profits through non-fund based income and also to move towards universal banking. A table of players registered with IRDA in both Life and Non-life segment along with their alliances is given below : Non – Life Reliance – General Insurance ICICI . Banking Briefs 158 (For private circulation only) .Lombard Insurance Cholamandalam. SBI Life ranks fourth after ICICI Pru. It received a premium income of Rs. Such long-term funds are available only in insurance sector. For the banks.284 Crores of first year premium representing 87% of the market share.Tokio General Insurance Royal Sundaram Alliance SBI Life The year 2003-04 was the 2nd full year of operations for the company. Cardif is well experienced in the business of Bancassurance – insurance products sold through banking outlets.96 % of the market share in terms of premium from new policies. It emerged as the top private insurer in terms of number of lives covered with a market share of about 14%. 2425 Cr representing 12. Cardif with its sister company Natiovie together rank third largest insurer in France. In terms of new premium income .ICICI HDFC – Standard Birla – Sun Life insurance Bajaj – Allianz. Reliance. As at end. IFFCO. SBI Life covered nearly 14 lakh lives. among the Private players. 73 Crore during 2002-03. LIC mobilized Rs. Bancassurance channel has contributed about 48% of the total premium received by SBI Life. registering a growth of 200%. Metlife India Insurance AMP-Sanmar AVIVA Life ING Vysya Life Insurance Sahara India Life The opening up of insurance sector augurs well for the country as it would provide the much needed funds for infrastructural development.26% of GDP during 02-03. ICICI Pru and Birla account for 49. ICICI. Bajaj are some of the other important players in the fray. During 03-04.

is known as the Competition Commission of India — the successor to the Monopolies and Restrictive Trade Practices Commission (MRTPC). There is a realisation in policy-making circles that in certain industries. banks or venture capital funds which are contemplating share subscription. Some provisions: High limit for asset size and turnover size for mergers . The Competition Commission is a body corporate and independent entity possessing a common seal with the power inter alia to hold and dispose of moveable and immovable property. to promote and sustain competition in markets. to enter into contracts and to sue in its name. financing or acquisition pursuant to any specific stipulation in a loan agreement or investor agreement. The intent of the legislation is not to prevent the existence of a monopoly across the board. This is an Act to provide. entities which are not required to approach the Commission for this purpose are public financial institutions. after due deliberation. the trigger for which was the existence or impending creation of a monopoly situation in a sector of industry. The apex body under the Competition Act which has been vested with the responsibility of eliminating practices having adverse effect on competition. The Competition Act has been designed as an omnibus code to deal with matters relating to the existence and regulation of competition and monopolies. domination to be determined based on market size. will in due course supersede and replace the Monopolies and Restrictive Trade Practices Act. promoting and sustaining competition. 2002. and for matters connected there. Such combinations would be treated as void. Notwithstanding that the Act is not exclusivist and operates in tandem with other laws. Banking Briefs 159 . The Commission. for the establishment of a Commission to prevent practices having adverse effect on competition.COMPETITION ACT. which was passed by both Houses of Parliament during the Winter Session of 2002-03. the nature of their operations and economies of scale indeed dictate the creation of a monopoly in order to be able to operate and remain viable and profitable. 2002 l Objective: To help companies to increase their size and to guard consumers against anti-corruption practices. number of players. foreign institutional investors. protecting the interests of consumers. and ensuring freedom of trade carried on by other participants in India. However. A system is provided under the Act wherein at the option of the person or enterprise proposing to enter into a combination may give notice to the Competition Commission of India of such intention providing details of the combination. would give its opinion on the proposed combination. in India. This is in significant contrast to the philosophy which propelled the operation and application of the MRTP Act. keeping in view of the economic development of the country. to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets. it is categorically stated that civil courts or any other (For private circulation only) l The Competition Act. 1969 (MRTP Act). merger bench to deliver judgement on approval within 90 days. stern action for anti-competitive practices. The Act declares that a person and enterprise are prohibited from entering into a combination which causes or is likely to cause an “appreciable adverse effect” on competition within the relevant market in India.

If no such judgement is forthcoming. The dominance of a company is determined not in terms of fixed percentage of market size or asset but by size of market. the merger will be deemed to have been approved. has to deliver its judgement on the approval of a merger within 90 days. There is no obligation at all for merging parties below threshold limit for mandatory pre-merger notification. Stern action is proposed in the Bill to deter this. the financial capacity. restricting sources of supplies and collusive bidding by companies. It would be open for the merging companies to seek the opinion of the proposed Competition Commission whether the merger would be a valid one as per the proposed law. under-pricing. turnoverwise is prescribed so that most mergers will be outside the ambit of Combinations Regulation. tariff barriers and competition from outside the country. The combination will go through unless it is established that it will have an appreciable adverse effect on competition. The Merger Bench of the Competition Commission of India (CCI).equivalent authority will not have any jurisdiction to entertain any suit or proceeding or provide injunction with regard to any matter which would ordinarily fall within the ambit of the Commission. sharing of territories. the regulatory body under the new dispensation. Some of the important Provisions of the Act: l A high threshold limit asset-wise. number of players. The proposed law would detail all the anticompetitive practices such as cartelisation. 160 l l l l l Banking Briefs (For private circulation only) . This was intended to give the corporates to test the water before going ahead.

The Rules have set annual targets for the phase reduction in key deficit indicators over the period ending March 31 . thereby enhancing the credibility of the fiscal stance. The rules also impose annual ceilings.FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT ACT (FRBM) l l l l Enacted in Aug 2003 and came into effect in July 04 Seeks to achieve revenue surplus and remove fiscal constraints on monetary policy and credit management Stipulates to eliminate revenue deficit by Mar 2008.S of 1985]. the Fiscal Responsibility and Budget Management Act. borrowings and debt of the Central Government over the medium-term while increasing transparency of fiscal operations. Fiscal defecit is considered to be the basic cause of the macro economic problem of an economy and when controlled would help in Banking Briefs 161 . 2004. This is sought to be achieved through limits on deficits. however. Government guarantees and additional liabilities. International experience shows that a number of countries facing widening fiscal imbalances have introduced medium-term fiscal adjustment plans through the adoption of rules: the mediumterm Financial Strategy in the U. The Act embodies the spirit of inter-generational equity and provides for long-term macroeconomic stability by achieving sufficient revenue surplus and removing the fiscal constraints on the conduct of monetary policy and debt management. In India. however. exceed the targets on grounds of national security. natural calamity or other exceptional circumstances. 2008 and thereafter build up adequate revenue surplus (The Union Budget for 200405 proposes to eliminate the revenue deficit by 2008-09). Provides for enhancing transparency in the fiscal operations of the government. 2003 was enacted on August 26. The Act also contains provision to enhance transparency in the Central Government’s fiscal operations by requiring the Government to place before the Parliament the outcome of a quarterly receipts of trend in receipts and expenditure in relation to the budget estimates. The Reserve Bank may. 2008. (For private circulation only) Fiscal rules have become an imperative in the context of the need to restrain discretionary policies which have an inherent deficit bias. buy or sell Central Government securities in the secondary market. Argentina (1999). The Act prohibits direct borrowings by the Centre from the Reserve Bank from the fiscal year 2006-07 except by way of Ways and Means Advances to meet temporary mismatches in receipts and payments or under exceptional circumstances. 2003 and came into force from July 5. effective handling of other financial problem. These deficits could. the Balanced Budget and Emergency Deficit Control Act [Gramm Rudman Hollings Act in the U. Fiscal responsibility legislations in New Zealand (1994).K. Peru (1999) and Brazil (2002). The Act stipulates appropriate measures by the Central Government to reduce the fiscal deficit (the bill sought to reduce fiscal deficit 2% of GDP by 2006) and eliminate revenue deficit by March 31.. The adoption of fiscal policy rules commits the Government to a deficit or debt reduction path into the future. Extended now to 2009. The combined fiscal deficit of centre and state governments was close to 10% of our GDP in the Financial Year 1999-2000.

unambiguous and equitable. transparent and equitable manner. When an acquirer acquires a ‘substantial’ quantity of shares or voting rights of the target company. (the ‘acquirer’). Following are the salient features of the code as approved by SEBI. Takeover means acquiring the control or management interest in a target company Major provisions: Informing the target company if the total holding exceeds 5%. making open offer to public if the proposed acquisition results in share holding in excess of 15%. informing Stock Exchange if holding exceeds 15%.TAKEOVER CODE 2002 l l l l Introduced in 1997 by SEBI based on P. Who is the target company and who is the acquirer? The target is a company whose shares are listed on the stock exchange(s) and whose shares or voting rights are acquired/being acquired or whose control is taken over/being taken over by the acquirer. Code amended in 2002. it is called the substantial acquisition of shares.N. would entitle him to more than 5 per cent of the shares or voting rights (For private circulation only) Banking Briefs 162 . acquires shares or voting rights (which. The SEBI approved the new takeover code in January 1997 based on the Bhagwati committee report. have defined substantial quantity of shares or voting rights separately for two different purposes: For the purpose of disclosures to be made by acquirer(s): l l Background Takeover of companies is an instrument of corporate growth. The SEBI Substantial Acquisition of Shares and Takeovers Regulations. along with PAC. 1997. It has taken place in a more pronounced manner through mergers and amalgamations. What is meant by the term ‘Persons Acting in Concert’? PAC are individual(s)/company(ies)/any other legal entity(ies) who are acting in concert for a common objective or for a purpose of substantial acquisition of shares or voting rights or gaining control over the target company either directly or indirectly.Bhagwati Committee recommendations It is meant to ensure that takeovers happen in a fair. a committee headed by Justice P. it is termed a takeover. and includes any individual/ company/ any other legal entity who intends to acquire or acquires substantial quantity of shares or voting rights of target company. transparent. Bhagwati was constituted to review the takeover regulations and recommend a comprehensive Takeover code. if any. Justice Bhagwati Committee Recommendations In order to make up the deficiencies in the existing regulations and to make it more fair. The committee submitted its recommendations in 1996. Five per cent or more shares or voting rights: A person who. when taken together with his existing holding.N. Salient features What is meant by takeovers and substantial acquisition of shares? When an ‘acquirer’ takes over the control or management of the ‘target’ company.

within 21 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration. would entitle him to more than 15 per cent voting rights. Consolidation of holding: An acquirer who has 75 per cent of the shares or voting rights of the target company. l More than 15 per cent shares or voting rights: An acquirer who holds more than 15 per cent shares or voting rights of target company shall. disclose his aggregate shareholding to the target company.f Oct.e. required to inform all stock exchanges where the shares of target company are listed. The target company is. Banking Briefs 163 (For private circulation only) . is required to disclose the aggregate of his shareholding to the target company within 4 working days of acquisition or within 4 working days of receipt of intimation of allotment of shares. Concession given for acquirers who hold a stake of 75% or above removed.2002 The code is amended in 2002 and following are the major provisions : l Creeping Acquisition limit reduced to 5% w. and any 2% change over 15% levels are required to be made to the target company and stock exchange l For the purpose of making an open offer by acquirer: l l Fifteen per cent shares or voting rights: An acquirer who intends to acquire shares which. can acquire further shares or voting rights only after making a public announcement specifying the number of shares to be acquired through open offer from the shareholders of a target company. TAKE OVER CODE . 02 indirect acquisition of over 15 % would trigger an open offer. Disclosures at 5%.of the target company). within 30 days from the financial year ending March 31 as well as the record date fixed for the purpose of dividend declaration. can consolidate his holding up to 5 per cent of the voting rights in 12 months. For determining the offer price. However any additional acquisition over and above the 5 per cent can be made only after making a public announcement to acquire at least 20 per cent of the shares of the target company from the shareholders through an open offer. l l l Creeping limit of 5 per cent: An acquirer who has 15 per cent or more but less than 75 per cent of shares or voting rights of a target company. the weekly average price of two weeks preceeding the date of public announcement should also be taken. Public announcement for global acquisition can be made within three months from the date of acquisition. along with his existing shareholding. Automatic exemption granted to preferential allotment removed. Shareholders allowed to withdraw shares tendered in an open offer upto 3 days prior to closure of the offer. in turn. 10%. can acquire such additional shares only after making a public announcement to acquire at least an additional 20 per cent of the voting capital of target company from the shareholders through an open offer. 14%. in addition to the existing 26 week criteria.

and likely to continue for another 3 years. An example will make it clear. Purchase tax. A makes some value addition. if states with high sales tax rates do not implement VAT. All industrial inputs and essential goods would attract 4% levy. Later.50 as input credit.50. on line with the model VAT law. tax paid on capital goods by both manufacturers and traders would be available as immediate credit. VAT or value added tax is working successfully in over 150 nations. (For private circulation only) l l l VAT or Value Added Tax is a new system of indirect taxation.5 %. he pays tax of (say @ 12. traders and industry. despite promised 100% compensation by the centre in the transition phase. interstate transactions may be zero-rated. framed by the empowered committee of state finance ministers. with the help of the National Institute of Public Finance and Policy. Entry Tax. This new system moves from the present ‘origin based tax’ to ‘destination based’.VALUE ADDED TAX l VAT taxes the seller only for the value added by giving credit for the tax paid for the input·It promotes tax compliance and eliminates double taxation This system will usher in a simplified system of book keeping By prescribing uniform tax rate for all states. and manufacturing states like Maharastra and Gujrat would be net losers. Presently. and buy products at lower prices. nobody has spoken about the consumers. Otherwise. which contains an element of previously paid tax. the exporting state will give 100% credit for the taxes paid within the state.5%. it takes a way the flexibility of the state to raise revenues. 1%. The industrialised states are highly averse to even reduce the CST rates. Lease tax. and Luxury tax.5 %. Banking Briefs 164 . and exported to another. which is called the input tax credit. who will be at the receiving end. and only a few commodities will be taxed at 20%. all central and state indirect taxes should be integrated in a single VAT chain. at Rs 150. 12. If a supplier of raw material for soap supplies raw materials worth Rs 100 to A. but only a vatable entry tax can completely replace CST Act. gems etc will attract 1 %. It is proposed to be implemented from April 2005. people can just cross the border. and is going to be introduced here soon. and sells it to B for further processing. VAT avoids the system on tax on price. VAT has a four rate structure.75. it is opposed by both the political class at the state level. It will not replace Octroi or Central Sales tax. and claims Rs 12. Turnover tax. in which a trader will buy goods after paying tax on the goods at the prescribed rate. including our neighbours. When goods are manufactured in one state. 4%. But for a few reasons. VAT is going to replace Sales tax. silver. non manufacturing states like Delhi would be net gainers. Most states have framed their VAT legislation. it is going to be implemented in all states. The FM has decided to reduce CST to 2%. Gold. Rs 12. Ideally. It being a destination based tax. So B pays @ 12. Rs 18. Work contract tax. Also.5%). and 20%. Most commodities will attract a general rate of 12. and claims refund of tax already paid by the seller in buying his raw materials. Central Sales Tax is an aberration. though surprisingly.

The prices may rise because of withdrawal of exemptions. Investment decisions will not therefore be based on tax differentials. Consumers in NE States having marginal sales tax rates are to be affected more. This system will usher in a simplified system of book keeping. and away with unfair competition from branch transfers. With zero rating of exports. the extent of tax evasion prevalent. The average incidence to such a manufacturer would be 5-6 % of revenue.P. while M. penalties would be stringent and non-discretionary. and traders who evade sales tax. They range from 3-6 months imprisonment. VAT has an in-built system of tax compliance. but has not specified how the system will work. and this should result in a boom in income tax collection. In case of stock transfers. There would be 100% self assessment through a simple onepage return. and yet credit will be given on tax paid on inputs. the pur- chase and the sales book. and second. the rate of tax on export goods will be zero. The empowered committee mentioned above has contemplated zero-rating as the desired mode of treating interstate sales. So the proposed system can only be called a Multi-Point Sales tax with input tax credit. Invoice based transactions makes it impossible to hide one’s actual income. The most basic is the input tax credit on inventories on the date of implementation. has asked for prorating for 5 years. But first. A seller will claim the offset due to him only by collecting taxes and remitting them to the government. and the new four rate structure. he would be required to pay at 4 % tax. removal of industrial incentives. This will eventually encompass the central duties of excise and customs. VAT should be a major blow to tax evaders. and claim 8. both manufacturers who evade excise duty.5 % as the input tax credit. The books of such manufacturers would always have a VAT credit. VAT has a bias against price rise. There would neither be a tax deduction at source. nor would it be required to obtain tax clearance certificates. This will make our exports more competitive. the average incidence of sales tax is 67%. There are several procedural issues bothering the traders. State and the Central Government will gain in terms of revenue. and bringing close substitutes at tax-parity. Prices after VAT can go up only on two counts. in the state of Delhi. which won’t be refunded till the end of the financial year. Some states have introduced legislation which allows prorating input tax credit between 6-9 months. They will be required to maintain only two books. The dealers will be able to buy or sell any commodity. The system of input tax credit will promote production efficiency of investments. which is significant. Claiming the same at the end of the year would result in the amount rising to a few hundred crores. Another unresolved issue is the case of a manufacturer who buys goods locally and sells in other states.5% post VAT. Similarly. Everyone has an incentive to buy only from registered dealers. besides preserving tax invoices. and cash penalty. But in this liberal regime based on trust. It is not clear how that would be implemented in a VAT regime? (For private circulation only) Banking Briefs 165 . without getting it mentioned in their sales tax registration certificate. tax holidays etc. the government needs a constitutional amendment to be able to introduce Vatable service tax. which will go up to an average of 12. the difference between the rates of tax now in force. The local statutory forms will disappear. Service tax should also be VATable. Consumers in the Union Territory of Andaman & Nicober Islands enjoy zero sales tax. first. Several states have given sales tax exemption for 15 years as a concession.

whose annual turnover is upto Rs 5 lacs. A proper VAT needs to cover the full chain of economic activity. with daily sales of a mere Rs 150. food consumption will be tax free. some states. which can be collected as a surcharge on VAT. even if the I. which hitherto used to exempt grains from sales tax. but will not be able to pass on the tax on his sale invoice. like Tamil Nadu. The power to fix the rates is the critical element of the power to levy a tax. tobacco. a dealer. which. After that. i. This means that small panshops. the uniform standard rate across all states. thus robbing the state of tax flexibility. with annual turnover between 5 lacs to 40 lacs will have to pay 1 % turnover tax. So grains with 4 % VAT will be costlier in the importing state. is kept out of the purview of VAT. The VAT proposed to be implemented at the State level is only on the value added at the trade level. IMPLEMENTATION: Constitution amendment is needed to provide for a unified VAT in place of the current melange of central and state taxes.T exemption limit is raised to Rs 5 lacs. small dealers find difficult to comply with. while the centre will continue to levy Additional Excise Duty under AED (Goods of Importance) Act. Kerala. A Unified VAT will centralise tax rates. customs duty. Banking Briefs 166 (For private circulation only) . VAT imposes an onerous burden on tax payers in terms of account keeping. he will be able to pass VAT on to his customer. whose annual sales turnover is Rs 1 crore. They may be allowed to levy state VAT on items of their choice. A dealer. 1957. if the goods he deals with. will come under VAT. and sugar will attract 4 % VAT. States which are deficit in agricultural production need to import grain from other states. Compensating VAT. a small industrial suppler will be out of business due to this provision. and thus the poor do not need to pay any tax. Thus.Attractive alternatives to the proposed VAT are Dual VAT. VAT is equitable. not on manufacture. transport or importation. The results were disappointing and the system abandoned. A dual VAT would be superior to the existing system of cascading state level taxes. The proposed system has another flaw. Moreover.e. service tax and sales tax. will pay only Rs 20000 VAT. etc. Dealers. advertising. Andhra Pradesh and Maharastra experimented with a modified indigenous model of VAT.. A dealer whose annual turnover is Rs 40 lakhs will now pay Rs 40000 as turnover tax. A unified VAT of say 16 % can replace the current melange of excise duty. attract 4 % rate of tax. In the mid-nineties. Textile. whereas. as it is difficult to collect VAT from millions of small and marginal farmers. with 5 % gross profit. If farm produce is not VATted. the exchequer will be richer by over Rs 10000-20000 crores.

It is regarded as an important tool for poverty alleviation. (ii) the economic lot of the poor can be improved through subsidy linked poverty alleviation credit programme. etc. particularly the rural poor. Generally. micro finance has become a buzzword for development initiatives particularly in the third World countries. The extensive banking sector network and the direction to the commercial banks to route 10 per cent of net bank credit to the weaker sections was a step in the right direction to create a clear policy environment for providing microcredit to the poor.100 societies/branches. The British Government in 1793 issued regulations for Taccavi loans to farmers/tenants for various purposes. MFAC. As a result. stipulation of 10% bank credit to weaker sections. Several focused programmes by both Central and State Governments. setting up of the Regional Rural Banks and the three tier co-operative structure. have enabled the creation of an extensive financial infrastructure for taking banking to the door steps in far flung rural areas. Integrated Rural Development Programme (IRDP) initiated in 1980 was not only the largest micro finance programme in the country but also by far the largest of similar programmes initiated in various countries around the world. etc. branch expansion in rural and unbanked areas. (i) the rural poor has no capacity to save. Its objective is to raise the income and standard of living of poor Measures taken in micro financing: Opening up of large number of branches. co-operatives became the major institutional source to provide all agricultural loans.830 semi-urban branches of commercial banks as on 31st Mar 03.721 crore in 2003-04. The nationalisation of banks. such as.386 rural and 14. The total advances to weaker sections by the PSBs stood at Rs. There has been phenomenal growth of agricultural credit from the level of Rs.03.522 RRB branches and 32.303 crore at the end of March 2003. These assumptions led to the policy orientation towards capital subsidies. semi-urban and urban poor. were implemented. the provision of financial services to the poor started in the form of rural credit. These measures were initiated to reduce indebtedness and regulate money-lending activities for agricultural purposes.1.MICRO FINANCE l It refers to the provision of credit and other financial services and products of very small amounts to rural. DPAP. 14. Since then and up to late fifties.885 crore in 1970-71 to the level of Rs. (iii) interest rates of credit from informal sources were exploitative. The policies concerning rural credit in India were based on certain assumptions such as. credit and other financial services and products of very small amounts to the poor in rural. IRDP. SFDA.000 retail credit outlets comprising co-operatives numbering 94. In India. the rural areas are served to- Banking Briefs 167 . the need for rural credit came into being even before independence.32. The Co-operative Societies Act was passed in 1904 with a view to providing necessary legislative support to streamline agricultural financing. target oriented poverty allevia(For private circulation only) l l l Micro finance refers to provision of thrift. MFA. With a view to expanding reach to the poor. introduction of several programmes such as SFDA. the Government took a number of initiatives during the last four decades. SHG has emerged as one of the successful instruments in Micro financing day by more than 150. In recent years. DPAP. semi-urban or urban areas for enabling them to raise their income levels and improve living standards.

Following the emergence of NGO sector in the country and their endeavour to provide micro-credit and support to micro-entrepreneurs. The said policy framework resulted in low recoveries. the Government of India perceives SHGs as the medium for promoting self-employment in rural areas. 75 per cent of the demand was for short term and emergent needs. Arising out of the encouraging progress of the SHG linkage programme. However. savings. credit guarantees for small loans. service area approach and review and monitoring system under the Lead Bank Scheme. RBI elevated SHG linkage from the pilot phase to the mainstream banking as a normal credit activity under priority sector. The Task Force set up by NABARD in November 1998 expressed the view that the National Policy on Micro Finance should emphasise on (i) encouraging initiatives and participation of different types of institutions in micro finance (ii) bringing micro finance activities within the regulatory framework (iii) creating policy environment for closer linkages of the micro finance sector with the formal banking channels and (iv) making available equity.79. and increasing reliance of the rural credit system on concessionary refinance from apex financial institutions. Banking Briefs 168 (For private circulation only) . whereas almost entire demand for consumption credit was met by informal sources at a very high interest rate (varying from 32 to 92%).000 SHGs in a period of 5 years. an informal segment comprising small. Production credit accounted for about one-third of the total credit which was met by the formal sector (mainly banks and co-operatives). 1992. indigenous Self Help Groups (SHGs) have started mobilising thrift and savings and lending these resources among their members on a micro scale. As on 31st March 2004.tion programmes. leakage and heavy dependence on concessionary refinance support. A study conducted by the Asia Technical Department of the World Bank (1995) observed that consumption credit. The cumulative number of SHGs credit-linked to banks aggregated 10. and improper selection. NonGovernment Organisations (NGOs). HUDCO. as per All India Debt and Investment Survey. several agencies and departments of the Central and State Government like NABARD. excess target orientation in government sponsored programmes. HDFC. The Government has targeted 40 lac poor families to be assisted by NABARD through 200. SIDBI. Due to the inadequacies of the formal financial system to cater to the rural poor.3904 crores. particularly women. production credit and insurance were the priority needs of the rural poor. In 1982. the dependence of rural household on such informal sources has reduced to 36 per cent. of late. The resources of these institutions are small but the potential of SHGs to develop as local financial intermediaries to reach the poor has gained wide recognition. The rural credit system was incapacitated by the poor quality of lending. Ministry of Agriculture/ HRD/Rural Development started using NGOs for reaching out credit and other welfare services to the rural. It neither contributed to the sustained growth of the rural credit system nor did it serve the rural poor to make them self-supporting. the cumulative bank loans disbursed to the SHGs aggregated Rs. Consumption constituted two-third of credit usage and. start-up capital and capacity building funds for the existing and emerging institutions engaged in micro finance. NABARD started a pilot project for linking SHGs to the banking system in consultation with RBI and NGOs. soft lending terms with nil or very low down payment. within consumption credit. such as illness and household expenses. From April 1996.091 as at end March 2004. stifling the recycling of credit. allowing grace period.

The National Internet Exchange of India or NIXI. Currently delays are estimated to be in the range of 0. that will serve the Delhi region. Indian ISPs route large chunks of their domestic traffic through international bandwidth.NATIONAL INTERNET EXCHANGE OF INDIA (NIXI) l At present.2 seconds to 0. the exchanges help deliver better quality of services to users by reducing latency and delays. Net4 India. CJ Online.0 seconds. this is set to change. Iserve. In the first phase. domestic traffic still is bounced off via international bandwidth rather than routed through local ISP (Internet Service Provider) networks. then to US and then come to Chennai. Ernet. MTNL and Data Access. The list includes HCL Infinet. Savings of foreign exchange as well as better quality are the major advantages that Internet exchanges bring. Apart from obtaining operational efficiencies.4 seconds. Reach. All because the ISPs whose traffic is originating from Mumbai does not have a ‘peering’ agreement with an ISP who has a network in Chennai so the traffic can be routed via that. the first of its kind in the country is expected to be operational anytime. India is perhaps the only country in the world that does not have an Internet exchange. Chennai and Kolkata. Mumbai. Internet exchanges will be set up across four locations: Delhi. Noida. However. Dishnet. Peering is the arrangement of traffic exchange between ISPs where the participating ISPs allow traffic to ride on each other’s network. the ‘peering point’ of the ISPs. the traffic in Internet within India gets routed through overseas location due to absence of proper exchange facility. Bharti Broadband. Banking Briefs 169 . (For private circulation only) l l l Even for the technologically savvy. Internet Exchange creates an arrangement by which traffic is routed on the domestic network of Internet Service Providers. World over. which will lead to markedly improved browsing. resulting in raised operational costs for service providers and surfing costs for users.7 seconds to 2. This is likely to go down to 0. The first exchange at STPI (Software Technology Park of India). is almost operational. The exchange would enhance operational efficiency. which in turn will save the usage of international bandwidth and foreign exchange. This causes higher operational and surfing cost. enhance quality and reduce delay and cost What NIXI will do is become the meeting point or in more technical terms. With NIXI the quality of service for the customers of ISPs participating in the project is expected to significantly improve as multiple international hops will be avoided and there will be lower delays. For instance. Already about 12 ISPs have signed up. Estel Sprint. Its purpose will be to facilitate domestic Internet traffic by routing it through peering ISP members. this routing of domestic traffic is done through ‘peering’. it is likely that they will first go from Mumbai to Singapore. it might come as a bit of a shock to know that nearly eight years after the gates of the Internet were thrown open to subscribers in India. STPI. if packets have to be routed from Mumbai to Chennai.

the Indian commodities market offers unparalleled growth opportunities and advantages to a large cross section of the participants including producers. to protect against possible price falls in the future and allow consumers traders. to ‘lock-in’ a price which they will receive and pay respectively. Regulatory Framework The commodity exchanges are governed and regulated under the Forwards Contracts (Regulation) Act. Food and Public Distribution. l l Banking Briefs 170 . The commodity exchanges are granted approval by FMC under the overall aegis of the Ministry of Consumer affairs. Regulated by SEBI Gives access to a huge market and provides ability to trade in multiple commodities and in multiple region from a single point. 1952 by the Forward Markets Commission (FMC) which is the apex regulatory body for commodity and futures market on the lines of the Securities and Exchanges Board of India (SEBI). among others . Hedgers and Arbitrageurs.. who provide market depth and liquidity in the system. All commodities and future contract traded on the exchange are required to be approved by the FMC along with their contract specifications which describes the quantity. quality and the place of delivery of the commodity traded. corporates. In this way they are able to ‘hedge’ their price risk. The underlying economic purpose of a commodity exchange as a marketplace is to enable commodity producers to sell their produce in advance. industry associations. for the securities market operations. l It is for these reasons the commodity exchanges actively encourage the participation of market specialists or ‘Liquidity Providers’. i. or just have peace of mind. which increases the likelihood that buying and selling can be made at all levels and at all points of time. on a real time basis. ‘Hedging’ and ‘Speculative’ trading provide equal liquidity. of (For private circulation only) Very deep level of intermediation. Government of India.e. thereby ensuring continuous entry and exit route for any participant. the lifeline of the national economy. The ‘underlying’ and universally traded commodities. traders. This ‘price-setting’ function is performed by providing a meeting-place for producers and the ultimate purchasers of the commodities. exporters. The Indian commodities market stands out quite tall amongst the global markets for a variety.MULTI COMMODITY EXCHANGE OF INDIA l l Is a market place to enable commodity producers to sell their produce in advance Helps to protect against possible price falls in the future. This in turn introduces the element of ‘price discovery’.clearly. cooperatives. l l l Background By its sheer size and turnover. importers. commodities are ‘trade’ driven. Given this background. and hence secure financing from their bank. allows consumers to buy in advance against possible price increase. processors and exporters to buy in advance to protect against possible price increases. regional trading centres. Spot market trading drives futures trading and vice versa. there are certain fundamental market realities about the commodities sector that merit closer attention: l Unlike equities.

Captive Market . Waiting to explode . In line with it strong belief of setting up a truly independent and a neutral platform. MCX has taken several initiatives to usher in a newgeneration commodities futures marketplace in the country and in the process. more agro commodities are now being identified and added to the list of permitted commodities for futures trading which has increased from 1 1 in the mid-90s to over 100 as of date. the Government has announced establishment of Nationwide Multi Commodity Exchanges as an important national initiative for the development of the commodities and futures trading in the country. is an independent and a de-mutualized exchange since inception. And the reasons for the same are not difficult to understand: l l Supply . 1952. multicommodity exchanges for providing deeper liquidity and better price access. MCX proposes to appoint intermediaries from the existing commodity exchanges. which is well poised to emerge as the “Exchange of Choice” for the commodity futures trading community in the country.World’s largest consumer of edible oils.. and removal of 11 days restriction on ready delivery which has now been made open ended.30. Banking Briefs 171 .000 crore (This is assuming a conservative multiplier of 10 times which in case of US is 20 times and also assuming that all commodities have future market over a period of time as the markets mature). securities exchanges and other sections of trade and (For private circulation only) l l As proposed in the National Agriculture.Agro products produced and consumed locally. online multi-commodity marketplace . ‘unlimited growth’ and ‘infinite opportunities’ to market participants. a ‘new order’ exchange with a mandate from the Government of India for setting up a nationwide. 2000. Moreover.3. Clearly. Width and Spread . MCX is committed in its pursuit of broad basing its ownership and has accordingly initiated several steps to make the exchange ownership pattern broader. Announcements made by the Government in this regard include: l Mandate for setting up national.factors. become the country’s premier Exchange.Predominantly an agrarian economy.000 crore and expected futures market potential around Rs.Value of Production around Rs. GDP driver . there has been a growing urgency to formulate a national infrastructure for creating a unified. MCX is all set to introduce a state-ofthe-art. MCX. performance excellence and affordability would be the key drivers for promoting and popularizing the MCX.500 mandies. online digital exchange for commodities trading in the country. The delivery and payment period restriction under the ready delivery contract of 11 days is now expected to be removed. nationwide marketplace for instituting trading in multiple commodities across different categories of participants at the same time.offering ‘unparalled efficiencies’. Promoted by a neutral third party. In addition. Demand . l Abolition of the Restricted Commodities for Futures as listed under Section 17 of’ the Forward Contracts (Regulation) Act.00. l l l Introduction to MCX At the forefront of the aforesaid changes is Multi Commodity Exchanges of India Limited (MCX). representative and inclusive.00. As a true neutral market. a nation-wide multi-commodity exchange.Over 30 major markets and 7. gold -’yellow metal’ mania.World’s leading producer of 17 agricultural commodities.

and on real time basis. MCX – Commodities Contracts to be Traded In order to ensure that MCX is able to maximize business opportunities and provide the widest range of commodities to trade in. and Risk Management Systems provided by MCX. then the turnover may be more than Rs.500 crore. This is the central belief of MCX and towards that it shall endeavor to provide all participants equally rewarding opportunities. MCX . MCX also proposes to educate these intermediaries on a continuous basis to enable them to make use of this market effectively. and the volume implication the cash market has on the futures trading globally. (This is an estimate. l Banking Briefs 172 (For private circulation only) . Access to a huge potential market much greater than the securities and cash market in commodities. Above estimations are based on the current size of the Indian commodity markets and potential for futures trading. Ability to trade in multiple commodities and access multiple regions from a single point. Further. I 00 crore to start with in futures trading and then subsequently. This is being done to ensure that sufficient trading interest and market depth is being built in all contracts that are introduced by the exchange from time to time. plans to put in place a large network of over 500 traders appointed all across India and managed through a central team of MCX professionals based out of Mumbai. if the participants in the industry decide. consumption and trading. Clearing and Settlement.The Execution Plan The MCX project. MCX proposes to work closely with trade and industry to create a user friendly and business oriented environment to tap the potential market.industry to penetrate all sections of the economy connected with commodities production. however. The entire Exchange would be automated with the members of the exchange being linked to the central system by VSAT and other medium.500 crore per day also). MCX – The Market Benefits The mark of a true exchange market is that it provides equal opportunities without any bias. based on the size of the cash market. l l However. the objective would be to introduce futures trading in contracts/ commodities in a phased manner. MCX proposes to start futures trading in all permitted commodities in due course. which is given below: * * * Gold Castorseed Rubber * * * Silver Cotton Pepper MCX expects to achieve a daily turnover of over Rs. a daily turnover of over Rs. Accordingly. with their business being controlled and managed through the Trading. Technology to be the state-of-the-art and to come from the capability of an advanced technology partner. the select underlying commodities are being considered in the initial list to begin with. Some of the significant benefits of MCX include: l Low cost membership of a national level commodities exchange. to begin with.

S. IDRBT is also in the process of preparing a comprehensive list of all the software readily available in the market for the banking and finance sector. 1999. any other advanced feature and names of the organisations where the product was already implemented for sharing with all banks and FIs. Saraff Committee on Technology Upgradation in Payments System. description. The network has been inaugurated in June. hardware platform. MIS. The Indian Financial Networking (Infinet) a wide area satellite based networking using VSAT technology. last date for updating. IDRBT has taken up research programmes in electronic payment systems. The INFINET covers more than 100 commercially important centres and serves as the communication backbone of the Integrated Payment and Settlement System (IPSS). being jointly set up by RBI and Institute for Development and Research in Banking Technology (IDRBT) at Hyderabad would facilitate connectivity within the financial sector. Trading in Government Securities. The institute has called upon all the software development and marketing vendors of banking and financial management software to submit product details in brochures such as the product name. Centralised Funds querying for Banks and FIs. type of application.THE INSTITUTE FOR DEVELOPMENT AND RESEARCH IN BANKING TECHNOLOGY (IDRBT) l l l l l IDRBT was set up in 1996 at Hyderabad It aims to promote technology solutions in banks and Fis It has set up INFINET which provides connectivity to banks INFINET helps in facilitating inter-bank transactions and settlements IDRBT is now an authorised certifying authority for digital signatures standards. was set up by the Reserve Bank of India (RBI) in 1996 at Hyderabad with the objective of making the institute a think-tank for the promotion of technology solutions to improve the functioning of the banking and financial sector. multimedia products. Banking Briefs 173 (For private circulation only) . ECS. database. data warehousing. Various inter-bank and intra-bank applications ranging from simple messaging. operating system. anywhere/ anytime banking and Inter-bank reconciliation are implemented through INFINET. The institute is also actively associated with a number of activities coordinated by the RBI and Indian Banks’ Association on the areas of technology upgradation in banking sector. Online Processing. certification. EFT. payment systems. Electronic Debit. security. issue date. The committee had recommended a variety of payment applications which could be implemented with appropriate technology upgradation and development of a reliable communication network and Certification authority for banking software. IDRBT as a Certifying Authority (CA) issues digital certificates and provides Pubic Key Infrastructure (PKI) based services. expected date of new version. The Institute for Development and Research in Banking Technology (IDRBT). messaging standards and inter-bank applications. etc. With a view to provide guidance to banks in networking and security issues in applications. IDRBT was set up following the recommendations of W.

there is a default inter-change switching fees between the banks.2004. It is a win-win situation for all the banks and more importantly.IDBRT has since launched National Financial Switch (NFS). Corporation Bank and ICICI Bank. IDBI Bank Punjab National Bank who are in the process of connecting with the NFS. to link ATMs in August 2004.000 by December 2005. The NFS comprises a national switch to facilitate inter-connectivity between the banks’ switches and inter-bank payment gateway for authentication and routing the payment details of various e-commerce transactions. which also facilitates NFS disaster recovery site from its premises at Mumbai. for the Bank consumers in India. With this customers’ dream of walking across to the nearest Automated Teller Machines (ATM) of any bank to transact has become a reality and NFS has gone live with three banks on 26. Banking Briefs 174 (For private circulation only) .08. As for the modalities of the working of the NFS. The three banks are Bank of Baroda (BoB). if the banks do not have their own mutual agreements. UTI Bank. The Clearing Corporation of India is the clearing and settlement agency for the switch. The infrastructure allows connecting directly to the individual bank’s switch or through their shared ATM network switches. There are 15 more banks including the SBI.000 units and it is expected to go upto 30. egovernment activities. The installed base of ATMs in the country is estimated to be over 15.

the risk of default has effectively shifted to another entity. Later. HFCs and banks would be in a position to invoke mortgage insurance if a borrower fails to repay the loan. while the Asian Development Bank (ADB) and the International Finance Corporation (IFC) will hold 13 per cent each. l l l The National Housing Bank (NHB) will hold 26 per cent stake in the proposed India Mortgage Guarantee Company. thereby permitting a greater volume of mortgage lending in the market. The so-far neglected semi-urban and rural sector. A separate study team has also been constituted — with representation from each of the promoters — to finalise the product mix. The other promoters — the Canada Mortgage and Housing Corporation (CMHC) and the Canada-based United Guarantee Company (UGC) — will hold 24 per cent each. With the setting up of the company. business class and selfoccupied persons would find it easy to get housing loans. Banking Briefs 175 (For private circulation only) . This would also help them extend the tenure of loans to up to 25 years or more instead of the current average of 15 years. for an upfront one time premium.MORTGAGE GUARANTEE COMPANY l Proposed to be jointly promoted by National Housing Bank with other international Guarantee companies. Initially NHB will invest $10. and improve the return on capital to the mortgage lender. Initially. ADB would be investing up to $10 million in the proposed company. while ADB and IFC will be the strategic partners. All housing loans above a cut-off point of loan to value ratio will be compulsorily covered under the scheme. The company would help protect primary mortgage lenders — HFCs and banks — in case of borrower default. CMHC and UGC would lend their expertise for day-to-day operations of the company. once the company becomes operational. The premium amount and the guarantee cover ratio are still to be finalized. This scheme would also benefit homebuyers. The other promoters — CMHC and UGC — will invest $9. UGC has also been considered as it has good exposure in the international market in offering mortgage insurance schemes.2 million each.4 million. Aimed to protect lenders ( of housing loans) and mortgage investors from financial losses due to default of the borrowers All housing loans beyond a cut-off would be automatically covered under the scheme for a premium It would help banks to increase the repayment period of Housing loans besides improving the return on capital. and lenders will be able to improve their loan provisioning requirements. it was decided to float the company with the help of the the apex body of the housing sector in Canada. to be floated with an initial capital of $40 million in a bid to protect lenders and mortgage investors from financial losses.6 million. while both ADB and IFC will invest $5.

2002. ARCIL’s objectives l l l Internationally. led to the enhancement of the initiative. ICICI Bank Ltd. ARCIL (For private circulation only) Banking Briefs 176 . strip and sell assets. balance 49% is held by SBI and IDBI. Industrial Development Bank of India (IDBI) and other private sector banks / institutions. Promoted by SBI and IDBI along with a few other banks.ARCIL l l l Established in Aug 2003. settle with promoters. 1956. Take over of assets by ARCIL helps banks to focus on core operations and isconsidered as a public financial institution within the meaning of section 4A of the Companies Act. ARCs act as debt aggregators and engage in acquisition and resolution of NPAs. under SARFAESI Act. Risk Based Supervision. act as managers and agents for recovery. the Government of India (GOI) and the Reserve Bank of India (RBI) have proactively initiated measures to regulate and control NPAs and quicken recovery. and ARCs thus provide a focused approach to the NPA resolution issue by isolating NPAs from the banking system. It acquires the impaired asset of banks and thus helps in cleaning up the NPAs of Banks It can restructure debts. Also.. Corporate Debt Restructuring and strengthening of credit appraisal and monitoring systems are some of the key initiatives taken in this regard. freeing the banking system to focus on their core activities. enactment of The Securitisation and Reconstruction of Financial Assets and Enforcement ofSecurity Interest (SRFAESI) Act. Asset Reconstruction Companies (ARCs) have been created to bring about a system-wide clean up of NPAs resulting from financial and economic crises. Debt aggregation by ARCIL will enable single point responsibility and ensure speedy implementation of resolution strategy. The Debt Recovery Tribunals. ARCs in India – the genesis In India. The Act has paved way for the formation of Asset Reconstruction Companies in India. facilitating their return to equity markets and normal banking business. ARCIL will pioneer the development of an active secondary market for Restructured Debt paper. 2002 Convert NPA into performing assets Act as a nodal agency for NPA resolution Unlock value by utilizing productive assets Create a vibrant market for NPA / Restructured debt paper Revitalizing the national economy Re-energize the financial sector l l l l l No single promoter has a majority stake ensuring independence of operations ARCIL – key strengths ARCIL will bring about faster debt aggregation and resolution of inter creditor issues. ARCIL is promoted by State Bank of India (SBI). Overview of ARCIL ARCIL is the first ARC in the country to be licensed by RBI under the SRFAESI Act. While the private sector banks hold together 51% of ARCIL’s share capital.

covering areas. Based on the recommendations of the two working groups constituted by the Reserved Bank to address the above issues. Takeover of debt by ARCs reduces expenditure on NPA maintenance (legal expenditure. l SCs / RCs seeking registration with the Reserve Bank are required to have a minimum owned fund of Rs. 2002 for regulation of securitisation and reconstruction of financial assets and enforcement of security interest by secured creditors. Carrying out any other business would require Reserve Bank approval. 2003. SCs / RCs should not accept deposits (as defined under Section 58 A of the Companies Act. Such SCs / RCs can undertake both securitisation and asset reconstruction activities. While change or take-over of management / sale or lease of business of the borrower is provided for in the SARFAESI Act. settlement with promoters and strip sale of assets. SCs/ (For private circulation only) l l l l Banking Briefs 177 . Subsequent to the sale of NPAs no known liability devolves on the Banks / FIs.) and releases resources for core operations. 2 crore. 2002 was enacted by the Government of Indian on June 21. RBI Guidelines for SCs/ ARCs The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. guidelines and directions have been issued to securitisation or reconstruction companies on April 23. Sellers have an opportunity to invest. such as. ARCs are empowered to change / takeover management and sale / lease of assets under the Act. The sale provides for sharing of upside upon eventual realization by ARCIL. follow-up requirements etc. in Security Receipts (SRs) issued by ARCIL for acquisition of NPAs. prudential norms. Companies carrying out any other business are to cease to undertake such activities by June 20. 1956). Following are the main features of the SCs / RCs. This empowerment will be available as soon as RBI guidelines in this regard are issued. as Qualified Institutional Buyers (QIBs). owned fund. capital adequacy. These provisions facilitate timely and effective implementation of the resolution strategy. Value realizable to lenders is determined by the fair price of the NPA (usually determined by an independent valuer). registration. The SRFAESI Act. Scs / RCs registered with the Reserve Bank would confine their activities to the business of securitisation and asset reconstruction and such other activities as permitted under the SARFAESI Act. Sale of NPAs on a portfolio basis enables loss on sale of any one asset to be set off against capital gains on another. Advantage Banks / FIs The sale of the financial assets to ARCIL enables the NPA to be taken off the loan books of the Bank / FI and unlocks capital. aggregate value and type of assets to be acquired. The Act vests the Reserve Bank with the powers to register such companies and frame regulations for their functioning. including securitisation companies (SCs) and reconstruction companies (RCs). While SCs / RCs not registered with the Reserve Bank can carry out the business of securitisation and asset reconstruction outside the purview of the SAFAESI Act. Resolution strategy adopted by ARCIL will be targeted towards maximizing realization of value for the selling banks.offers a comprehensive range of resolution strategies such as debt restructuring. 2002 provides that no fresh reference to BIFR can be made once assets are acquired by an ARC. they would not be able to exercise the powers of enforcement provided for in the SARFAESI Act. based on an in depth analysis of enterprise characteristics. subject to RBI guidelines on provisioning / valuation norms. 2003. mergers and acquisitions.

This should. on an ongoing basis. invest in the equity share capital of another SC / RC for the purpose of asset reconstruction. a capital adequacy ratio. Investments in land and buildings can be made only out of funds borrowed and / or owned funds in excess of the minimum prescribed owned fund of Rs. description of assets backing the security receipts. if any.RCs cannot exercise these powers until the Reserve Bank issues necessary guidelines in this regard. as a sponsor or for the purpose of establishing a joint venture. provide norms and procedure for acquisition of financial assets. l l l l l l l l Banking Briefs 178 (For private circulation only) . SCs / RCs. as per policy framed in this regard. l l Every SC / RC shall frame an asset acquisition policy with the approval of their board within 90 days of grant of CoR by the Reserve Bank. through one or more trusts set up for this purpose. Loss assets are to be written off. Prudential norms covering capital adequacy. valuation of investments and provisioning. SCs / RCs may reschedule and settle the debts payable by the borrower in terms of a policy framed by their boards in regard thereto. valuation of assets and delegation of powers. and the non-performing assets further into sub-standard assets. may. Surplus funds available may be deployed in government securities and deposits with scheduled commercial banks in terms of a policy framed in this regard by their board. 2 crores. Provisioning is to be made at the rate of 10 per cent and 50 per cent (100 per cent to the extent the asset is not covered by the estimated value of the security) in respect of substandard assets and doubtful assets. SCs / RCs should formulate a plan for realization of assets. asset classification. The security receipts. redemption details including servicing arrangements. respectively. which shall not in any case exceed five years from the date of acquisition. inter alia. SCs / RCs should maintain. provisions are to be made to the full extent. to be issued on private placement basis. All investments made by the SCs / RCs are to be valued at the lower of cost or realizable value. Every SC / RC should classify the assets on its balance sheet into standard and nonperforming assets. income recognition. interest rate / probable yield. which shall not be less than 15 per cent of its total riskweighted assets. inter alia to make disclosures in the balance sheet and offer document in the form of financial details. SCs / RCs may raise funds from Qualified Institutional Buyers (QIBs) by way of issue of security receipts. which clearly spell out the steps proposed to reconstruct the assets and realize the same within a specified time frame. credit rating. SCs / RCs are. If loss assets are retained in the books for any reason. shall be applicable to the assets borne on the balance sheet of such companies. types and desirable profile of the assets. can be transferred only amongst QIBs. doubtful assets and loss assets.

REGIONAL RURAL BANKS l l l There are 196 RRBs with 14433 branches More than 160 RRBs make profits Narasimham Committee proposed several reforms for RRBs including creation of separate subsidiary by combining branches of commercial banks and RRBs. more particularly after mid-nineties RRBs have adopted a multi pronged approach for overall development of the districts as a whole.1975 coinciding the birth anniversary of our father of the nation Mahatma Gandhi. It also observed that the deposit collection by the Banks in rural areas was not totally deployed in rural areas. they participated vigorously in poverty alleviation schemes(IRDP) and disadvantaged areas. To masses. Along with commercial banks.) Banking Briefs 179 (For private circulation only) . their financial viability was initially overstretched by policy rigidities coupled with lower capital base in an environment of inadequate infrastructure and deeper social and economic disparities. The following figures highlight significant contribution of RRBs in rural sector. State Government(15%) and a Sponsor Commercial Bank(35%).. Chairman. of India(50%). attitudinal features of their employees and lack of professional banking approach in cooperative credit structure were causing difficulties in expansion of rural credit. l (Article contributed by Shri V.With 95% of their branches in rural areas. permission to finance big borrowers. Jaganmohan. Warangal. Keeping the above in view. agricultural labourers. Kakatiya Grameena Bank. Regional Rural Banks (RRBs) were established by promulgation of ordinance on 26th September. The first RRB was established on 2 nd October. small traders. l l Performance of RRBs In initial stages. However. The mandate of these rural financial institutions was: l To mobilise rural savings and channelise them for supporting productive activities in rural areas To generate employment opportunities in rural areas and To bring down the cost of providing credit in rural areas. The RRBs are owned by Govt. particularly in areas without banking facilities To make available cheaper institutional credit to the weaker sections of the society. Some key reforms in RRBs: Deregulation of interest rate.1975. RRBs quickly became an important and integral part of the rural credit system. In the post reform era. RRBs financed only the weaker sections of the rural community-small and marginal farmers. Narsimham Committee recommended for creation of a new set of regionally oriented rural banks which would combine the cooperatives’ local feel and familiarity with problems and commercial banks’ business acumen. they have made substantial contribution in financing agriculture. and so on. RRB has emerged a major Central Government Institution in 516 rural districts of the country. The sponsor bank manages the RRB on behalf of owners. handling non-fund based business such as guarantees and lockers who were to be the only clients of these banks l l Background The Narsimham Committee (appointed in 1975) observed that the cost structure of commercial banks. Crores As at the end of ‘ Dec.75 Jun82 June 88 Mar91 Mar95 Mar04 Reform Measures After the financial sector reforms, several measures to improve the viability of RRBs were initiated. More importantly, re-capitalisation to cleanse their balance sheets was taken up in 1993-94. Altogether, 187 RRBs have been selected for recapitalisation with an aggregate financial support of Rs.2182 crores. Other important reform measures include:

No.of RRBs 6 121 196 196 196 196

Districts covered 12 207 365 381 425 516

No.of branches 17 5393 13586 14527 14509 14433

Deposits Advances CD Ratio 0.20 382 2,455 4,989 11,150 56,350 0.10 462 2,428 3,609 6,290 26,074 50 121 99 72 56 46

and signing of memorandum of understanding with sponsor bank for sustained viability in a planned manner;

Provision of greater role space and larger operational responsibilities to sponsor banks in the management of RRBs; Encouragement to function as self-help promoting institutions and financing of selfhelp groups Introduction of Kisan Credit Cards to simplify provision of production credit to their clients.


Deregulation of interest rates on advances as well as deposits; Permission to lend to others outside target groups; Provision for rationalization of branch network- relocation and merger of lossmaking branches; Introduction of prudential norms on incomerecognition, asset classification and provisioning; Preparation of development action plans



Contribution to micro credit movement RRBs have taken a lead role in financing of Self Help Groups(SHGs) mostly comprising of women leading to their economic and social empowerment. The share of RRBs in SHGBank linkage programme is equally commendable as under:




AGENCY-WISE DISTRIBUTION OF NUMBER OF SHGs FINANCED UPTO 31-3-2004 Agency SHGs Commercial Bank RRBs Cooperatives Total (Source: RBI Annual Report: 03-04) Bank Loan No. 5,38,422 4,05,998 1,34,671 10,79,091 % 50 38 12 100 Amount (Rs. In Crores) 2,255 1,278 371 3904 % 57 33 10 100

Banking Briefs


(For private circulation only)

The continued relevance of RRBs RRBs were created to exclusively serve the rural sector wherein many infrastructural deficiencies still prevail whereas commercial banks have the comfort of operating in Metro/ Urban environment with obvious infrastructural advantages. Post-reforms, a uniform levelplaying field has been created between rural financial institutions and commercial banks with regard to regulatory regime/practices/norms though both are operating in divergent and unequal economic backyards. RRBs are destined to face rough weather financially in the initial stages of level-playing regulatory mechanism being created under financial sector reforms. 97 out of 196 RRBs have been classified by RBI as weak banks. At the same time, role and structure of RRBs cannot also be dispensed with against backdrop of growing rural credit requirements and with the renewed emphasis on increased credit flow to Agriculture. Against the background of growing signs of weaknesses in cooperative banking system and the dwindling role of commercial banks in rural credit, RRBs have, by ipso facto, emerged as the only surviving rural financial institution with professional management culture to meet the small-value and large-volume rural credit. Therefore, the time has come for revitalising/ revamping the structure of RRBs to enable them to play a critical role in rural and agricultural credit. Performance of RRBs sponsored by State Bank of India. Our Bank has sponsored 30 RRBs (all our associate banks together have sponsored 14 RRBs) spread over 102 districts in 16 states with a network of 2,350 branches. The aggregate deposits and advances of the sponsored RRBs stood at Rs. 7,813.78 Cr and Rs. 3401.90 Cr respectively as at the end-March 04. During the financial year ended Mar 04, 18 of the Bank’s RRB made profit, same as in the previous year.

The Bank had, up to March 04, contributed Rs. 134.97 Cr for recapitalization of the 29 RRBs taken up for restructuring. The RRBs actively participated in marketing of SBI Life’s insurance products. In SBI Life’s Group Scheme, 1,93,685 clients were covered with sum assured aggregating Rs. 1001.10 Cr with premia aggregating Rs. 5.86 Cr. Vyas Committee Report on RRBs. The Vyas committee report had suggested mergers among the RRBs, under the aegis of the respective sponsor banks. There is another view to adopt a hybrid model, where strategies for restructuring of the RRBs should be decided on a case-to-case basis. Under the hybrid model, merger of the banks again will be contingent upon the nature of function and volume of business. The report had suggested three preferred models. In the first stage, the RRBs in the north-eastern states should be merged into a zonal bank with equity infusion from the Nabard, State Bank of India and United Bank of India, in the ratio of 26:37:37, through a holding company, which will return the share capital and additional share capital deposits contributed by the Central and state governments at a price based on the book value. In the second stage, the RRBs in the rest of the country will be reorganised, the report recommended. All the RRBs of a sponsor bank in a state should amalgamate into a single unit, it suggested. Sponsor banks in each state may establish a holding company, with equity from sponsor banks and Nabard in the ratio of 74:26. The holding firm would contribute to the equity of the various state-level RRBs of the sponsor bank. This will reduce the number of RRBs to 74 from 196 Holding companies should harmonise staffing patterns, procedures and policies of amalgamated RRBs operating in a state in three to five years, the report suggested. Thus 20 state-level rural banks will emerge.
(For private circulation only)

Banking Briefs


l l

Guideline by RBI in Aug 1996 for opening LABs. Objective: To promote rural savings and credit & provide efficient and competitive financial institutions LABs to cater to maximum three geographically contiguous districts To be established in private sector 8 LABs authorised and only 5 opened operations. Presently only 2 LABS are funcioning No new licences for LABs of the risk weighted assets from the very beginning. In the area of liquidity require­ments and interest rates, these banks would be governed by Provi­sions applicable to the Regional Rural Banks under the RRBs Act 1976. l Labs will be identical to the regional rural banks (RRBs) which are jointly owned by the sponsoring nationalised banks, the Centre and the respective State Governments. l Labs will be entirely in the private sector and will have the freedom to fix deposit and lending rates. The promoters may be individuals or corporate entities and will have to indicate the mode of raising funds. Present Position: The Review Group (Chairman: Shri G.Ramachandran) appointed by RBI in July 2002 recommended the following: l There should be no licensing of new LABs till the existing LABs are placed on a sound footing; l The existing LABs should be asked to reach net worth of at least Rs.25.00 crore over a period of 5 years for attaining viability; l LABs should maintain a minimum CAR of 15%; l LABs should be treated like any other commercial bank on regulation and supervision. At present only 2 LABs are functioning.

l l


l l

The RBI as per its guidelines on 24th August 1996 decide to allow setting up of local area banks in the private sector “ with a view to providing institutional mecha­nisms for promoting rural savings as well as for the provision of credit for viable economic activities in the local areas by catering to the credit needs of the local people and to provide efficient and competitive financial intermediation services in their area of operation”. Salient Features LABs would be registered as public limited companies under the Companies Act, 1956. l They would be licensed under the Banking Regulation Act 1949 and would be eligible for inclusion in the second schedule to the RBI Act, l 1934. l Their minimum paid-up capital would be Rs.5 crore with promoters l contribution being atleast Rs.2 crore. l Their area of operation should be a maximum of three geographi­cally contiguous districts. l Their activities would be focused on the local customers and therefore they would lend for agriculture, allied activities, SSI, agro industrial activities and non farm sectors. l 40% of their net credit would go to the priority sector while 25% of it (credit to priority sector) would go for weaker sections. They would adopt the prudential accounting norms and would have to maintain capital adequacy of 8% (or any other rate as decided by the Reserve Bank of India from time to time)

Banking Briefs


(For private circulation only)


NBFCs are popular due to simple procedures, speed of service, higher rate of interest and timeliness in meeting credit needs of clients There are around 14000 NBFCs in India of which around 800 can accept public deposits All NBFCs should compulsorily register with RBI NBFCs are now subjected to Capital Adequacy, IRAC norms, reserve requirements Some types: Leasing Company, hire purchase company, housing finance company, Loan company, Residual non-banking finance company etc. The ceiling of rate of interest for deposits reduced to 11% from 2003 Fund is the aggregate of paid up capital and free reserves after adjusting a) the amount of accumulated loss b) deferred revenue expenditure and other intangible assets c) investment in shares and loans and advances to subsidiaries, companies in the same group and other NBFCs in excess of 10% of owned fund. RBI has approved 13815 applications as at end Aug 2001 out of which only 776 companies are permitted to accept public deposits. ENTRY OF NBFC IN INSURANCE NBFCs are permitted to take up insurance agency business for a fee on a non-risk participation basis without the approval of RBI. NBFCs have to undertake insurance business as joint venture participants in insurance companies. Around 5 NBFCs were licensed by RBI to undertake insurance business. Of these, while two NBFCs were granted permission to undertake both life and general insurance business, three NBFCs were permitted to undertake only life insurance business. TYPES OF NBFCS Some of the major types of Non Banking Financial Companies are as under:

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BACKGROUND NBFCs have emerged as an important financial intermediary due to simplified sanction procedures, attractive rate of return on deposits, flexibility and timeliness in meeting the credit needs of the customers. During the second half of 90s many NBFCs defaulted on payment of principal and interest due to faulty lending policies and management malpractices. This has led to amendment to RBI Act in 1997, which provided for the compulsory registration of NBFCs with the RBI for commencing and carrying on business. The Act also provided for minimum entry norms, maintenance of a portion of deposits in liquid assets, creation of Reserve Fund and transfer of 20% of profit after tax annually to the Fund. The Act also conferred powers to RBI to issue directions to companies and its auditors, prohibit deposit acceptance and alienation of assets by companies and effect winding up of companies. RBI has issued directions to NBFCs to adhere to prudential norms such as Capital Adequacy, income recognition, asset classification, provision for bad and doubtful debts, exposure norms; and follow other measures in order to monitor financial solvency and reporting by NBFCs. NBFCs, which commence operations after April, 21 1999 are required to have a minimum Net Owned Funds (NOF) of Rs.2 Crore. Net Owned

Equipment Leasing Company: Principal business is leasing or equipment or financing of such activity
(For private circulation only)

Banking Briefs



Hire Purchase finance Company: Principal business is hire purchase transactions or the financing of such transactions Housing Finance Company: Principal business is financing the acquisition or construction of houses including acquisition and development of plots. Investment Company: Principal business is acquisition of securities Loan Company: Principal business is providing finance by way of loans and advances. Mutual benefit finance company: A company notified by Central Government under Sec 620 A of the Companies Act. They are also called Nidhi Companies


companies not falling under any of the above and governed by the provisions of Residuary Non-Banking Companies (RBI) Directions, 1987. The deposits of NBFCs have declined from Rs. 6500 Cr in 2000-01 ( 17.2% of the total liabilities) to Rs. 3400 Cr in 2003-04 (12.7% of the total liabilities). The number of deposit taking NBFCs has also reduced from 996 in 1997 to 577 by Sep 04. Internationally, non-banks including NBFCs raise resources from institutional sources or by accessing capital market. RBI has in its recent monetary policy has toyed with the idea of phasing out acceptance of deposits from the public, by NBFCs voluntarily.




Residual non-banking Norms for Banks and Non-Banking Financial Companies Regulatory company: These are Particular 1 Bank 2 NBFC 3 Net owned fund of not less than Rs. two crore is a pre-requisite for grant of CoR for commencing the business of a non-banking financial institution.

Minimum capital/ Minimum capital requirements of Net Owned Fund Rs. 200 crore, to be raised to Rs. 300 crore within three years of operation, in case of new banks. Promoters’ minimum contribution is 49 per cent of the paid-up capital. Statutory Liquidity Maintain in India, in either, (i) cash, (ii) gold (at up to current market Requirement price), (iii) unencumbered approved securities valued at a price specified by the Reserve Bank, or (iv) net balances in current accounts with nationalized banks in India, at close of business on any day, an amount not less than 25 per cent of total of demand and time liabilities in India on fortnightly basis, or such other percentage not exceeding 40 per cent, as the Reserve Bank, by way of notice, specifies from time to time.

To maintain in India in unencumbered approved securities’, valued at current market price, an amount at the close of business on any day which shall not be less than 15 per cent of the public deposits outstanding as at the last working day of the second preceding quarter.

Banking Briefs


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Particular 1 Cash Ratio Reserve

Bank 2 Applicable.

NBFC 3 No such requirement

Reserve Fund

Applicable. Transfer out of the profit Same as in the case of banks. of each year before dividend is declared, to such reserve fund a sum, not less than 20 per cent of such profit. Necessary. Applicable in case of No such requirement. amendment to the terms and conditions of the appointment of managing directors. Etc.

Prior approval of Reserve Bank for appointment of the managing directors. Prohibition of common directors Powers for appointment of additional directors


No such requirement.

The Reserve Bank may appoint one No such powers in case of NBFCs. or more persons to hold office as additional directors of a banking company.

Control over Prior approval of the Reserve Bank No such requirement for NBFCs. appointment of for appointment, re-appointment or These companies have freedom to appointment their auditors as per the auditors removal of the auditor required. Companies Act, 1956. Deposit directions Acceptance of deposits from the public, repayable on demand, allowed. Interest rate payable on saving accounts prescribed by the Reserve Bank. Detailed directions on acceptance of public deposits relating to, inter alia, minimum eligibility criteria, quantum, minimum and maximum period, rate of interest, and advertisement.

Payment system

Member of payment and settlement Cannot accept deposits withdrawable system. by cheque. Deposits insured by the Deposit Insurance and Credit Guarantee Corporation of India up to Rs. 1 lakh for each depositor in respect of his / her deposit in an insured bank in the same capacity and in the same right. Deposits are uninsured and no official agency guarantees the payment of principal or the interest on such deposits.

Deposit insurance

Banking Briefs


(For private circulation only)

Particular 1 Refinance facility

Bank 2


The Reserve Bank may grant No such provision in the Reserve refinance, rediscounting facilities Bank of India Act. 1934. and demand loans. The Reserve Bank has powers to No such provision. sanction schemes of amalgamation, reconstruction, and arrangement approved by the requisite majority of shareholders of the bank. Special provisions for winding up Winding up, subject to the general of a banking company under certain provisions contained in the Companies Act, 1956. circumstances.

Powers of amalgamation and scheme of arrangement Winding up proceedings

Banking Briefs


(For private circulation only)

hypothecation loans borrower group-wise credit exposure to related parties and other than related parties. the Reserve Bank has directed NBFCs to append an additional schedule effective March 31. (For private circulation only) l l l l l l l l l l l Banking Briefs 187 . A committee of officials of the Reserve Bank and the Institute of Chartered Accountants of India (ICAI). Break up of long-term quoted and unquoted investments. Break up of hypothecation loans (counted towards lease or hire purchase finance) where assets have been repossessed or other outstanding loans. Assets acquired in satisfaction of debt. Break up of stock on hire and repossessed assets. Khanna) recommended that the Reserve Bank should explore the possibility of redesigning t h e format of the balance sheet required to be prepared by the NBFCs. Break up of secured and unsecured loans and advances as also bill discounted. After taking into account the various suggestions of the industry and other developments. set up to examine the issues. 1956 were designed primarily to capture the business operations of non-financial companies and therefore. Position of gross non-performing assets recoverable from related parties and other than related parties. The additional disclosures cover the following items: l The Expert Group for Designing a Supervisory Framework for Non-Banking Financial Companies (Chairman: Shri P. The formats of the financial statements prepared by NBFCs as per Schedule VI to the Companies Act. partly secured debentures and other public deposits and the amount overdue under each head. Group=wise investment exposure to related parties and other than related parties.BALANCE SHEET DISCLOSURES BY NBFCS l l l l l l secured/unsecured borrowings friom various sources break up of public deposits break up of leased assets into financial leases and operational leases breakl up of stock on hire. and guidelines for corporate governance for listed companies by the SEBI and amendment of the provisions of the Companies Act regarding measures for protection of the depositions. the issuance of new Accounting Standards by the ICAI.R. repossessed assets. recommended in September 1999 that. 2003. such as. additional disclosure by way of schedules to the balance sheet and profit and loss account may be prescribed to reflect the particular risk profit of non-bank financial intermediaries. Borrower group-wise credit exposure to related parties and other than related parties. Net non-performing assets recoverable from related parties and other than related parties. These recommendations were discussed with industry associations and others concerned. Secured and unsecured borrowings from various sources and through different instruments and the amount overdue. did not reflect their particular business characteristics. Break up of public deposits in the form of unsecured debentures. while the basic structure of the existing formats of balance sheet of NBFCs as prescribed in the Companies Act should be retained. Break up of leased assets into financial leases and operational leases. Assets acquired in satisfaction of debt.

1 lakh of debt or part thereof in excess of Rs. viz: a) Attachment or sale of movable or immovable property.12000 for an amount of debt of Rs.10 lakhs and Rs. lie with the Appellate Tribunal. the Narasimham Committee on Financial System (1991) also emphasized the need for the establishment of special tribunals for banks and financial institutions. The Tiwari Committee (1981) and subsequently. 5 DRATs also have been set up. All this process has to be completed within six months. As on March 2004. After the defendant is heard. and Appointing a receiver for the management of the movable or immovable property.10 lakh or above. The fee payable is Rs.DEBT RECOVERY TRIBUNALS (DRTs) l DRTs set up under the Recovery of Debts due to Banks and Financial Institutions Act. The Presiding Officer of Appellate Tribunal is appointed by the Central Government by notification. Act framed on the recommendations of Tiwari and Narasimham Committee.10 lac and above. b) c) Arrest of the defendant or detention in jail.1000 for every Rs. Appeal against the order of Tribunal and orders of the recovery officer of DRT.10 lakh but more than Rs. the Recovery of Debts Due to Banks and Financial Institutions Act was enacted in 1993. The salient provisions of the Act are discussed hereunder. DRT deals with cases of Rs. subject to a maximum of Rs. Recovery Officer: On receipt of the copy of the certificate issued by the Tribunal the recovery officer proceeds to recover the amount of debt as specified in the certificate in one or more of the following modes. no fees need to be paid.1 lakh.10 lakhs. On the basis of these recommendations. But in respect of suits transferred to DRT from courts. DRTs are set up at 29 places Each DRT is given a territorial jurisdiction covering one or more States/Union Territories. Registrars and other officials in each DRT. The act applies to whole of India except Jammu & Kashmir. On receipt of the applications the DRT issues summons requiring the defendant to show cause within 30 days as to why the relief prayed for should not be granted. The Recovery Officer who enjoys certain powers like Income Tax Officer will then (For private circulation only) Banking Briefs 188 . DRTs are not speedy in settlement as promised by the Act. The Presiding Officer issues a certificate under his signature to the Recovery Officer for recovery of the debt specified in the certificate.1993. Appeal to be preferred within 45 days 29 DRTs set up so far. Order passed within 6 months. Appellate Tribunals is set up in Mumbai. There are Recovery Officers.50 lakhs. DRT passes an order on the application. About the Act Tribunals: The Act applies only to cases where the amount of debt due to banks or financial institutions is Rs. Objective: To set up a special tribunal which can provide speedy court remedies. The Central Government has powers to authorise the tribunals also to hear cases where the amount involved is less than Rs. l l l l l Introduction Lack of expedition us court remedies has been one of the major impediments experienced by banks and financial institutions in the recovery of non-performing advances (NPAs).1.

Recovery through DRTs The Tribunal has the power to appoint a receiver of any property. DRTs are looking into bigger companies with liability of Rs. But a large sum is recoverable from smaller companies with a liability of less than Rs. protection. The tribunal can make an interim order (injuction or stay or attachment) against the defendant to debar him from transferring. The amount so recovered by him will be distributed among the concerned banks/financial institutions. the application and disposal of such a company to be distributed among its secured creditors in accordance with the provisions of Sec. Banking Briefs 189 (For private circulation only) . In reality. the collection of the rents and profits thereof. For appeal. custody or management of the receiver for the realisation.10 lakhs which are now outside the purview of the DRTs. The filing of appeal should be done along with the fees and 75 per cent of debts as mentioned in the order. management.recover the amount of debt by following appropriate methods. filing of appeal is inconvenient to the aggrieved persons. this may not happen. alienating or disposing of any property and assets belonging to him. 1956.” The Act has several loopholes. the Memorandum of appeal has to be filed within 45 days from the date of receipt of a copy of the order of the DRT with DRAT. Recently.529A of the Companies Act. 2. Wide residuary powers are given to DRT so that “the Tribunal may make such orders and give such directions as may be necessary or expedient to give effect to its orders or to prevent abuse of its process or to secure the ends of justice. For instance. Deficiencies in 1. It is important that bank recovery tribunals should be presided over by judges with sufficient knowledge of banking and financial matters. Due to lack of infrastructure/staff of DRTs the process of disposal/recovery is delayed. 4 5. Lok Adalat model is introduced for DRT. preservation and improvement of the property. the Act provides the defendant to challenge the decision of the Tribunal at the Appellate Tribunal and later in High Court causing delay. 3. Since there is only one Appellate authority. to remove any person from the possession or custody of the property and commit the same to the possession.10 lakhs and above. The Appellate Authority has to dispose off the appeal within six months.

integrity. registrars and share transfer agents. Deals with : Membership/broker. Extensive powers have been given to SEBI under Securities Contracts (Regulations) Act. 1956 to regulate and modify the matters pertaining to the stock exchanges. contain a number of disclosures to be made in prospectuses of companies making issues of capital. bought out deals. Introduction of stock-invest instrument. a number of steps have been taken to strengthen SEBI and reinforce its autonomy. as also technology and products applicable to capital markets. portfolio managers. Role of SEBI in the Capital Market Since SEBI became a statutory body in 1992. merchant bankers. Structure & Objectives: The Securities & Exchange Board of India (SEBI) consists of a Chairman and five members of which two members are from the Ministry of Finance and Law. Buy-back. one from the RBI and the other two being persons of ability. are among the other steps taken by the SEBI to protect the investors. brokers. The responsibilities and obligations of the intermediaries to­wards investors were specified by SEBI. venture capital. and to regulate and promote the development of security market. were brought under SEBI regulations. Venture Capital. l l The Securities & Exchange Board of India (SEBI) came into being in 1992 as an agency to protect the interests of investors in securities and to promote a transparent and strong regulatory structure for the efficient functioning of the capital market. Intermediaries including merchant bankers. regulations to ban insider trading and prohibiting manipulation of prices in the stock market etc. sub-brokers. SEBI deals with all aspects of capital market viz. SEBI notifies several rules and regulations for brokers. Technology. With a view to develop and regulate the capital market. underwriters. to enable the prospective investors to be well informed before subscribing to the issue. bankers to issue. b) c) to promote the development of securities market. primary markets and to impose penalities and any other suitable action against the offenders it deems fit in this regard. merchant banker. It appoints expert groups to investigate problems related to capital market and its development. debenture trustees etc. to regulate the securities market. Objectives of SEBI According to the preamble to the SEBI Act.. SEBI also issues Guidelines for disclosure and investor protection. standing and capacity to deal with problems in securities market. Mutual Funds.. These guidelines/clarifications. entry to act as member/dealer. merchant banker. technology and products and practices applicable to capital market Brought in a number of measures to enhance financial disclosure and to prevent manipulation of security prices. portfolio managers. It super­vises functioning of institutions/firms/ indivi-duals dealing in capital market and takes corrective action if necessary. the objectives of SEBI are: a) to protect the interests of investors in securities. Banking Briefs 190 (For private circulation only) . mutual funds etc. take-over codes. MF.SECURITY & EXCHANGE BOARD OF INDIA l l Established in 1992 Objective: To protect investor interests.

It has built in checks and controls to ensure the highest safety in operating procedures. etc. LIC. While the selling of Treasury Bills by the DFHI at the ‘offer’ rate depends upon the availability of such bills in its assets portfolio. It will help in eliminating physical transfer of scrips in the market. Elimination of voluminous paper work and physical handling of documents. It will introduce book entry transfer system thereby freezing within SHCIL’s safe custo­dy vaults. upto a period of 14 days at negotiated interest rates. Imparting greater liquidity to investments in scrips due to easy transfer. The DFHI also provides ‘repo’ facility (buy-back and sell back) to banks. It is the largest custodian in India and has received permission to provide custodial services for US based funds. promoted jointly by IDBI. select financial institutions and public sector under­takings. was set up by RBI jointly with public sector banks and Fls in 1988. is a central security depository ( i. facilitation centres and satellite centres all over India. UTI and GIC is a Central Securities Depository. longterm investors and small investors. the scrips representing millions of securities. IFCI. the DFHI is always willing to purchase Treasury Bills at its ‘bid’ rate.e it holds physical security and maintains them in electronic form) Benefits: Eliminates physical transfer of scrips by keeping them in dematerialized form. participates in call money market/inter-bank term deposit market and engages in sale/pur­chase of CD. Benefits : l Elimination of delays in purchase and sale of scrips and their transfer.SHCIL & DFHI l SHCIL. In other words. ICICI. (For private circulation only) l l l STOCK HOLDING CORPORATION OF INDIA LIMITED SHCIL . CP. SHCIL will ultimately emerge as a Bank for securi­ties. ICICI. The call money operations of the DFHI have enabled the pooling of borrowers’ demand and lenders’ supplies to the extent both borrowers and lenders opt to avail of the DFHI services for their operations. SHCIL has branches. linked to its Mumbai head office through VSAT to provide online information and services. DFHI avails refinance facilities from RBI against the collateral of 182 days Treasury Bills. LIC. and to deal in short term money market instruments DISCOUNT AND FINANCE HOUSE OF INDIA DFHI. eliminates voluminous paper work. SHCIL has developed a variety of schemes to suit those who trade frequently both for. UTI and GIC. avoids errors and frauds and imparts greater liquidity to due to easy transfer of security DFHI established in 1988 jointly by PSBs and Fis Objective: To even out liquidity imbalance in the banking system. It quotes every day its ‘bid and ‘offer ’ discount rates for different instruments. redis­counts short term commercial bills. Avoidance of chances of frauds and errors. It deals with Treasury bills in the secondary market. The establishment of DFHI was the result of a felt need for setting up of a discount and finance house (i) to even out liquidity imbalances in the banking system and (ii) to deal in short term money market instruments with the primary objective of imparting liquidity to these instruments and at the same time operating on a commercial basis.promoted by IDBI. l l l Banking Briefs 191 . The DFHI fulfills the role of a provider of liquidity to the Treasury Bills. These provide customers to switch from one scheme to another at the end of the year.

l Safety of securities is enhanced in a depository and there will be no problems of bad delivery. Investors can see prices of traded securities and know whether their orders have been placed into the system. etc. commercial papers. Besides the traditional retail market for equities. Banking Briefs 192 . the counter party and the time at which the trade was executed. LIC . loss. debentures. commercial banks including State Bank of India and other institutions in­cluding SBI Capital Markets Limited. Promoted by ICICI.. To provide a fair. l Price and brokerage are separately shown on contract notes. Banks and Other institutions Main objective: To establish national trading facility for equity and debt instruments. investors and issuers due to transparency and speed. certificates of deposit. To Investors l The investor is assured of the best price in the market. GIC. To issuers l By a single listing they can provide nationwide access to their investors. It benefits traders. efficient and transparent securities market to investors using electronic trading systems. viz. and provide a fair. l As a result their listing costs are reduced considerably. traded under the capital market. To enable shorter settlement system. l The system will assure ‘best price’ to participants in the market. GIC and its subsidiaries. Benefits To Trading Members l They can provide efficient service to their clients. On the WDM segment. The system provides complete transparency of trading operations. etc. WDM is a facility for institutions and bodies corporate to enter into high value transactions in instruments such as government securities. and thus can lead to reduced establishment cost. l There will be no need to occupy office premises near the Exchange unlike at present. To ensure equal access to investors all over the country through an appropriate communication network. l Their back office load is reduced considerably. in which trading takes place with all market participants stationed at their offices and making use of computer terminals. screen based trading facility for the Whole­sale Debt Market (WDM). there are two types of entities. l l l l The NSE is thus a stock exchange with a difference. for the first time in the country. debt instruments and hybrids. Issuers will have high visibility. LIC. To meet the current international standards of securities markets. l Date and time of trade are indicated.. treasury bills. l The system is better monitored and regulated ensuring a fair deal to investors. public sector bonds. theft or forgery. ICICI. the NSE is operating. l Settlement will be quick and efficient. 25 crores and promoted among others by IDBI. Trading Members and Participants. the rate at which their deal has taken place. IDBI. The Main Objectives of the NSE l To establish a nation-wide trading facility for equities. efficient and transparent security market Trading through fully automatic screen. The NSE market is a fully automated screen based trading environment. (For private circulation only) l l The National Stock Exchange of India was incorporated in November 1992 with an equity capital of Rs.NATIONAL STOCK EXCHANGE l l Established in 1992.

The exchange today has 115 listings. SALIENT FEATURES OF OTCEI Ringless & Screen based Trading: For the first time in India. to provide investors with a transparent & efficient mode of trading through Automatic Trading Mechanism . which creates a disciplined and transparent stock market.3 crores can raise finance from the capital market exclusively through OTCEI. Listing of Small and Medium Sized Companies: OTCEI provides an opportunity for small and medium sized companies to access the capital market. market making. Companies with an initial post-issue capital of more than Rs. thus providing liquidity to the investor. Banking Briefs 193 . issues between Rs. though one of the oldest. were suffering from various kinds of inefficiencies. date. Faster Delivery and Payment: OTCEI follows T+3 rolling settlement for its listed securities and weekly settlement for trading in permitted securities. transparency. Transparency of Transactions: The investor is able to transact by seeing the quotations on the screen of the computer and get instantaneous trading document. Competition among market makers produces efficient pricing and reduces spreads between buy and sell quotations.30 lacs and less than Rs. Commenced operations in 1992 Purpose:To aid enterprising promoters to raise finance for new Project in a cost effective manner. distinctive nos. nationwide listing and depository service Has tied up with NASDAQ Sponsorship: All the companies seeking listing on OTCEI are to be sponsored by a member. providing all details like price. faster delivery. Over The Counter (OTC) trading was evolved to automate trading mechanism. established in 1990. especially the retail segment. The Exchange was set up with an objective of aiding enterprising promoters in raising finance for new projects in a cost effective manner and to provide investors with a transparent & efficient mode of trading.5 crores can only get listed on OTCEI or on such exchanges which have screen-based trading and market making facility. OTC Exchange of India. who appraises and does compulsory market making for 18 months. Also with the implementation of the Malegam Committee Report by SEBI. automated screen-based trading was introduced by OTCEI in place of a trading ring as in the traditional stock exchanges. Liquidity through Market Making: The sponsor-member is required to give two-way quotes (buy & sell) for the scrip for 18 months on commencement of trading. The OTCEI system also ensures that trades are done at the best prevailing quota­tion in the market..3 crores and Rs. (For private circulation only) l l Indian capital markets. Besides the compulsory market maker. and to create a disciplined and transparent stock market Salient features: Provides screen-based trading. brokerage. investors and members/dealers of the Exchange. time. commenced operations in September 1992 and has since successfully imple­mented revolutionary changes in the traditional trading mecha­nisms of the Indian Stock exchanges thus creating a fair and disciplined market for the benefit of issuers. etc.OVER THE COUNTER EXCHANGE OF INDIA l l Established in 1990. To eliminate this. there is an additional market maker and voluntary market makers giving two-way quotes for the scrip.

OTC allows a Company to place its equity intended to be offered to public with the sponsor-member at a mutually agreed price. OTCEI performance has been considered dismal. training in various aspects of the capital market. Transactions take place at the best prevailing price. access to the global market etc. Banking Briefs 194 (For private circulation only) . SCRIPLESS EXCHANGE: Since the Exchange has its own online elec­tronic depository. This ensures swifter availability of funds to companies for timely completion of projects and listed status at a later date. Hence by listing on just one stock ex­change. the second largest stock exchange in the world.Nation-Wide Listing: OTCEI is spread all over India through its member/dealer network. TIE UP WITH NASDAQ: OTCEI also has a Memorandum of Understanding with NASDAQ USA. QUOTE DRIVEN MARKET: Being a Quote Driven Market the investor always has the facility to buy or sell scrips through market markers. the company and its products get nation-wide exposure and investors all over India can start trading in that scrip. Bought-out Deals: Through the concept of bought-out deal. The MOU entails mutual exchange of information. there is no trading through Share Certifi­cates. This ensures purity of transaction and elimination of problem associated with bad deliveries.

these are: Open Market Operations (OMO). RBI also uses the Credit Policy to do some housekeeping functions of giving directions to the banks. An inflationary cycle begins after an event (like a crop harvest in India) that puts a lot of money in people’s pockets. more money comes into circulation. which Banking Briefs 195 . the RBI buys securities when the economy is sluggish and demand is not picking up and sells securities (For private circulation only) l l Very simply. For example. that now be financed more cheaply. who can now lend a multiple of this amount. a credit policy announcement is the Reserve Bank of India’s (RBI) way to influence the amount of money and credit in the Indian economy. targets good growth. if the RBI says that inflation may be a concern. On the opposite side is the situation when people have less money to spend (like at tax saving time or crop sowing time). So. Bank Rate and Repo rate are the four major weapons used by RBI to regulate money supply is spent. RBI has four chief weapons to do its job of maintaining the desired equilibrium. employment and stable inflationary one or a recessionary one. It tries to even out the fluctuations between demand and supply of money and sets the long-term agenda on money Open Market operations (OMOs). like home loan companies. The RBI’s role as the Central Banker makes it responsible to smoothen out the seasonal wrinkles between demand and supply of money in the economy as well as set the long term agenda for all money matters in the country. The opposite happens when the RBI sells government securities. lay offs and further loss in spending money. then the lenders.CREDIT POLICY l Credit Policy of RBI aims to influence the amount of money and credit in the Indian economy. production is stepped up. This means that RBI. When the RBI buys government securities. RBI’s credit policy also the institution’s way of giving market signals on which market players will base their production decisions. this drives prices down. This drives up prices as the current goods are less than the demand. employment increases. may want to hike their long term interest rates. then borrowers can hope to borrow cheaply in the future at a lower rate or at least. by making money cheaper (lower interest rates) or more expensive (higher interest rates) influences money and credit conditions in the economy. Again if unchecked. Big words but they have simple meanings. Reserve requirements. As prices increase. Left to its own an economy can get into two opposing cycles . This cycle (given very simplistically here) may spin out of control and cause hyper inflation in extreme cases. a downward spiral can spin the economy into recession. Apart from these two signals there are innumerable variables that have the power to shift the economy from the desired growthinflation equilibrium. driving prices up further. leading to cuts in production. Or if the RBI says that we are still in a soft interest regime. be sure that rates will not harden. The extra liquidity has the power to push down interest rates and give a boost to business activity. This is added to the reserve of the selling bank. then it soaks up the extra money with the banks and that has a multiplier effect in reducing money supply and pushing up interest rates. which has an impact on the rates of interest and inflation and hence on economic growth and prices. it adds to the stock of money in the economy.

then a bank that gets Rs 100 as a deposit may lend forward only Rs 90. The RBI uses these tools to steer the ship of the Indian economy at a pace that allows for speed without too many lurches. This is also an indicative rate that gives price signals on money. Banking Briefs 196 (For private circulation only) . Banks borrow from the RBI to meet any shortfall in their reserves. The higher is the reserve ratio. OMO are also used seasonally to heat up or cool off the economy. down from 15 per cent in 1981. This credit policy has kept the bank rate unchanged at 6 per cent signalling an economy on course. If the reserve requirement is 10 per cent. A fraction has to be kept as a ’reserve’. Bank Rate or Discount rate. Rs 10 it will keep either with itself or will buy government securities from the RBI. or Rs 81. the CRR currently is 5 per cent. and 90 per cent of that. This is called the multiplier effect of the banking system. In India. This Rs 81 will be deposited by the borrower somewhere. Repo rate The rate at which the RBI borrows short term money from the market. will get lent by the third bank.when the economy is overheated and needs to cool down. or Rs 72. That bank will be able to lend out only 90 per cent of Rs 90. whoever borrows this Rs 90 will deposit it somewhere. This is the rate at which the RBI makes very short term loans to banks. Repo rates are unchanged again giving the ’on-course’ signal to the economy. Now.9. The RBI does not allow banks to lend all of the money they get as deposits. after the harvest the economy is flush with funds and the RBI will sell securities to soak up some of that liquidity. A cut means that the RBI wants the economy to grow and can handle the accompanying inflation. the lower the multiplier effect and the lesser the money supply in the economy. For example. higher the rates of interest. Reserve Requirements. An increase in the discount rate means the RBI wants to slow the pace of growth to reduce inflation.

Since then. Capability of commercial exploitation and application. there are about 20 VCFs operating in India with an aggregate fund of nearly Rs. In 1989 Unit Trust of India sponsored venture capital unit schemes. At present. FIIs contribute 52. 3. and Must have attained pre-production stage. l l l l The Concept Venture Capital (VC) is defined as a form of risk finance provided to enterprises which either because of their size. 2. with an expectation of spectacular return later. Some of the important steps initiated to develop venture capital industry in India include: (i) permitting banks to invest in VC funds and to treat such investments as priority sector lending. 4. State Bank of India has a venture capital scheme operated through its subsidiary SBI Caps.VENTURE CAPITAL FINANCING l Venture Capital is a form of risk finance extended to units with new and untried or advanced technologies VC financing is normally by way of equity participation VC was started in 1985 in India. He said that the VCF was being formed on ‘an experimental basis’ with an initial capital of Rs. The method of financing such high-risk projects is usually done by way of equity participation. the stage of development.2500 crores. A novel idea or new invention or improved technology/skill. Banking Briefs 197 (For private circulation only) .10 crores to provide equity capital for pilot projects attempting commercial applications. In 1988 IFCI sponsored Risk Capital and Technology Finance Corporation of India Ltd. The main purpose of venture capital financing is thus to exploit new and untried or advanced technologies and turn them into commercially viable propositions. the degree of leverage or the nature of their business can not raise funds from the capital market or from the banking system. There are now 20 VC companies in India SBI participates in VC financing through SBI Caps VCs enjoy certain tax concessions As the risk involved in financing a new venture is high. a number of ationalize financial institutions have floated a number of VCFs. The need for venture capital finance Since the risk involved in implementing new inventions for commercial use is high. 1. Large sales potential for the product/ service. In such a situation.46% and FIs another 25% of VC funds in India. 1985 by the then Finance Minister when he presented the long-term fiscal policy. (ii) making SEBI the single point nodal agency for registration and regulation of both domestic and overseas VC funds and (iii) applying the principle of ‘pass-through’ in tax treatment to VC funds. Venture capital in India The formation of the first Venture Capital Fund (VCF) was announced in Parliament on 20th December. Commercial banks also are generally averse to financing such high-risk projects. naturally. the system of venture capital financing comes in very handy to obtain financial assistance to the deserving and eligible projects. Venture capital process In order to be eligible for venture capital financing. a project should have the following attractions. professional investors would always like to go through the draft of the business plan carefully and study it thoroughly before making up their mind.

in 1964.684 Crores through 467 schemes. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs. These could range from shares to debentures to money market instruments.1. 6000 Cr. The money thus collected is then invested by the fund manager in different types of securities. In India. The private sector and foreign institutions were allowed to set up Mutual Funds since 1993. PNB. During 2003-04 MFs have mobilized Rs. BOB and LIC. In Feb 03. has a long and successfully history. The Specified Undertaking of Unit Trust of India. As at the end of Mar 04 . Traditionally debt oriented schemes topped the funds mobilization of MFs and the trend continued in 2003-04 as well. The Securities and Exchange Board of India (SEBI) regulates this fast growing industry. functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. In February 2003. the Mutual Fund industry started with the setting up of Unit Trust of India in 1964. in the US alone there were 7. the Mutual Fund. like the United States. there were 31 Mutual Funds and 386 schemes with total assets of Rs. Public Sector banks and financial institutions began to establish Mutual Funds in 1987. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. (For private circulation only) l l l l Mutual Fund Worldwide. The income earned through these investments and the capital appreciation realised by the scheme are shared by its unit holders in proportion to the number of units owned by them. As at the end of December 1999.1. What is a Mutual Fund? A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. the assets of US Banking Briefs 198 .835 crores representing broadly. These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy. assured return and certain other schemes. following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities.616 cores. It is registered with SEBI and functions under the Mutual Fund Regulations. The popularity of the Mutual Fund has increased manifold. 47. 64 scheme. Private and Foreign Mutual Funds in 1993 As at the end of Mar 04.39.29. SBI MF manages asset over Rs.8 trillion (Rs. Public sector MFs in 1987.616 Crores Regulated by SEBI MFs sell units in small sums to investors and deploy the funds so collected in the market as per the investment objective of the individual schemes.791 Mutual Funds with total assets of over US$ 6. 39. there were 31 MFs and 386 schemes with total assets of Rs.296 lac crores). sponsored by SBI. Mutual Funds have almost overtaken bank deposits and total assets of insurance funds. the first mutual fund. or Unit Trust as it is called in some parts of the world. depending upon the scheme’s stated objectives. The second is the UTI Mutual Fund Ltd. professionally managed basket of securities at a relatively low cost. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified. In developed financial markets.MUTUAL FUNDS (MFs) l UTI.

unitholders’ expectations and other market factors. whatever our age. Investors who need some income to supplement their earnings. financial position. Interval Schemes These combine the features of open-ended and close-ended schemes.Types of Mutual Fund Schemes There are a wide variety of Mutual Fund schemes that cater to our needs. You deal directly with the Mutual Fund for your investments and redemptions. You can conveniently buy and sell your units at Net Asset Value (“NAV”) related prices. but closer to maturity. short-term instruments such as treasury bills. preservation of capital and moderate income. Ideal for : l Investors looking for a combination of income and moderate growth. commercial paper and interbank call money. These schemes generally invest in safer. SEBI Regulations ensure that at least one of the two exit routes are provided to the investor. The key feature is liquidity. risk tolerance and return expectations. Return on these schemes may fluctuate. l Balanced Schemes Aim to provide both growth and income by periodically distributing a part of the income and capital goals they earn. You can invest directly in the scheme at the time of the initial issue and thereafter you can buy or sell the unit of the scheme on the stock exchanges where they are listed. One of the characterisitcs of the close-ended schemes is that they are generally traded at a discount to NAV. the discount narrows. the NAV of these schemes may not normally keep pace. certificates of deposit. Ideal for : l Investors in their prime earning years. Money Market/Liquid Schemes Aim to provide easy liquidity. depending upon the interest rates prevailing in the market. Some close-ended schemes give you an additional option of selling your units directly to the Mutual Fund through periodic repurchase at NAV related prices. Ideal for : l Corporates and individual investors as a means to park their surplus funds for short (For private circulation only) Banking Briefs 199 . In a rising stock market. Close-Ended Schemes Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called closeended schemes. The market price at the stock exchange could vary from the scheme’s NAV on account of demand and supply situation. or fall equally when the market falls. These schemes are not for investors seeking regular income or needing their money back in the short-term. They may be traded on the stock exchange or may be open for sale or redemption during predetermined intervals at NAV related prices. (B) By Investment Objective Growth Schemes Aim to provide capital appreciation over the medium to long term. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. These schemes normally invest a majority of their funds in equities and are willing to bear short-term decline in value for possible future appreciation. Different schemes are : (A) By Structure Open-Ended Schemes These do not have a fixed maturity.

Japan. 6008. SBI MF reported a net profit of Rs. Korea. SEBI has mandated all Mutual Fund companies to update Banking Briefs 200 (For private circulation only) . In July 04. This is made possible because the Government offers tax incentives for investment in specified avenues. For example. Sbimf. The readers can get more information on SBI Mutual Fund on the website www. Singapore besides the Eurozone countries. or industry specific scheme (which invest in specific industries) or sectoral schemes (which invest exclusively in segments such as ‘A’ Group shares or initial public offerings). The details of such tax saving schemes are provided in the relevant offer documents. risk control and compliance. Other Schemes Tax Saving Schemes These schemes offer tax rebates to the investors under tax laws as prescribed from time to time. economic Research and Our Bank has introduced a special incentive scheme for our staff members for obtaining the certification from AMFI. Investors seeking tax rebates. 10. U. Special Schemes This category includes index schemes that attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. It has got a website which can be accessed at www. our Bank signed a MOU with Societe Generale Asset Management (SGAM) to divest 37% of our holding in the Mutual Fund arm for an amount exceeding us$ 35 million. distributors and persons engaged in sales and marketing of Mutual Funds to obtain certification from AMFI. Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index. Sectoral fund schemes are ideal for investors who have already decided to invest in a particular sector or segment. investment process. As on 01st Oct 04. AMFI also conducts various examinations for different functionaries such as Mutual Fund Advisors etc. the fund has a market share of 3. The total Asset Under Management (AUM) of SBI Mutual Fund is over Rs. it has become mandatory for all agents.periods or awaiting a more favourable investment with more than 8 lac investors spread over 18 schemes.34Crores. SGAM would bring its expertise in the area of Product Development. Ideal for : l the Net Asset Values (NAVs) of various schemes on this website by 8 P.09 Cr for the year ended Mar 04 and declared a dividend of 10%. the total AUM of the fund was Rs. As per SEBI guidelines. 6000 Crores. Amfiindia.K. ABOUT SBI MUTUAL FUND SBI Mutual Fund was set up in June 1987. Today. Equity Linked Savings (ELSS) and Pension Schemes. China. SGAM is the asset management arm of Societe Generale group which manages more than Euro 252 billion and operates in 20 countries including the U.M everyday to enable the investors to know the NAV position on a daily basis. About AMFI AMFI stands for Association of Mutual Fund in India. innovation. Thailand.

stability and maturity to money market. Initially only mutual funds floated by insurance companies. felt the necessity of strengthening the money market and appointed a task force to examine indirect participation of individual investors in the money market through MMMFs. dated government securities. mutual funds required prior authorisation of only the RBI and the private sector mutual fund needs to approach the RBI as well as SEBI to setup MMMFs. CDs. firstly.Vagul) made a serious of recommendations for developing various segments of the money market. 15 days which means that an investor cannot exit out of the MMMF within 15 days of making his investment. In September 1991. On the basis of the recommendation made by the task force. It should be in the nature of a drawing account and no deposits can be made in the account. public financial institutions and nationalised banks were allowed to start MMMFs and RBI issued guidelines stipulating certain limits for investments by MMMFs. Both public and private sector MFs offer MMMF scheme MFs are allowed to offer cheque writing facility to investors for MMMF schemes. 1999 RBI has allowed banks to offer cheque writing facility for the investors of money market mutual funds (MMMF). The Discount and Finance House of India (DFHI) was established in 1988 to promote secondary market activity in money market instruments. and to increase returns on investment to individual investors Enables individuals to invest in: Treasury bills. Allowing corporates to invest also added to the optimism. stability and maturity to the money market and secondly to increase returns on investments of individual investors. RBI has also permitted private sector funds to set up MMMFs. which invest exclusively in various money market instruments like treasury bills.MONEY MARKET MUTUAL FUNDS (MMMFs) l l Introduced in 1992 Objective: To provide depth. l l l The genesis of the MMMFs in India is not very old. the RBI. In order to make the MMMFs more attractive to non resident Indians (NRIs). The principal amount of the subscription continues to remain non repatriable. “It should clearly specify the drawal limit and the number of cheques that can be drawn as prescribed by the MMMF”. In late 80s the Working Group on Money Market (Chairman: N. where RBI has kept a limit on a MMMFs exposure to CPs issued by a company to three percent of the total corpus. Kothari Pioneer Mutual Fund was the first to launch a money market scheme and now many MFs offer Money Market Schemes. call or notice money through MMMFs scheme. to provide depth. Public sector. while initiating the reforms process in the country. dated government securities with an unexpired maturity of up to one year. MMMFs. CPs. commercial paper (CPs) and certificate of deposit can now determine the extent of their investment in individual instruments except in the case of CPs. MMMFs Scheme was introduced in April 1992. the RBI has permitted repatriation of dividend and income on these subscriptions. The RBI had twin objectives behind inviting the household sector. In its Credit Policy of April. call and notice money. There is minimum lock-in period of Banking Briefs 201 (For private circulation only) .

89% in the previous year. The outstanding amount in CP was Rs. Banking Briefs 202 (For private circulation only) .260 Crores as on 31st Mar 04. The daily average turnover was Rs. this facility has to be in the nature of a tie-up arrangement with a bank. 4461 Cr while the notional amount of Forward Rate Agreements/Interest Rate swaps was Rs.18. Call rate remained easy during the year and continued to remain so until Sep 04. 5. 2506 Cr in Mar 04. CD outstanding was Rs. The easy liquidity conditions prompted companies to mobilize large volume of funds through CP during 2003-04 which resulted in increase in outstanding amount of CP by 59% over the previous year.131 Cr as at the end of Mar 04.RBI has said that as MMMFs are non-banks and cannot provide ‘cheque writing’ facility directly.62% as against 5. CBLO can have a maturity between one day to one year. 9. The Collateralised Borrowing and Lending Obligation (CBLO) was operationalised as a money market instrument through the Clearing Corporation of India Limited (CCIL) in Jan 03. Money Market – trends in 2003-04 The weighted average call rate during 2003-04 was 4.

And because ETFs are traded on the stock exchanges. which are then offered to investors over the stock exchange.EXCHANGE TRADED FUNDS l l l l l ETFs are funds that are listed on stock exchanges and traded like individual stocks ETFs are linked to some index In this the underlying shares are not traded The prices of ETFs are determined by market dynamics Benefits: It provides the benefit of diversified index funds and brings trading flexibility of stocks. short sold. etc. ETFs can be bought on margin. In simple terms. Does India have an exchange traded fund? The first exchange traded fund in the world Standard & Poors’ Depository Receipt (SPDR) . an ETF can trade at a discount to the NAV of the underlying net asset value. Moreover. (For private circulation only) l What are Exchange Traded Funds? Exchange Traded Funds. trading at the stock exchanges does not affect their portfolio. ETFs are funds that are listed on stock exchanges and traded like individual stocks. However.was launched in 1993. because ETFs are bought and sold over stock exchanges. ETFs are linked to some index and are not managed. A securities firm creates ETFs by depositing a basket of stocks. In that sense. ETFs do not sell their shares directly to investors for cash. Just like the shares. there is a transaction cost involved in dealing with brokers. an investor does not have to worry about the performance of the fund manager. the ETF receives shares. which are actively managed by the fund manager. they trade in a small range around the value of the assets (NAV) held by them. Also. the stocks deposited form the holding of the ETF. In practice. like mutual funds. more popularly known as ETFs. But there are some significant differences between mutual funds and ETFs. Unlike mutual funds. However. it is possible to buy and sell these throughout the day. In the case of mutual funds. India’s first ETF . In return for these stocks deposited. the portfolio undergoes changes whenever an investor buys or redeems units. the operating expenses of these funds are lower than even that of similar index funds. Thus. are a hybrid of open-ended mutual funds and listed individual stocks. ETFs bring in the trading flexibility of stocks. ETFs bring the trading and real time pricing advantage of individual stocks to mutual funds. since they are essentially open-ended mutual funds. This difference is reflected in the somewhat higher NAV against an index fund of same portfolio. their price is determined by the demand-supply dynamics in the market.Nifty Benchmark Exchange Traded Scheme (Nifty BeES) . which one cannot do with mutual funds. Banking Briefs 203 .was launched towards the end of 2001 by Benchmark Mutual Funds. unlike the mutual funds. Therefore. How do ETFs compare with mutual funds structurally? ETFs are not much different from mutual funds in that they too enable an investor to own part of a portfolio managed by a professional. but in the case of ETFs. This large block of stocks is called a creation unit. the price is also dependent on the value of assets held by them. Also. However. What determines the price of Exchange Traded Funds? Since ETFs are listed on stock exchanges. Thus. The operating expenses are lower The first ETF in India was launched in 2001 What are the advantages and disadvantages of investing in ETFs? While providing the benefits of diversified index funds. investors have ready liquidity even when they own not shares but only a part of a diversified portfolio. at times. ETFs entitle investors to a proportionate amount in their underlying portfolio.

The approval from the MoF only specifies the price range at which the issue is to be made. If for whatever reason. Nonetheless. GDRs can also be reconverted. It can be traded on the stock exchange. an application is made to the Ministry of Finance (MoF).which the depository converts into Banking Briefs 204 . the underlying shares are denominated in rupees. Apart from the exchange risk that he assumes. called the red herring prospectus. a GDR holder wishes not to hold the GDR or to trade it overseas he always has the option to approach the depository bank for cancellation of the GDR and the release of the underlying shares back in India into the Indian stock market for sale. Usually they represent a certain number of equity shares. These depository receipts may be traded freely in the overseas markets like any other dollar-denominated security either on a foreign stock exchange or in the OTC market.GLOBAL DEPOSITORY RECEIPTS (GDRs) l l l l GDRs are dollar denominated instruments traded in US or Europe or both. some issues began to be priced at a premium over the price prevailing on the Indian bourses. GDRs represent a fixed ratio of Indian Shares It helps in raising funds from international market. the depository in whose names the shares are registered. without having to subject itself to the settlement practices and delivery procedures of the Indian Stock Exchanges and without having to receive its income in rupees. dollars and pays to the investor. The physical possession of the shares is with the custodian who is an agent of the depository. Dividend payments are made by the company in rupees .e. The modus operandi of issuing a GDR is as under: First a board resolution has to be passed to adopt the issue. Cancelled GDRs can be re-issued (i. The record of ownership of the underlying shares will stand in the name of the overseas depository. It is a negotiable certificate. The GDRs are issued by a depository (usually an American bank) denominated in US dollars. which leaves a blank space on the section reserved for entering the issue price of the share. i. However. This is because pricing is finalised only in the last stage. The advantage for such a foreign investor in dealing with the GDRs (rather than the underlying shares) of the Indian Company is that it can effectively enjoy the benefits of being a shareholder without having to register itself as a SEBI approved foreign institutional investor in India. The shares are issued by the company to an intermediary. while the actual Indian shares are held by a custodian in India (typically an Indian institution like ICICI). They do not have any voting rights themselves. So. Holders entitled to receive dividends but have no voting rights. After this. Once a GDR is issued it can be traded freely among investors. The GDR is as liquid as the shares of the same company in its home country. when the demand for Indian paper increased and then boomed with the coming of FIIs. (For private circulation only) l l A GDR is a dollar denominated instrument traded on the stock exchanges in Europe or the US or both. though the GDR is denominated in dollars. the primary concern of a foreign investor who buys the GDR of an Indian Company is the behaviour of the underlying share itself in the domestic Indian stock market. It is freely tradable and can be cancelled any time. In recent times. an investor who wants to cancel a GDR can do so only after the cooling off period of 45 days. A prospectus is then prepared. The buyers of GDRs tend largely to be institutional investors. The GDRs represent a fixed ratio of Indian shares. GDR holders may enjoy all economic benefits of the underlying shares but none of the corporate rights. the underlying shares represent large chunks of voting capital.e two-way fungibility is permitted) GDR holders assume exchange risks and price fluctuation risk. The underwriter then markets the issue by organising road shows.

ADRs are freely tradable in the overseas market like any other dollar-denominated security. a US instrument had to be created. The guidelines state that ordinary shares issued against the ADRs shall be treated as direct foreign investment in the issuing company and such investment will be governed by the Foreign Direct Investment Guidelines issued by the FIPB. offer lower trading and custody costs as compared to shares bought directly in the foreign market. This requirement has been done away with in case of infrastructure companies. ADR/GDR Guidelines Any issue of ADRs or GDRs by an Indian company is governed by the provisions of Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme. ADRs help companies in accessing funds from US. These guidelines require that any Indian company desirous of offering ADRs to overseas investors is required to obtain approval of the Ministry of Finance. Infosys are some companies which floated ADRs. UK shares were not allowed to leave the UK physically. The issuer company should also have a consistent track record of good performance (financial or otherwise) for a period of at least three years. The most important distinction for issuers of ADRs is that some structures allow the company to raise capital in the US while others simply provide a mechanism facilitating the US investors to buy and trade existing shares. The underlying shares are held by the Depository which is entitled to vote at the general meetings. ADR holders are generally not entitled to any voting rights as the ADRs are not shares. improve accounting and disclosure practices. and get better valuation ADRs can be cancelled and re-issued (i. enhance the liquidity of the underlying shares of the issuer. 1993 (Guidelines) which were announced by the Government of India on November 12. v) ADRs can be used as an equity financing tool in merger and amalgamation transactions. and so. ADRs are termed as domestic securities and that makes it possible for many US bank and pension fund portfolios to invest which are otherwise prohibited to invest in nondomestic issues. Satyam Infoway. to accommodate US investor demand. Advantages of ADRs i) ii) simplify the trading and settlement of foreign equities.e two-way fungibility is allowed) ADR holders have no voting rights ICICI. through a (For private circulation only) iii) iv) Banking Briefs 205 . 1993. this was called an American Depository Receipt. American Depository Receipt (ADR) is a negotiable instrument denominated in US dollars and issued by a depository bank representing ownership in non-US securities representing the underlying ordinary shares.AMERICAN DEPOSITORY RECEIPTS (ADRs) l l ADRSs are dollar denominated instruments traded in US. l l l ADRs were first introduced in 1927 in response to a law passed in Britain which prohibited British companies from registering shares overseas without a British-based transfer agent. GDR/ ADR holders can sell their underlying shares on a recognised stock exchange.

1999. and the pre-issue debit-equity ration is not more than 2:1. IDRs can be transferred and redeemed. INDIAN DEPOSITORY RECEIPT (IDR) In terms of the Companies (issue of Indian Depository Receipts – IDRs) Rules. the issuing company shall appoint an overseas custodian bank. 2004 notified by the Government. subject to the provisions of the FEMA. a company incorporated outside India can issue IDRs subject to the following: a) the pre-issue paid-up capital and free reserves of the issuing company should be alteast US $ 100 million with an average turnover of US $ 500 million during the preceding threee financial years.registered stock broker and remit the proceeds out of India without RBI’s prior approval. The IDRs will have to be denominated in Indian rupees. The underlying shares will be delivered to an overseas custodian bank which will authorize the domestic depository to issue IDRs. IDRs will be listed on one or more recognized stock exchanges having nation wide trading terminals in India and may be purchased. According to the IDR rules. IDRs issued by any company in any financial year shall not exceed 15% of its paid-up capital and free reserves. the company has been making profits for atleast five years preceding the issue and has been declaring dividend of not less than 10% each year in this peripd. possessed and freely transferred by persona resident in India as defined under FEMA. blanket permission from the apex bank is available to the issuer company to repatriate dividend or to issue additional ADRs to the existing holders in case of rights or bonus issues. Also. The issuing company would also have to fulfill the eligivilty criteria stipulated by the SEBI and obtain necessary approvals from local authorities. irrespective of the denomination of the underlying securities. IDRs will not be redeemable into the underlying equity shares for a period of one year from the date of issue. a domestic depository and a merchant banker for the purpose of issue of IDRs. b) c) Banking Briefs 206 (For private circulation only) . ADRs which are cancelled can be reissued. The issuing company may or may not have established any place of business in India.

a domestic depository and a merchant banker for the purpose of issue of IDRs. IDRs will be listed on one or more recognized stock exchanges having nation wide trading terminals in India and may be purchased. The IDRs will have to be denominated in Indian rupees. IDRs issued by any company in any financial year shall not exceed 15% of its paid-up capital and free reserves. and the pre-issue debit-equity ration is not more than 2:1. The issuing company may or may not have established any place of business in India. 2004 notified by the Government. The underlying shares will be delivered to an overseas Banking Briefs 207 (For private circulation only) . custodian bank which will authorize the domestic depository to issue IDRs. 1999. In this chapter we confine ourselves in providing the guidelines for issue of IDRs. the pre-issue paid-up capital and free reserves of the issuing company should be alteast US $ 100 million with an average turnover of US $ 500 million during the preceding threee financial years. the issuing company shall appoint an overseas custodian bank. b. According to the IDR rules. irrespective of the denomination of the underlying securities. IDRs can be transferred and redeemed. The issuing company would also have to fulfill the eligivilty criteria stipulated by the SEBI and obtain necessary approvals from local authorities. c. subject to the provisions of the FEMA. l Indian Depository Receipt (IDR) is an indian version of ADR/GDR to attract Foreign Investments in India. possessed and freely transferred by persona resident in India as defined under FEMA. Readers are suggested to refer the articles on ADR/GDR to understand the mechanism. a company incorporated outside India can issue IDRs subject to the following: a. the company has been making profits for atleast five years preceding the issue and has been declaring dividend of not less than 10% each year in this peripd. IDRs will not be redeemable into the underlying equity shares for a period of one year from the date of issue. In terms of the Companies (issue of Indian Depository Receipts – IDRs) Rules.INDIAN DEPOSITORY RECEIPT (IDR) l l l Indian version of ADR/GDR helps foreign companies to access Indian funds The issuing company should have pre-issue paid up capital and free reserves of min US $ 100 million and turnover US $ 500 million The issue in any financial year shall not exceed 15% of the capital.

the call money market is an overnight money market. and the second. to meet. insurance companies) and mutual funds can participate in this market. of those who can lend but not borrow. Only the banks can do both. Why does a bank borrow in the call market ? Banks borrow in the call market to meet any temporary shortfall in funds on any given day. The STCI lends funds against the government securities that a bank holds with an offer to sell back the security (called repurchases or repos). For how long can a bank borrow these funds? Technically. Normally. Non banking finance companies. However. But there are temporary gaps. There are mainly two reasons why a bank may face such a shortfall. financial institutions (term-lending institu­tions. and up to three days on weekends. as a regulator it can intervene in the market when rates go through the roof. The first consists of those who can both borrow and lend in this market. The second reason is to meet the cash reserve ratio (CRR) which is the cash reserves it must maintain with the Reserve Bank of India. funds are borrowed for one day.5% Non-banking entities to lend lesser in call money market. Can the RBI lend in the call market? What does intervention by the central bank mean? The RBI is the market regulator and cannot lend or borrow funds in the call market. The call money market is used to manage these gaps. are not allowed to participate in this market as yet. Why do rates fluctuate? What does this indicate? The rates fluctuate in the market depending on the demand and supply of money in the market. or mismatches. daily cash needs of the banks’ clientele. public sector and cooperative banks). High rates indicate a tightness of liquidity in the financial system.CALL MONEY MARKET l Call Money is money borrowed for shorter repayment period (1-14 days) to meet temporary mismatch Call market is generally a one day or an overnight market Major Participants: Banks/FIs/PDs and Mutual Funds Banks borrow/lend in call money to meet CRR RBI intervenes in Call Money Market through STCI & DFHI to stabilize rate Weighted Average Call rate presently rules around 4. Banking Briefs 208 . Who can participate in this market? All scheduled commercial banks (private sector. however. While low rates indicate an (For private circulation only) l l l l l l What is the inter bank call market? The interbank call market is a part of the domestic money market from where banks borrow and lend on a daily basis. It inter­venes in the market through two market intermediaries — the Securities Trading Corporation of India and Discount Finance House of India. Banks normally lend out of the deposits that they mobilise. while the DFHI lends funds that it receives from the central bank against repos of certain securities specified as eligible for them. But a bank can borrow these funds for between one day up to 14 days. Participants are split into two categories.

Some Developments In tune with the suggestion of Narasimham Committee II. non-bank participants would be allowed to lend only up to 30% (as against 45%) mentioned above. Banking Briefs 209 (For private circulation only) . that of ultimately moving towards a pure inter-bank call/notice money markets including primary dealers. l In the Mid term review of Annual Policy 2004-05 announced by RBI in Oct 04. effective from Jan 08. 2005. on an average in a reporting fortnight up to 45% of their average daily lending in call/notice money market during 2000-01. Non-bank entities could lend.easy liquidity position. the following measures were taken. l To enable non-bank participants to deploy their short-term resources repo market was widened for these players. This is due to the fact that it has a limited number of players whose needs are similar.

The system of administered interest rates which was prevalent till the greater part of 1980s. Treasury Bills. though there was a differentiation between nonGovernment borrowers and issuers and Government bonds. State Government Securities. corporate debentures. telecom. In addition. The National Stock Exchange (NSE) is emerging as another regulator of the secondary market activity. there are a few associations of intermediaries such as brokers. Government guaranteed bonds. commercial papers and certificates of deposit.DEBT MARKET IN INDIA l A well-developed debt market would help in financing the investment needs of infrastructure and other essential sectors. While the money market is fairly well developed with a wide range Banking Briefs 210 . merchant bankers and fund managers in the securities industry. PSU bonds. The principal regulatory authorities of the debt market are Ministry of Finance and the Department of Company Affairs. cash credit facility and preference for shares affected its growth. some of whom are planning to evolve into self-regulatory organisations. The instruments traded in the debt market include Government of India Securities. the Reserve Bank of India and the Securities and Exchange Board of India (SEBI). It would facilitate financing massive investment needs of sectors such as power. Present facilitating factors: Deregulation of interest rate. while reducing intermediation costs relative to comparable instruments like bank deposits and equity. ports and housing. The costs of borrowing for the Central and State Governments could come down with broadening of market for gilt edged securities— an important subsegment of the debt market— which is a captive market at present. And finally such a market would encourage development of new products for risk management such as interest rate futures and options thus enabling market participants to better manage interest rate risk. It helps in reducing the intermediation cost · It would provide scope for effective deployment of funds Facilitate product innovation and better management of interest rate risk Administered interest rate. credit rating of instruments and a fairly large turnover. introduction of short term treasury bills. the secondary market for bonds has been primitive and stunted. Government of India. Institutional investors such as pension and provident funds will find profitable avenues for deploying funds at their disposal through the debt market. The prevalence of cash credit system of lending for working capital and long-term loans for project finance prevented the (For private circulation only) l l l l l Importance A well-developed and strong debt market would offer many benefits to the economy. The debt market would enable banks and financial institutions to shore up their Tier II capital by issuing bonds without diluting the equity base. introduction of PDs. neither reflected the scarcity of capital nor credit risk. It would provide conducive environment for the central bank to move away to open market operations — an effective indirect instrument of monetary policy. Structure The Indian debt market includes the money market and the bond market. phased reduction in SLR. Reasons for Slow Growth There are historical reasons for the stunted growth of the debt market in India.

obsolete settlement mechanism. Setting up of the Securities Trading Corporation of India (STCI) aimed at improving the liquidity of the Government securities and thereby enhancing their attractiveness to the investors. There is a need to expand the area of discretionary investment for the existing institutional investors. The legal system is cumbersome and time consuming and it is estimated that it takes anywhere between 10 to 12 years for a case to be concluded at the lower courts. It has a potential to meet massive needs of the infrastructure. housing and also large funds requirement of the Central and State Government. Construction of bond market indices by ISec and other agencies. There are other obstacles in the way of sound development of debt market such as high incidence of stamp duty. Establishment of the National Stock Exchange with a separate debt trading segment. yields on l l l l Phased reduction in the SLR requirements for commercial banks. Introduction of 364-Day Treasury Bills on auction basis with no pre-determined amount and without any support from the RBI. The preference of retail investors for equity and equity-linked instruments explains the relative slow growth of market for non-convertible debentures. besides encouraging new institutional investors. poor liquidity at the long end of the market due to lack of sufficient paper and players and the absence of a fully mark to market valuation system among the investors. Presence of credit rating agencies to rate debt instruments. In addition to this. Introduction of 91-Day Treasury Bills on auction basis with a pre-determined amount and with RBI support at the cut-off yield. the premium for this risk will be a barrier for retail investors. the debt market could become retail in case we adopt innovative mechanisms to sell rated papers for the retail segments. (For private circulation only) Gradual deregulation of interest rates on money market instruments which are now largely market determined.development of marketable debt instruments. Introduction of the system of Delivery Versus Payment (DVP) in transactions of Government securities at the Public Debt Office of Reserve Bank of India in Mumbai. l l FURTHER STEPS NEEDED There is a need to broadbase the market and attract the retail investors. STCI has been giving two way quotes for Government securities and Treasury Bills. l Introduction of a system of Primary Dealers (PDs) to strengthen the infrastructure in the Government securities market. multiplicity of regulatory authorities. Unless and until contract enforcement is possible in a reasonable time. Gradual Emergence of Active Market for Debt Instruments Since the latter half of 1980s. PDs will perform the role of underwriters and will provide two way quotes in the secondary market. Already RBI bonds are made available to retail investors and steps should be taken to enhance retail participation to increase depth and maturity of debt market. to speed up process of transfer of securities l l l Banking Briefs 211 . Offering market-related Government securities. The market for gilt edged securities remained captive with yields under the administered interest rate regime remaining unattractive for general investors. a number of policy measures were initiated for providing market orientation to the debt market. The debt market can act as a catalyst for India’s economic development. The measures which have provided a shot-in-the arm to the fledgling debt market in India are listed below: l by introducing transparency and eliminating counter-party risks.

borrowing s for the purpose of repayment as well as repayments made out of such borrowings are not included in the calculation of the GFD. does not have any effect on the magnitude of the fiscal deficit since by definition. For the States. as per revised estimates the States swapped Rs. The DSS. savings in the form of lower interest payments would reduce the pressure on the revenue account of the States and thereby reduce their borrowing requirement. debt neutral as it involves swapping one form of debt with another. the DSS is GFD neutral. the DSS results in a change in the composition of financing of Centre’s GFD since the NSSF’s reinvestment in the Central Government Special Securities reduces the financing need from other sources. recoveries from the States include a sum of Rs. According to the accounting arrangement in the Union Budget. 11.000 crore and the remaining through small saving transfers. 10.5 per cent and the remaining through issue of special securities to the national Small Savings Fund (NSSF) with the interest rate fixed at 9. as this repayment is made out of additional market borrowings and small saving transfers.000 crore under the DSS for the current fiscal year.400 crore. Thus. The NSSF.DEBT SWAP SCHEME l Debt Swap Scheme enables the State Governments to substitute their high-cost loans from the Centre with fresh market borrowings DSS does not have any effect on the magnitude of the fiscal deficit DSS alters the composition of financing of States GFD debt capital receipts. Under the DSS. 13. However. the States swapped high cost loans (bearing coupons in excess of 13 per cent) amounting to Rs. about 61 per cent was financed through additional market borrowings at interest rates below 6. including market borrowings. recoveries of loans from the States under the DSS lead to an increase in non- Banking Briefs 212 (For private circulation only) .5 per cent. ipso facto. the DSS is. reinvested the funds in fresh Central Government special securities in 2003. (net) loans from the Centre register a decline. In the States’ Budgets.04 at market-related interest rates. As in the case of the Centre.602 crore with additional market borrowings of Rs. repayment of loans to the Centre reduces the debt of the States. 26. During 2003-04. As per the Union Budget for 2004-05. The receipts under the DSS were used by the Central Government to partially redeem the special securities issued to the NSSF at the time of its inception in 1999. in turn. the DSS alters the composition of financing of States GFD.766 crore during 2002-03 with additional market borrowings of Rs. Since both the receipts and expenditure increase by the same magnitude. Over a period of time.623 crore (as per RBI records) and 30 per cent of the small saving transfers. of the total debt swapped amounting to Rs. While (net) market borrowings increase. However. it increases the debt from these sources by an equal magnitude. 46. however. while Centre’s repayment to the NSSF results in an increase in the nonplan capital expenditure. 60. l l Debt Swap Scheme enables the State Governments to substitute their high-cost loans from the Centre with fresh market borrowings and a portion of small saving transfers (100 per cent of the net small savings collections are being transferred to the States from 2003-03 onwards).

On 31. conduit for open market operations of RBI. to open market operations. operating switches with the central bank. the Reserve Bank announced on March 29. 1997. (b) the primary dealers shall maintain the minimum capital stand­ards on risk weighted basis. Primary dealers are subject to prudential and capital adequacy regulations either by the central bank or by the agency incharge of investor protection. facility of borrowing bonds/funds from the central bank. active secondary market for Government Securities. securities market. provides signals to RBI for market intervention SBI Gilts Limited is renamed as SBI DFHI Ltd. liquidity support linked to bidding commitments. Primary Dealers serve a number of purposes such as the following : (i) help placement of Primary issies in Govt. (c) The Reserve Bank would extend to primary dealers facilities like Current Account/ Subsidiary General Ledger (SGL) Account. securities. 174. securities in primary issues by committed participation in auctions. right to participate in securities auctions and access. and (iv) provide signals to central banks for market intervention. 11 entities have been granted approval for registration as SDs as on November 18. The Monetary Credit Policy of RBI (April 2000) continues to permit the PDs to underwrite 100% of the notified amounts in Treasury Bills as well as dated securities auctions. and to make it liquid and broad based Benefits: Help place primary issues in government securities with committed participant in auctions.1996 RBI has announced the guidelines for Satellite Dealers (SDs) in Govt.12. The broad features of the guidelines are : (a) The eligibility is based on the considerations that primary dealers should have a strong capital base and they should not be final investors but dealers in securities. (d) Primary dealers would be subject to the Reserve Bank regulation. It posted a net profit of Rs. They are intended to act as second tier in trading and distribution of govt. Banking Briefs 213 (For private circulation only) . on an exclusive basis. Perhaps the 100% underwriting is a step l l With a view to strengthening the infrastructure in the Government securities market and making it liquid and broad based. 1995 guidelines and procedures for enlistment of primary dealers in the Government securities market.PRIMARY DEALERS IN GOVERNMENT SECURITIES l l Guidelines for PD announced in Mar 95 Purpose: To strengthen the infrastruture in Government securities market. freedom to deal in money market instruments and a favoured access to open market operations. (iii) act as conduit for open market operations by the central bank.09 Cr during 03-04 (ii) provide active secondary market in securities by giving two way quotes. Primary dealers enjoy certain privileges like maintenance of clearing balance with the central bank and participation in clearing.

32.000 Cr for underwriting primary issues. SBI Gilts has merged with Discount and Finance House of India Ltd and the combined entity is renamed as SBI DFHI Ltd. IDBI Capital Market Services are some of them. 174. The combined entity posted a post-tax profit of Rs.30. 1138 Crores for the year ended Mar 03. Total bids received during 03-04 were Rs.towards the RBI eventually off loading the entire notified amount on the PD’s who will inturn. DFHI. whereas. Gilt Securities Trading Corporation Ltd. Security Trading Corp of India. Rs.279 Crore for Treasury Bills.953 Cr for dated securities. The PDs will have access to RBI finance at Bank Rate (BR) upto a base limit and at BR + 2% for higher amounts. 1.790 Cr as on 31st Mar 04.10. can expect to get finer rates with the increase in the number of PDs from 6 to 15. SBI Gilts Ltd. Rs. PD system has contributed to the development of a deep and vibrant market for the Government securities. 1. a system followed in certain developed countries. SBI DFHI Limited SBI Gilts Limited was incorporated as a subsidiary of SBI in March 1996.00. SBI and its Associates and Subsidiaries contributed the rest 85%. The net profit of the 18 PDs was Rs.During 03-04. Several issues such as granting the PDs limited exclusivity in the Treasury Bills auctions and permitting them to invest in Overseas Sovereign bonds and setting of JVs/ Wholly owned subsidiaries abroad to enable them to diversify their balance sheets are under examination. The company commenced its operations in July 1996. Total market turnover of all PDs was Rs. 99. Asian Development Bank has contributed 15% to its equity.09 Crores for the year 2003-04 Banking Briefs 214 (For private circulation only) . There were 18 PDs in India as at the end of Mar 04. the PDs would now vie with each other to get a larger chunk of the securities auctioned. to act as a Primary Dealer in the government securities market. place it with investors. PERFORMANCE OF PDs as at the end of Mar 04 and Recent Trends. The RBI as manager of public debt.

Preserving the value of portfolio during times of market stress: There are times when the main worry is the possibility that the value of the entire equity portfolio may fall substantially if. Sales of stocks Index Futures can be used to insure against the risk. this can be carried out with greater speed and less cost and without adding too much to market. the mutual funds and other financial institutions are handicapped in their investment strategy because of the non-availability of portfolio hedging facility in India. second.STOCK INDEX FUTURES l l l l Futures are standardized contracts and are tradeable Standardisation implies that size. event ‘X’ occurs. Stock Index Futures offers the following advantages: Reducing the equity exposure in a mutual fund scheme: iv) i) Suppose that a balanced mutual fund scheme decides to reduce its equity exposure from. its disturbing effects can possibly be minimised if the facility of stock index futures is available. at much less cost and with much less impact on the cash market. repurchases may sometimes necessitate liquidation of a part of the portfolio but there are problems in executing such liquidations. They are traded on specially designated exchanges in a highly sophisticated environment. In other words. Selling each holding in proportion to its weight in the portfolio is often impracticable. They are standardised in size. Stock Index represents an average price of various scrips Advantages: Serves as a hedging mechanism. this can be achieved only by actual selling of equity holding. International investors: The buying and selling operations of FIIs presently cause disproportionate price-effect on the Indian bourses. date of expiry and other features are standardized. If stock index futures are available. Suitable securities at reasonable prices may not be immediately available in sufficient quantity. Such selling entails three problems: first. Stock Index Futures Stock Index represents an average price of various scrips. Presently. While trying to maximise the net inflow of FII portfolio investment. Presently. Stock Index Futures can help to overcome these problems to the advantage of the unit holders. iii) Open-ended funds: In the case of openended scheme. ii) Investing the funds raised by new schemes: When a new scheme is floated. Index futures do not represent a physically deliverable asset. The same objective can be achieved through index futures at once. it cannot be achieved speedily and third. say 40% to 30% of the corpus. The futures trading system has effective inbuilt safeguards in the form of cash adjustments (mark to market) to the account of trading member on daily price change. Stock index futures have the following advantages: a) Institutional and other large equity holders need portfolio hedging facility. Also. Some of the holdings may be relatively illiquid. Rushing to the cash market to liquidate would drive down prices. the money v) Banking Briefs 215 . (For private circulation only) Futures contracts are standardised tradeable contracts. it is likely to depress equity prices. raised does not get fully invested for considerable time. say. guards against price fluctuation caused by FII’s investment strategy. The availability of stock index futures can take care of this problem. what the FIIs buy/ sell is a “piece” of the whole Indian equities market. it is a costly procedure because of brokerage etc. expiration date and all other features. preserves portfolio value during market stress.

b) Stock index is difficult to be manipulated as compared to individual stock prices.000. The mechanics of trading are as under: Suppose Sensex futures for July is 5000.5 lakhs (50 contracts x Rs. more so in India. But what if the Sensex falls to 4. The entire money need not be paid upfront. thus. The most important point is that on final settlement. we have to pay just Rs.5 lakhs. such as stock index options. we can buy the index futures at 5000.12.62. thus. A trader can bet on Sensex futures of six types .500 on the contract worth Rs.5200. At least 50 contracts of Sensex futures have to be bought and each contract is priced at Rs. we will have to pay the seller Rs. Of course. we have gained 200 points (5400 in the cash market .75.5 per contract) from the seller. We will. 2000. Since Index futures do not represent a physically deliverable asset. (For private circulation only) c) d) e) Regulatory complexity is likely to be less in the case of stock index futures than for other kinds of equity derivatives. The initial margin is fixed at 5 per cent or a percentage based on Value at Risk (VaR) model. we will have to pay the seller Rs. however. This.12. or individual stock options. How is the final settlement made? Suppose the contract expires on the last Thursday of July and the Sensex futures closes the previous day at 5200. they are cash settled all over the world on the premise that the index value is derived from the cash market. If. it is reduced by designing the index appropriately. likely to be more liquid than all other types of equity derivatives as is learnt by international experience. two months and three months and three spread futures (June-July.5 per contract) which we will receive from the seller. Stock index. While the possibility of such manipulation cannot be ruled out.5. whichever is higher. and the possibility of cornering is reduced. manipulation of stock index can be attempted by influencing the cash prices of its component securities.50.5 per contract x 5000 index).75. of course.50. But that is not the end of the transaction. The lower margins will induce more players to join the market. Suppose the margin is 5 per cent. If we believe that the Sensex will close at a higher level by end-July. July-August and June-August). therefore. This mark-to-market transaction is carried out on a daily basis till the futures contract expires. implies that the cash market is functioning in a reasonably sound manner and the index value based on it can be safely accepted as the settlement price. We have.000 (200 points x 50 contracts x Rs. and are. it means that the market today expects the Sensex to close at 5000 on expiry of the futures contract in July. is much less volatile than individual stock prices. Banking Briefs 216 . our contract value will be Rs. This implies much lower capital adequacy and margin requirements in the case of index futures. the Sensex loses 300 points on the expiry of the contract. If the Sensex in the cash market closes on the last Thursday at 5400. Stock Index Futures Trading The BSE and NSE ushered in a new era by launching index futures trading in the second week of June. the previous day’s futures price). What if the Sensex futures rises to 5200 the next day? We have already gained 200 points on our futures contract (5200-5000 points). for futures contracts work on a margin month. made a profit of Rs. Suppose we buy 50 July contracts of Sensex futures at 5000. the Sensex value in the cash market is compared with the Sensex futures value of the previous day. Stock index futures enjoy distinctly greater popularity. receive Rs.000 as the final settlement.000 (200 points x 50 contract x Rs. being an average.700 the day after we purchase the futures contract? Since we have lost 300 points per contract.

13. A welcome fall-out of this should be the increased liquidity of bonds and FIs will be able to “liquefy” their balance sheets — an essential characteristic of a well-developed financial market — with the help of repos. It is thus an avenue for short-term investment of surplus funds. The instrument has provided liquidity and depth to the underlying securities markets like bond markets. securities. It is a contract to buy securities and then to sell them back at an agreed future date and price. PSU and corporate bonds and those of FIs. The RBI has made some radical attempts tostir up the repo market. which are short on SLR securities due to a temporary increase in their demand and time liabilities.378 Crores. In the second place banks.REPOS l Repos means a contract to buy securities such as Treasury bills. FIs are allowed to borrow from the money market across the entire spectrum of short-term maturities. In the first place. The price differential represents interest element. call rate was lower due to large volumes of liquidity). Investing money in a repo can generate a better return than other short-term money market instruments. For example. Apart from RBI the repo market in India is also regulated by the provisions of Securities Contracts Regulation Act (SCRA). A ‘reverse repo’ is an instrument of borrowing funds for a short period and involves selling a securi­ty and simultaneously agreeing to repurchase it at a stated future date for a slightly higher price. banks having shortfall in their CRR requirement. Repoable securities include not only T-bills and gilts but also State Government securities. 1997. repos are effectively used by central banks as part of open market operations (OMO) to influence bank reserves/overnight or shortterm interest rates and thereby the liquidity and monetary condi­tions in the economy. In countries like the USA. Fixed Rate Repos were introduced with effect from November 29. acquire SLR securities through repo as under repo they are not required to lock up their funds in SLR securities for longer periods. Canada. The development of repo increases the range of short-term money market instruments. Through the mechanism of repos. during Apr 04. Repo transactions are entered into by commercial banks mainly for two reasons. gilts and sell them back at an agreed future date and price RBI uses it for open market operations to influence liquidity and short-term interest rate The average daily turnover in repo market during Mar 04 was Rs. such as the Treasury Bill. prefer to borrow through the repo route against surplus SLR securities. the rate of which is slightly lower than the Call money rate and constitutes the cost of borrowing funds against the security. The repo rate and the period of repo is announced by the Reserve Bank in the evening of the previous day. l l Simply stated ‘repo’ means a purchase and sale agreement. as the cost of borrowing through a repo deal is usually lower than that of borrowing in the Call market (there are exceptions to this. Banking Briefs 217 (For private circulation only) . 35 non-banking entities were permitted to undertake ready forward transactions in notified govt. The RBI has also permitted inter-bank repo deals on the NSE through brokers. Germany and Australia.

reduce exchange expenses. Besides developing the securities market with a better yield curve. In the UK. or the proposed Government Securities Act. according to the report. STRIPS would help pension funds and insurance companies narrow gaps while matching liabilities. No legal changes need to be made. in turn. Fungibility enables exchangeability of either identical coupon or principal STRIPS which. where it was introduced in December 1997. The Report of the Informal Working Group on Stripping of Gilts set up by the RBI has favoured STRIPS “as an integral part of the ongoing programme of introducing innovative instruments and techniques”.STRIPS l l Stands for Separately Traded Registered Interest and Principal of Securities It means that interest payment coupons of securities can be detached and traded separately Suitable for conventional stock with long term maturity It helps in developing securities market by reference to the stock from which they are derived or in any other manner. should be taxed on an annual basis. Initially. Corporates. 10 coupon STRIPS and one principal STRIP will be created on stripping the bond. STRIPS has not been overly favoured. either to the Public Debt Act. This will facilitate lowering of funding costs against the cash flows. irrespective of whether they are held in stripped form or not. Some of the existing stocks with large sizes and fungible coupon dates could also be used. It is felt that stripping should be for conventional stocks with long-term maturity and sufficiently large issue size. In other words. whereas those of another stock will be treated separately even where the STRIPS are payable on the same date. STRIPS will provide foreign institutional investors an opportunity to contract higher duration with lesser cash outlay and. 1944. on the other hand. the task of stripping Government securities and marketmaking will be done by the primary dealers (PDs). Fungibility of coupon STRIPS from different underlying strippable bonds is a must. Likewise. If a conventional bond of five-year maturity has 10 semi-annual coupon payments and one principal payment. coupon STRIPS payable on the same day will not be distinguished from another Banking Briefs 218 . PDOs. will enable easy stripping. (For private circulation only) l l STRIPS stands for Separately Traded Registered Interest and Principal of Securities and is created by separating the coupon from the principal for independent trading. The Informal Group contends a hi-tech environment could help STRIPS become a popular instrument. while the principal STRIPS will be distinguished from coupon STRIPS. segments of principal STRIPS derived from a particular stock will not be distinguished from another. can ensure precise management of cash flows while eliminating reinvestment risks. Moreover. strippable stocks. It would be possible only when different strippable bonds have common dates for coupon payment. which maintain the Subsidiary General Ledger system. The committee feels the Government should choose large issues of conventional stocks with long-term maturity. hence. should be in a position to offer information on strippable securities. 1996. A key condition for STRIPS is they should be demat with the Public Debt Offices being fully computerised.

(CARE). borrower of money) capacity to meet its financial obligations to the depositor or bondolder (i. ICRA and Duff and Phelps are the credit rating agencies in India. (For private circulation only) l l l Credit Rating (CR) as a financial service. CRISIL rated the first bank in the country in 1992. 5. the rating is done not for a company but for the instrument. Management Evaluation. A Credit rating may be defined as an opinion of a CRA as to the issuer’s (i. Thomson BankWatch. Duff and Phelps has tied up with two Indian NBFCs to set up Duff and Phelps Credit Rating India (P) Limited in 1996. Broadly speaking ratings are divided by CRA’s into three levels. Earnings and Liquidity.e. 6. Ratings attempt to provide a consistent and reasonable rank-ordering of relative credit risks. non-investment grade and default grade. lender of money) on a particular issue or type of instrument (i. Fitch Investor Service 3. Resources.. 2.. Since the setting up of the first credit rating agency Credit Rating and Information Services of India Ltd. CRISIL. Moody’s Investors Service. Fitch Investors Service. 4.) in a timely manner. has come a long way. Resources. Standard and Poor’s Corporation. (CRISIL) in India in 1987. Banking Briefs 219 . Most of the rating agencies have long had their own symbols — some of them use alphabets. Management Evaluation. many use a combination of both for ranking the risk of default. though it started only in 1988. In essence. The default risk varies from extremely safe to highly speculative. Earnings and Liquidity). Standard and Poor’s Corporation. (ICRA).. Moody’s Investor service 2.e. there has been a rapid growth of credit rating agencies in India. 9. CRISIL. viz. Asset Quality. include Investment Information and Credit Rating Agency of India Ltd. Major Credit Rating Agencies in the world 1.etc. a domestic or foreign currency: short term or medium term or long term etc. promoted by IFCI in 1994. 3.e. 8. BBB. with specific reference to the instrument being rated. 7. apart from CRISIL. Canadian Bond Rating Service. others use numbers. The ratings are usually provided through a simple symbol system like AAA. Japan Bond Rating Institute.Capital Adequacy. credit rating has recorded rapid strides. Japanese Credit Rating Agency. Baa or BBB. Duff and Phelps Credit Rating.CREDIT RATING IN INDIA l l The first credit rating Agency. since John Moody first introduced the concept in 1909. The ratings provided by the different rating agencies (Indian and international) have been provided below. The major players in the Indian market. Asset Quality. was set up in India in 1987 Credit Rating provides a measure of credit risk associated with specific reference to the rated instrument. when he started rating US railroad bonds. promoted by IDBI in 1991 and Credit Analysis and Research Ltd. IBCA Ltd. Rating is based on evaluation of CRAMEL. The ratings methodology for banks and financial institutions is essentially based on the CRAMEL approach (Capital Adequacy. Credit ratings are in use in the financial markets of most developed economies and several emerging market economies as well. CARE. investment grade. In the Indian context. The major rating agencies in the world are: 1.

the company has an incentive to shop around for the best possible rating. Instead. to the extent that the information provided is inaccurate and incomplete. The agency. Consequently. the ratings process is compromised. Period of validity of registration shall be three years. does not perform an audit. The ratings process attempts to provide a guidance to investors/creditors in determining the risks associated with the instrument/credit obligation. for instance. it has to rely solely on information provided by the issuer. if (i) there are common chairman. subsidiary. (iii) there are common chairman. SEBI is the regulatory authority for CRAs. The SEBI board has chosen to go well beyond the recommendations of the Vijay Ranjan Committee on credit rating regulations which had recommended dual rating in the case of rating of securities of promoters. personal risk/reward preferences that might influence investment decisions. director or employee of any such entity. to the extent that a certain instrument of a specific company attracts a lower rating. directors. No chairman.In spite of the advantages that the ratings process offers. Some of the important and far reaching regulations are as under: l No credit rating agency (CRA) shall rate a security issued by its promoter. director or employee who is also a chairman. The CRA cannot rate securities issued by any borrower. compromising the authenticity of the rating process itself. an associate of promoters of CRA. the ratings process is based on certain primitives. Secondly. directors between CRA and these entities. l l l l Banking Briefs 220 (For private circulation only) . No CRA shall rate a security issued by its associate or subsidiary if the rating agency or its rating committee has a chairman. (ii) there are common employees. employees on the rating committee. It does not attempt to provide a recommendation and does not take into account factors like market prices. director or employee of the promoters shall be a chairman. director or employee of the CRA or its rating committee. several drawbacks remain. Thirdly.

the percentage holdings of the promoters will increase without bringing in a single paisa. the prices of shares fall below the intrinsic value of the stock making the investors nervous. This type of buy back is not permitted in India. Shares/securities bought back may not be extinguished: The shares or securities bought back by the company can be retained and reissued after some time. despite fundamentals of the company being strong. 2. back as a weapon to soothe their nerves by supporting the share price during periods of temporary weakness. Controlling Interest: If buy back takes place in which promoters will not sell. Book Value and gearing ratio of the Company. profits. EPS. the company buying back its own securities shall extinguish and physically destroy the securities bought back within 7 days of the last date of completion of buy back. CONDITIONS: 1. Liability on any of its shares/securities may be reduced: Under this scheme.BUY BACK l Buy Back is an arrangement by which shares issued to equity holders are bought back by the company Why done: To support market price. Thus buy back of shares by the company can block unwelcome take-overs. 4. then the company may decide to return the surplus cash to shareholders. This type of buy back is also not permitted in India. Company is not Performing Well: Some companies may not be performing well leading to bear hammering of their scrips. Banking Briefs 221 . l l l Why buy back at all? Buy back of shares is done for one or more of the following purposes: 1. 3. Buy back of shares can be used as a market support operation for the scrip of such a company. to acquire controlling interest. Shares/securities bought back may be extinguished: As per Companies Act. the funds required for buy back shall not exceed the balances under (For private circulation only) 1. Ultimate Sources: Buy back shall be out of the following sources as per Section 77A1 of the Companies Act. Shares are underpriced: Sometimes. 3. Companies can use buy out of its free reserves out of the securities premium account out of the proceeds of an earlier issue other than fresh issue of shares made specifically for buy back purposes In other words. to deploy surplus funds Funds for buy back should come from authorised sources Effects: Buy back may affect company’s liquidity. Returning surplus cash to shareholders: If the company is generating more cash than they need or when the business in which they are operating does not offer substantial opportunity for growth and does not find long term avenues for deployment. 2. l l l What is buy back? Buy back is paying back of paid up capital or specified securities (including employees stock option or other securities as may be notified by the Central Government from time to time) which are in excess of the requirements of the company. Buy back can be in one of the following ways 1. the liability of the company buying back can reduce the liability of the company proportionately on the security/share but not to the full amount of the face value.

Such price makes it attractive for holder to dispose off the shares. the number of shares after the buy back will also decrease. Profits of the company : If the source of funds are the sale proceeds of the earning assets. the gearing ratios of the company will be adversely affected. which shall be the highest price accepted. this will be on proportionate basis. Hence the nature of immediate source of funds for buying back the shares will determine the liquidity position/current ratio of the company. shall be paid to all the holders whose shares have been accepted for buy back. Hence the earnings per share will go up. 3. 3. 2. the Profit after Tax (PAT) will also decrease even after the decreased tax liability of the company. the shares are bought back at a price higher than market value. In case of book building.the above mentioned three sources. EFFECTS ON THE COMPANY: 1. these funds might have already been used for treasury function/holding current assets/creation of fixed assets. the offer shall be open for 15 to 30 days. The buy back shall not exceed 25% of the total paid up capital and free reserves of the company purchasing its own shares or other specified security. The corporate tax liability will also decrease due to the decrease in the taxable profit of the company and the charges on income allowed by the Income Tax Act. In such a case they would dispose of the shares at the rate being bought back because there will be ready demand for it. 3. 2. 2. The announcement shall come at least 7 days in advance. the interest payable on these liabilities will be a charge on the profits and hence the PBT will decrease if the others remain constant. Thus the rule has also ensured that buy back of shares is not directly financed by issue of securities. Since the PBT will decrease. Liquidity of the company : Though the company may be having adequate undistributed profits etc. (For private circulation only) Banking Briefs 222 . Booking of Profits : The holder of shares may decide to book profits or cut loss and therefore surrender the shares to the company under buy back. Gearing Ratio: If liquidity for buy back comes from the proceeds of assets. Buy back from the existing security holders on a proportionate basis through the tender offer: Offer by a company to buy back its shares through a letter of offer from the holders of shares is called tender offer. Earnings Per Share : Though the profits will decrease. Book Value of the Share: Book value of the share will also increase after the buy back of shares. If the funds are raised by way of interest bearing liabilities. 2. the income that would have been earned therefrom will cease. why the present shareholders shall sell the shares at all? 1. The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy back. One is through book building process and the other through stock exchange. Since the offer is to all the shareholders. 4. The proceeds of the shares under buy back are subject to capital gains tax in the hands of the share disposers. 5.. Thus the number of shareholders eligible for dividend will decrease. or from additional liabilities. Liquidity : The shareholders in need of funds may need to dispose off some of the shares. PROCEDURE: 1. The offer shall be open within the range of 7 to 30 days. The final buy back price. the profit before tax (PBT) if all other factors remain constant. The price shall be determined based on the acceptance received. From open market: Under this it can be under 2 ways. Profitability : Generally. thus reducing Shareholders’ perspective : If the EPS of the company is expected to increase after the buy back of shares.

The structure of cash flows in the ZCB thus adds to its attractiveness in trading. Unlike other bonds which cannot be traded during the book closure period every year. The ZCB is also known to be the fastest to react to market perceptions on interest rates : its prices fall and rise most rapidly in reaction to corresponding views on rising or declining interest rates. the Government of India (GOI) introduced ZCB of five year maturity for the first time in January 1994. the value of these bonds keeps on appreciating and hence investing banks do not need to make provisions against these investments. The reasons for their popularity with investors are easy marketability and saving on tax liability. likewise is issued at deep discount to its face value and is usually (but not necessarily) for a longer period. for instance. However the ZCB is most volatile instrument in the bond market. But this increase is the most pronounced in the case of price of a ZCB. however. A deep discount bond. Being long-term in nature. There is always a danger of adverse variance between the expectations and the actuals of future cash flows. has witnessed many innovations in recent years. In the gilt edged segment. the attractiveness of the instrument is in the deferred nature of payment of interest. the ZCB has no such ‘shut’ period. deep discount bonds. There have been a few more issues of ZCBs subsequently and the reasons for their success are not far to seek : apart from the inherent merits of ZCBs. the issuers may be tempted to issue more and more long term zeros at unrealistically high discounts and thereby shift interest burden to the posterity. Banking Briefs 223 (For private circulation only) . buy and sell the two securities simultaneously to take advantage of momentary differences in price). the income payment in ZCBs is treated as capital gains and hence subject to lesser taxation. Unlike fixed income securities. Zeros became so popular that the US Treasury launched its own zeros programme in 1984. ZCBs are subjected to uncertainty in cash flows and interest rate risk. For issuers. zeros have no coupon payments to reinvest and hence the total return on a zero held to maturity does not depend on future interest rates. This in turn enables dealers to arbitrage Zeros against coupon bonds (that is. They do not entail any payment of interest during the currency of the bond but call for a bullet payment of the face value on maturity. l l l The debt market in India which remained comparatively underdeveloped till the early 1990s. because they do not carry any “reinvestment risk”. which are typically subjected to a much lower rate of taxation compared to current interest income ZCBs have a special appeal to investors such as pension funds. is that in their desperation for funds. is a variant of Zero Coupon Bonds. This is because an issuer of a zero coupon bond is essentially gambling on the future cash flows for redemption. Since the difference between discounted value and the face value of a ZCB is treated as capital gains. Zero Coupon Bonds (ZCBs) popularly called Zeros are issued at a discount to face value. Originally this innovation in bond financing first appeared in 1981 in the US corporate bond market. The ZCBs have turned out to be popular both with the issuers as well as investors. A potential danger. The instrument of deep discount bonds was first introduced in the Indian debt market by the Industrial Development Bank of India (IDBI) in March 1992 followed by a similar issue by the Industrial Credit & Investment Corporation of India Limited (ICICI) and others. zero coupon bonds and their variants. In a falling interest rate scenario. The ZCBs thus score over normal debt instruments in terms of saving in the interest cost.ZERO COUPON BONDS l l Zero Coupon Bonds entails no payment of interest during the currency of the bond. all bond prices rise. Among such innovations are. The bonds are issued at a discount to the face value and the full amount is paid on maturity Unlike in normal instruments. Deep discount bond.

000 with multiples of Rs. insurance companies and pension funds. Hitches One of the major hitches that this instrument brings along is the choice of the benchmark index.000 thereafter. Minimum size Banking Briefs 224 (For private circulation only) . complexities introduced in it make the pricing difficult. huge scope exists for bonds indexed to inflationary levels. secondary market pricing has to develop for the popularity of CI Bonds. This is sought to be overcome by linking the return on bonds to an index like inflation. The Government borrowing is expected to come down with the launch of this new instrument.CAPITAL INDEXED BONDS l Intended to provide real return to the investors and savings to government.10. Creating an active secondary market for the Bonds is very essential. of the issue is Rs. l l l The objective of Capital Indexed Bonds (CI bonds) is to provide real returns to investors as well as savings to the Government. For instance. Government is made to ensure price stability. The Unique Selling Proposition (USP) of the instrument is the indexa­tion benefit available at maturity. but at the same time. they nevertheless carry the risk of erosion in purchasing power for the investor. CI bonds provide an excellent investment opportunity for investors whose liabilities are linked to inflation. even though bonds issued by the Government are the most safe instruments for investment. which improves the pretax yield on the instrument . such as individuals. Further. The Capital Indexed bonds floated by the Government in December 1997 have a maturity period of 5 years and carry interest at 6 per cent per annum with coupons payable every 6 months. These instruments will also be an attractive avenue for investment during periods of rising inflation expectations as compared with fixed income securities. The Government acquires this benefit at the expense of assuming future inflation risk. Conclusion: Considering the fact that India is one of the most inflation sensitive economies. The low floating stock and lack of investor education also need to be addressed. Though WPI has been taken as the benchmark index. The principal amount is to be repaid after adjustment for inflation calculated on the basis of monthly average of Wholesale Price Index (WPI) at the time of maturity. The Government as issuer also gains in the form of reduced funding cost due to the reduction in premiums charged by investors to compensate for inflation risk.this makes it the only government bond in the market which offers taxation benefits. The instrument provides a hedge against purchasing power of savings due to inflation. The savings for Government is made by lesser coupon rate The principal is adjusted to inflation and hence investors get real return Government issued Capital Index Bonds in Dec 97 linking it to wholesale price index By issuing such bonds. this also lends greater credibility to the Government’s policy of maintaining price stability in the long run. Merits CI Bonds should help in adding depth to the government bond market by the launch of new products. They are basically long term investors who would aim to protect the pur­chasing power of their instruments.10.

come what may. Normally this should be considered a healthy development but this led to unusual chemistry in corporate America. Thus companies are under double constraints. more and more company bosses today are more bothered about shareholder value than they would otherwise be. Thanks to stock options. that if a company reports a drop of 10 percent in profits. That is because the US GAAP allows them to do so. Today it is not only the chief executive who gets paid in stocks but also the lower level employee. The stock options turned many of the young techies into millionaries. Strangely. so will the value of the option.EMPLOYEES STOCK OPTION PLANS (ESOP S) l Employee stock option plan gives the right to employees to purchase share of a company at a set price Under this. For employees the booty represented a beautiful road to riches. Nowhere the use of employees stock options is as widely prevalent as in corporate America. That is keeping the CEOs on toes to report year on year increases in profits lest they shall meet the wrath of the market. it is this focus on shareholder value that is driving the company bosses to report highest profits. The market prices in turn are influenced by the profitability of the firms. the concept of shareholder value was so dearly adored as it is in the present day. they tend to buy equities at high costs. Given such a situation. more and more companies are borrowing money to buy back the equities to enable their employees exercise their options. it is understandable that company bosses dislike the idea of taking a shot on their company profits by treating the stock options as cost. While granting stock options doesn’t result in cash cost. There is no gain saying the fact that human capital is the (For private circulation only) l l l ESOP Accounting A Stock option confers an employee the right to purchase the share of the company at a set price. The underlying logic is that when managers own part of the stock of the firm they tend to make decisions that increase the value of the firm as also that of their holdings in the process. In simpler terms devoid of jargon what it means is that when the salaries are paid in cash they become cost and reduce the reported profits. unlike other forms of compensation. its market price gets battered by more than as much. When the salaries are paid in the form of stock options they do not. with the market prices ruling at historic highs. no drain on cash Disadvantages: Stock options will not be attractive when share prices fall. Also. Secondly. As the company’s share price goes up. Much of the success of the tech companies of Silicon Valley as also the techies who inhabit it is ascribed to the stock options. Banking Briefs 225 . Shareholder value is measured by the increase in the market prices of equities. Tech companies whose success depends on the skill of human assets found stock options a handy device to lure the human capital. firstly they come under debt trap not for expansion but to pay their employees. The accounting framework makes the stock options a cheaper way to pay. The market became so sensitive to profits. stock options do not result in a drain on cash resources up front. after a set period of time. employees are offered shares in lieu of salary or other compensation Advantages: Increased employee commitment. Never before in the history of corporates.

one may find revival of interest in ESOP in the days ahead.. Banking Briefs 226 (For private circulation only) . And as a result of the amendment to the Income Tax Act. Reversely.driving force of the tech companies. ESOPs is not taxed as a perquisite in the hands of the employees but subjected only to one time capital gains tax and that too only at the time of its sale. Various options are available to the employers for granting ESOPs to its employees. While in some cases ESOPs can be granted by allotting to the employees equity shares of the employer company at face value itself. decline in IT boom and financial scandals such as Enron. A bold approach has been taken with regard to taxation of the perquisite value of the shares etc. ESOPs are virtually tax free. As a result of this amendment. but the enormous price that is being paid. that too outside the accounting framework. stock option is losing its charm. is a cause for serious concern. In recent times. Worldcom etc. allotted under the ESOP. in the alternative ESOPs may contain a proposal to grant shares of the employer company at a price lower than the present date prevailing market price. ESOPs may also be in form of free issue of shares or debentures to the employees. due to global economic slowdown. With recent robust growth in IT industry and recovery of global economy.

2. records the amounts offered by various investors. called Book-Runner. investors have a say in pricing. SEBI has further clarified in December 1996 that the option of book building is available to all body corporates which are otherwise eligible to make an issue of capital to the public. Statutory Requirements Book building is a novel concept and is in infancy in India. market determined pricing. Efficient capital raising and improved issue procedures lead to a reduction in (a) issue costs. the issuer (or issuing company) is required to tie up the issue amount by way of private placement. Hence. SEBI further stipulated that all issues of over five times the networth via the book building route only and all pre-IPO and preferential allotments to have a lock-in period of one year. The issue price is market determined. 5. (b) paper work and (c) lead time. It is a distant possibility that the market price of the shares would fall lower than the issue price. As the issue is pre-sold. Book build­ing is a transparent and flexible system based on real time feed­back of investors and is an alternative to the rigidity of the existing system of fixed pricing. 1995. The process of book building is advantageous to the issuer company since the final price is decided at a date very close to the date of opening of the issue. In course of the roadshow exercises. it is also called price discovery mechanism. 9. Determining Issue Price Book building is a process of price discovery. debenture or bonds) is arrived at as an weighted average at which the majority of investors are will­ing to buy the instrument. savings on issue expenses. Book-building helps in evaluating the intrinsic worth of the instrument being offered. Fair price is supposed to emerge out of offers given by various institutional investors. Optimal demand-based pricing is possible. being introduced only in 1995. SEBI has thrown open the doors for public issue Banking Briefs 227 . Benefits of Book Building 1.. equity.e. Price of instrument is determined in a more realistic way on the commitments made by the prospective investors to the issue. the issue manager. The price of the instrument (i. It is determined by offer of potential investors about the price which they may be willing to pay for the issue. (For private circulation only) l Concept Book building is rather a new concept for us in India. 4. Benefits: Evaluation of the intrinsic worth of the shares. The issuer company saves on advertising and brokerage and they can choose investors by quality. Investors have a voice in the pricing of issues. Book building is a pricing mechanism whereby new securities are valued on the basis of a demand feedback following a period of marketing. 7. 6. 8. reduction in lead time. there would be no uncertainties relating to the fate of the issue involved. Book building also offers access to capital more quickly than the public issue. Under book building process.BOOK BUILDING l l l Introduced in India in 1995 It is a process of determining price of shares based on market feedback Under this. the offer price is not determined by the issuer but by the quotes given by the prospective buyers. for companies without a profit track record provided they did so only through the book building route and 60% of the issue is picked up by qualified institutional buyers. Book building enables fair pricing of the issue. 3. The concept has assumed significance in India as the SEBI has approved the book building process in pricing new issues with effect from the 1st November. They have a greater certainty of being allotted what they demand. The issue price is not priced in advance.

For the first time OTCEI adopted the rolling settlement when it started operation. it reduces speculation and arbitrage in scrips as settlement occurs on a daily basis. l l After dematerialization of shares. Advantages The virtues of rolling settlement are many. All is not well? The rolling settlement in prevailing stock market have disadvantages too: One. If trading starts on Wednesday morning on a clean slate and trades take place all through the day including intra-day squaring off. reduces the settlement risk and eliminates the need to synchronize the settlement dates on NSE and BSE or for that matter across the exchanges. The SEBI Committee on rolling settlement decided to introduce T+ 5 settlement with a 5-day trading period.ROLLING SETTLEMENT l Denotes settlement of trading transaction by delivery of scrips and payment of amount on a daily basis as against at the end of the week T+5 implies delivery and payment at the end of 5 working days after the date of transaction Advantages: Reduces speculation. all open positions at the end of a trading day ‘T’ turn into delivery and payment five working days later. it cuts down the liquidity as it reduces the speculation and arbitrage. there would be increase in delivery-based transactions reducing the speculation currently existing by way of carry forward of position in various scrips. it reduces end of settlement period pressure as delivery of shares and payment of cash take place everyday instead of a week. Two. helps price discovery. it reduces pricing glitches and manipulation and explores for better price discovery process. with the implementation of Rolling Settlement investors will be benefited. as there will not be delays in settlement and the prices an investor pays or receives will be closer to the market price.. Rolling Settlement seems to be the next major reform affecting the stock markets. rolling settlement on a set of demat stock has been in place since July 1997. Three. Likewise trading which takes place on Thursday will be settled on the next Thursday so on and so forth. So Rolling Settlements will kill the biggest advantage of the secondary market-the flexibility to enter and exit without funds and/or stocks. One. Banking Briefs 228 (For private circulation only) . Even badla brokerage charges to be paid every day will prove to be expensive. Liquidity is probably the biggest advantage of being in the stock markets. And. Two. more bills and more brokerage charges. eases settlement risk and pressure Three. it narrows the bid-ask spreads. then the open positions at the close of trading result in delivery and payment on the next Wednesday. in the new arrangement if the volumes in a day are dominated by speculative deals which is not new to the Indian market. of course.e. It was also decided that rolling settlement should be applicable to all segments of investors and not restricted to only institutions as was the case when compulsory demat trade was introduced. it causes more formalities and incurs more cost. On the NSE. The reduction of speculation means reduction of liquidity. As the cycle would be rolling there would be a set of transactions for delivery every day. With the daily settlements there will be more contracts. the day end rush to square up the position can increase the volatility. The current intra-week volatility may get concentrated as intra-day volatility. Thus. Four. It is not as if rolling settlement is completely new to the Indian Capital Market. Rolling Settlement in India is in the form of T+ 5 i.

which has to be paid in cash. exceed the borrowed funds and 50 per cent of “net worth”. Initial margin is the minimum amount. and (iv) if the client’s deposit in the margin account (after adjustment for mark to market losses) falls to 30 per cent or less of the latest market value of the securities.MARGIN TRADING l Margin trading is an arrangement whereby an investor purchases securities by borrowing a portion of the purchase value SEBI has allowed member brokers to provide margin the cash segment since April 1. When the balance deposit in the client’s margin trading accounts falls below the required maintenance margin. 2004. Brokers wishing to extend the facility of margin trading to their clients are required to obtain prior permission from the exchange(s) where the facility is proposed to be provided. total indebtedness of a broker for the purpose of margin trading is not allowed to exceed 5 times of his net worth as defined by the SEBI. The “total exposure” of a broker towards the margin trading facility shall be within the self-imposed prudential limit and shall not. 2004. the broker shall promptly make the margin call. The broker may use his own funds or borrow from scheduled commercial banks and/or NBFCs regulated by the Reserve Bank.3 crore would be eligible to participate. 2004 trading facility to their clients in l l Only corporate brokers with “net worth” of at least Rs. respectively.3 crore would be eligible to participate subject of the SEBI guidelines prescribed on March 19. (iii) where the cheque deposited by the client has been dishonored. Only corporate brokers with “net worth” of at least Rs. The SEBI and stock exchange(s) have the right to inspect the books of accounts maintained by brokers with respect to the margin trading facility. calculated as a percentage of the transaction value. to be placed by the client with the broker before the actual purchase. the broker may liquidate the securities if: (i) the client fails to meet the margin call made by the broker. The margin arrangement has to be agreed upon between the authorized broker and the client Banking Briefs 229 (For private circulation only) . The Securities Exchange Board of India (SEB) has allowed member brokers to provide margin trading facility to their clients in the cash segment since April 1. in any case. (ii) fails to deposit the cheques after the marginal call has been made. The exposure to any single client at any point of time is restricted to 10 per cent of the “total exposure” of the broker. calculated as a percentage of the market value of securities with respect to the last trading day’s closing price to be maintained by the client with the broker. Margin trading is an arrangement whereby an investor purchases securities by borrowing a portion of the purchase value from the authorized brokers by using securities in his portfolio as collateral. The broker shall maintain separate client-wise accounts of the securities purchased on the basis of margin trading with depositories. Initial and maintenance margin for the client shall be a minimum of 50 per cent and 40 per cent. At any point of time. The maintenance margin is the minimum amount. Securities with mean impact cost of less than or equal to one and traded at least 80 per cent (+/-5 per cent) of the days during the previous 18 month s would be eligible for margin trading facility. According to the current arrangement.

INTERNET TRADING l l l l Internet trading is buying and selling of securities through the Internet. and is also a depository participant. signature authentication. Worldwide e-broking acknowledged more frequently as Internet broking has radically transformed the way people trade in stocks. It helps in transparency. for instance. creates a fair and efficient market and reduces systemic risk. SEBI has directed the exchanges to ensure that the system used by the stock broker has provisions for security. client-broker relationship. l The Indian stock market is the latest to be bitten by the Internet bug. by elimination of mismatches. ICICI. trade confirmation. started working in the same line much before. Some of the Foreign and Private Banks are in the fray to provide the best facilities to the investors with the help of their integrated network. has its own bank. therefore. SEBI has issued regulatory guidelines on internet trading. provide management information system (MIS). contract notes. ICICI. risk management. network security protocols and interface standards. l l l l Besides. Regulatory initiatives SEBI adopted the roadmap laid down by the International Organisation of Securities Commission (IOSCO) in framing its policy on the use of Internet in the securities market. Banks have discounted the benefits of Internet trading long back and thus. HSBC. and efficient market and 230 l Banking Briefs (For private circulation only) . Since Internet is the fastest medium to get stock quotes no other medium can beat the net in speedy dissemination of information and. through Internet trading three fundamental objectives of securities regulation can be easily achieved. Objectives Internet trading is expected to l reduction of the systematic risk. reliability and confidentiality of data through use of encryption technology. The speed at which Net brokerages are mushrooming will certainly make a huge difference in the coming days in the capital market. by increasing quote continuity and market depth. to exploit as it comprises of 23 stock exchanges and over 9000 registered brokers. reduce settlement risks due to open trades. These are: l investor protection creation of a fair. broking house. These conditions pertain to operational integrity. netbased trading has the enormous potential of the Indian stock market. system capacity. increase transparency in the markets enhance market quality through improved liquidity. ABN-Amro are some of the banks which provide internet trading facility. SEBI has already finalised the conditions to be enforced by the stock exchanges for permitting their stockbrokers to trade on Internet. Regarding the operational and system requirements. introduce flexibility in systems. so as to handle growing volumes easily and to support nationwide expansion of market activity.

Facility for creating charge on dematerialized shares for granting loans and advances against shares. No stamp duty on transfer. Dematerialisation is the process by which an investor gets his physical certificates converted into electronic form and reflected in his account with the DP. theft. The DP will also give the investor a statement of holdings. This will be done at the request of shareholders through the medium of a Depository Participant (DP). The DP will maintain the account balances of securities bought and sold by the investor from time to time. bonus. reduction in paper work. Further. which holds your securities in the form of electronic book entries. no risk of loss of share certificate in transfer l Depository is an organization. reduction in transaction costs.Every account holder in our Bank can open a Demat account. DPs are located in various cities and towns These are directly connected with National Securities Depository Limited or Central Securities Depositories Limited through VSAT.DEPOSITORY PARTICIPANT SERVICES l l l It is a bank for deposit of securities Helps in holding securities in dematerialized form Benefits: Eliminates risks of forgery and bad delivery. l l l l l Facilities provided by Depository Account opening An investor (investors are called Beneficial owners in Depository system) intending to hold securities in the electronic form in the Depository system will have to open an account with a DP of NSDL/CSDL. Depository Account Opening An investor needs a satisfactory introduction and identification to open a Demat account with our DP. through the electronic mode. The DP will provide the investor a statement of holdings and transactions. mutilation. Benefits of holding Shares in Electronic form l Elimination of bad deliveries and all risks associated with physical certificate such as loss. which is similar to a passbook. Easy liquidity. No postage/courier charges. Separate account needs to be opened for each combination of names. An investor has to fill up an Account Opening Form and execute an agreement with the DP for opening a Demat account. Dematerialisation/Rematerialisation l Transactions take place much faster in electronic trading compared to a 30-60 days settlement cycle that is presently experienced. etc. The investor can open multiple accounts with same DP as also with different DPs. a depository transfers securities as per the investor’s instructions without actually handling securities. no stamp duty on transfers. If an investor wants the services of a Depository. speedy transfer. The investor has to fill up an account opening form and sign an Agreement. forgery. (For private circulation only) Banking Briefs 231 . Transfer of shares is effected within a few days after payment is made. he has to open an account with the DP. Faster disbursement of corporate benefits like rights. etc. In case the shares are held in joint names then the account is to be opened in the same order of names.

Submit his share certificates along with the above form (legend like ‘Surrendered for Dematerialisation’ should be written on the face of each certificate before its submission for Dematerialisation). investor) accounts are credited. Conversion. Transaction fees. Pledging The securities with the investor can be pledged in favour of a lender for securing a loan. The Depository (i. The new rematerialized certificates with new range of certificate number may use existing Folio number or a new folio number for the certificates. NSDL) will also ensure that the interests of the investor are protected. NSDL then downloads this information to the DP and the corresponding beneficiary (i. neither there is any fear of bad delivery.. In one wishes to convert his electronic shares back to physical shares at a later stage.e. l Electronic Trading Trading in the Depository mode takes place in the following manner: l If the investor wants to sell his shares. who releases the pledge and get the shares transferred in its name. Every transaction in the account will be authorized by beneficial owner. Freezing/Locking of Investor Accounts An investor can freeze/lock his account for any given period of time if he so desires. l l l l Banking Briefs 232 (For private circulation only) . Cost of Trading in the Electronic mode Each DP charges its client a certain amount of fees.e. These charges are by way of Account Opening fees. The DP will debit his account with the number of shares sold by him. For non-monetary benefits like Bonus. the alteration details are downloaded to NSDL by the Issuer/R&TA.l One has to just fill in Dematerialisation Request Form available with his DP. etc. Security Aspect At the time of opening account with DP. he has to place an order with his broker and give a “Delivery Instruction” to his DP. one signs an Agreement in which DP indemnifies the investor for any misuse of his holdings. During this period no debits can be made to the investors account. he can still do so by applying for rematerialisation through a Rematerialisation Request Form available with his DP. The beneficial owner’s account will be credited with in 15 days and he will be informed by the DP. Corporate Benefits At the time of distribution of corporate benefits NSDL transmits the data electronically to the ISSUER/R&TA. affixing stamps and applying to the Company for registering the shares in Beneficial owner’s name are required to be observed. The shares one buys are transferred in his name promptly after he makes the payment. Payment for the electronic shares bought or sold is to be made in the same way as in the case of physical securities. Custody fees.. The pledged securities are blocked in favour of the lender. If one wants to buy shares. Monetary benefits like. and the rate of fee is fixed by each DP separately. No formalities of filling transfer deeds. dividend is mailed directly to the investors by the Issuer. he is to inform his broker about his Depository Account Number so that the shares bought by him are credited into his account. Rights.

Gems & Jewellery and Leather & Footwear sectors.‘Vishesh Krishi Upaj Yojana’ introduced to boost exports of fruits. The Foreign Trade Policy takes an integrated view of the overall development of India’s foreign trade. vegetables. especially in semiurban and rural areas.250 crores in these thrust sectors.1000 crores to Rs. 2. (ii) Creating an atmosphere of trust and transparency. For the present. (b) Duty free import of capital goods under EPCG scheme. removal of age of goods and decrease in cut off of minimum depreciated value to Rs. (c) The key strategies are: (i) Unshackling of controls. vegetables. flowers. and specific sectoral strategies have been prepared. Handlooms. Special Focus Initiatives have been prepared for Agriculture. l l l New government has decided to terminate the five-year Exim Policy. flowers. minor forest produce and their value added products. Package for Agriculture The Special Focus Initiative for Agriculture includes: (a) A new scheme called Vishesh Krishi Upaj Yojana has been introduced to boost exports of fruits. (b) Further sectoral initiatives in other sectors will be announced from time to time. (b) The objective of the Foreign Trade Policy is two-fold: (i) to double India’s percentage share of global merchandise trade by 2009. 25 Cr for imported goods are other special features. served from India scheme. (c) The threshold limit of designated ‘Towns of Export Excellence’ is reduced from Rs. Special Focus Initiatives: (a) Sectors with significant export prospects coupled with potential for employment generation in semi-urban and rural areas have been identified as thrust sectors. 2002-07 and replace it with a Foreign Trade Policy for a five-year term beginning this fiscal year on the 31st August 2004.NATIONAL FOREIGN TRADE POLICY 2004-09 l l Introduced in 2004 and replaces EXIM policy Objectives: To double our share in global trade (presently around 0. & (ii) to act as an effective instrument of economic growth by giving a thrust to employment generation. 3. 1. Banking Briefs 233 (For private circulation only) . Strategy: (a) It is for the first time that a comprehensive Foreign Trade Policy is being notified. Handicrafts. minor forest produce Target Plus.70%) by 2009 and to act as an effective instrument of economic growth with thrust on employment generation particularly in semi-urban and rural areas Sectors with export prospects and potential for employment in rural and semi-urban areas are identified as thrust sectors A new scheme.

10% and 15% of FOB value of incremental exports. 4. This would improve the viability of such projects. (e) Import of seeds. the lower limit of performance for qualifying for rewards is pegged at 20% for the current year). In the case of stand-alone restaurants. (e) DFRC: Import of fuel under DFRC entitlement shall be allowed to be transferred to marketing agencies Banking Briefs 234 (For private circulation only) . and other service providers who earn foreign exchange of at least Rs. (f) Export of plant portions.5 lakhs. minor forest produce and their value added products. Export of these products shall qualify for duty free credit entitlement equivalent to 5% of FOB value of exports. (v) Export obligation for specified projects shall be calculated based on concessional duty permitted to them. (c) ‘Served from India’ Scheme: To accelerate growth in export of services so as to create a powerful and unique ‘Served from India’ brand instantly recognized and respected the world over. derivatives and extracts has been liberalized with a view to promote export of medicinal plants and herbal products. whereas in the case of hotels. the requirement of installation certificate from Central Excise has been done away with. (d) EPCG: (i) Additional flexibility for fulfillment of export obligation under EPCG scheme in order to reduce difficulties of exporters of goods and services.10 lakhs will be eligible for a duty credit entitlement of 10% of total foreign exchange earned by them. bulbs. (iii) Transfer of capital goods to group companies and managed hotels now permitted under EPCG. tubers and planting material has been liberalized. the entitlement shall be 20%. Individual service providers who earn foreign exchange of at least Rs. For incremental growth of over 20%. (Since the target fixed for 2004-05 is 16%. flowers. Exporters who have achieved a quantum growth in exports would be entitled to duty free credit based on incremental exports substantially higher than the general actual export target fixed. (d) ASIDE funds to be utilized for development for Agri Export Zones also.(c) Capital goods imported under EPCG for agriculture permitted to be installed anywhere in the Agri Export Zone. (ii) Technological upgradation under EPCG scheme has been facilitated and incentivised. (b) Vishesh Krishi Upaj Yojana: Another new scheme called Vishesh Krishi Upaj Yojana (Special Agricultural Produce Scheme) has been introduced to boost exports of fruits. the earlier DFEC scheme for services has been revamped and re-cast into the ‘Served from India’ scheme. The entitlement is freely transferable and can be used for import of a variety of inputs and goods. it shall be 5%. (iv) In case of movable capital goods in the service sector. 25% and 100%. Hotels and Restaurants can use their duty credit entitlement for import of food items and alcoholic beverages. Rewards will be granted based on a tiered approach. Export Promotion Schemes: (a) Target Plus: A new scheme to accelerate growth of exports called ‘Target Plus’ has been introduced. the duty free credits would be 5%. vegetables.

(ii) FDI would be permitted up to 100% in the development and establishment of the zones and their infrastructural facilities. mts. (b) EOUs shall be permitted to retain 100% of export earnings in EEFC accounts. Free Trade and Warehousing Zone: (i) A new scheme to establish Free Trade and Warehousing Zone has been introduced to create trade-related infrastructure to facilitate the import and export of goods and services with freedom to carry out trade transactions in free currency. and develop strategic market access programmes. built up area.Import of Second hand Capital Goods a. Units in the FTWZs would qualify for all other benefits as applicable for SEZ units. Agriculture. (g) New Status Holder Categorization for Export Houses A new rationalized scheme of categorization of status holders as Star Export Houses has been introduced as under: Category Total performance over three years One Star Export House 15 crores Two Star Export House 100 crores Three Star Export House 500 crores Four Star Export House 1500 crores Five Star Export House 5000 crores Star Export Houses shall be eligible for a number of privileges including fast-track clearance procedures. Import of second-hand capital goods shall be permitted without any age restrictions. exemption from furnishing of Bank Guarantee. Export oriented units (EOUs) (a) EOUs shall be exempted from Service Tax in proportion to their exported goods and services. (d) Import of capital goods shall be on selfcertification basis for EOUs.50 crores to Rs. This is aimed at making India into a global trading-hub. b. Floriculture. Minimum investment criteria shall not apply to Brass Hardware and Hand-made Jewellery EOUs (this facility already exists for Handicrafts. Animal Husbandry. IT and Services). Aquaculture. (iii) Each zone would have minimum outlay of Rs.25 crores. (e) For EOUs engaged in Textile & Garments manufacture leftover materials and fabrics upto 2% of CIF value or quantity of import (f) shall be allowed to be disposed of on payment of duty on transaction value only. (c) Income Tax benefits on plant and machinery shall be extended to DTA units which convert to EOUs. including brand building. 5. (For private circulation only) Banking Briefs 235 . 7. Services Export Promotion Council: An exclusive Services Export Promotion Council shall be set up in order to map opportunities for key services in key markets. 6.100 crores and five lakh sq. Minimum depreciated value for plant and machinery to be re-located into India has been reduced from Rs. (f) DEPB: The DEPB scheme would be continued until replaced by a new scheme to be drawn up in consultation with exporters.authorized by the Ministry of Petroleum and Natural Gas. eligibility for consideration under Target Plus Scheme etc. 8. in co-ordination with sectoral players and recognized nodal bodies of the services industry.

10. Multi-media operations. particularly in areas like Engineering & Architectural design. software developers etc. Bio Technology Parks Biotechnology Parks to be set up which would be granted all facilities of 100% EOUs.Time bound introduction of Electronic Data Interface (EDI) for export transactions. to draw in a vast multitude of home-based professionals into the services export arena.9.. 11. The other measures are in areas like : l Gems & Jewellery Handlooms & Handicrafts Leather & Footwear Co-acceptance/ Avalisation Board of Trade l l l l Banking Briefs 236 (For private circulation only) .5 crores and good track record shall be exempt from furnishing Bank Guarantee in any of the schemes. so as to reduce their transactional costs. Common Facilities Centre Government shall promote the establishment of Common Facility Centres for use by homebased service providers. Procedural Simplification Rationalisation Measures & All exporters with minimum turnover of Rs. in State and District-level towns.Validity of all licences/entitlements issued under various schemes has been increased to a uniform 24 months. 75% of all export transactions to be on EDI within six months.

In other words.e. Comparative advantage principle refers to relative and not abso­lute efficiency in producing goods & services. cotton. it implies that exports of other countries have grown much faster than ours. services and remittances) The difference between export and import of goods is referred to as Balance of Trade (BoT). In 1948. foreign aid. grants etc India’s share in total world trade is 0. (i) Merchandise trade (i. Different countries generally concentrate on providing goods & services in which they have comparative advantage and in this sense interna­tional trade is economically beneficial to all the countries. Conceptually and arithmetically. Different countries have comparative advantage in different commodities or services. The capital account includes (i) External borrowings or repayment l l l l The fundamental reason why foreign trade benefits an economy is the principle of comparative advantage..e. export-import of goods) (ii) Invisibles (i.67% in 2002-03. besides special items like spices and precious metals...Capital and Current Current Account: Import and Export of goods and invisibles (Services and remittance) Capital Account: External borrowings or repayment. Merchandise trade and invisibles together comprise the current of account of a country and the difference between inflows & out­flows here gives the current account surplus or deficit.OVERVIEW OF INDIA’S FOREIGN TRADE l l Foreign Trade benefits an economy due to comparative advantage Inflows and outflows of foreign exchange take place under two accounts. 2.53%. It is customary to value imports on Costs Banking Briefs 237 . costs or technology. the net difference be­tween current and capital account must compensate the movement in reserve position of a country. The inflows i.e. India’s share in the total world export was 2.53lac Crores Insurance Freight (CIF) basis while exports are valued on Free On Board (FOB) basis to arrive at Balance of Trade or Trade Balance of a country.. external payments are customarily classified under two broad headings. external receipts and outflows i. India’s share in the total world export has declined to a mere 0. external investment/disinvestments. arising out of differences in resources.91lac Crores and 3. jute etc. The international trade leads to inflow & outflow of foreign exchange. namely (i) Current account (ii) External investments or disinvestments (iii) Foreign Aid. The foreign exchange reserves of India touched (For private circulation only) (ii) Capital account The current account inturn can be spilt into two heads. India’s exports and imports during 03-04 was Rs. Historically India had been an exporter of primary goods like tea.e.6%. The balance on current account together with the balance on the capital account will effect changes in the coun­try’s forex reserves. grants etc.

45 2. engineering goods.7 (-1.09.3 51.the all time low of US $ 1.4 61.206 2. Manufactured Goods form the bulk of our exports constituting 75%.018 14. Agricultural and allied products exports were for Rs.4 1.35%) by 2009. Since then external sector performed rather well.137 2. textiles and Gems and Jewellery comprise a major portion of manufactured products.71 20.03 2002-03 43.41 19.2 billion as at the end of December 1990.1 2.7 77. It was at this juncture.3 22.200 19. India’s Foreign Trade: Performance in the la st 3 years (2001-02 to 2003-04) Item 2003-04P Exports 2.1 21.582 Growth (%) Imports 3.91. during the Gulf crisis (Kuwait war) and India had to pledge gold in the London market to prevent a possible default in meeting external obliga­tions. 34.2 Salient features of our foreign trade in principal commodities in 2003-04: l Around 27% of our imports were Petroleum and related products.55.030 Cr constituting 11.976 Growth (%) Rupees in Crores 2002-03 2001-02 63.53.6) 2001-02 2. Chemicals and related products.2 l Rupees in US$ billion 2003-04P 52. EXIM Policy seeks to achieve a global share of 1% while the recent National Foreign Trade Policy aims to double our share in global trade (which means more than 1. l Banking Briefs 238 (For private circulation only) .82 20.41 25. that India embarked on the path of liberalisation and globalisation.7% of our exports Projected Growth India’s share in global foreign trade is still below 1%.

transactions in or out of India by residents and their overseas offices or agents and transactions in India by non-residents or their offices or the agents in India. except where the offender does not pay even the fine. simple and transparent rules. But current account transactions are exempted from such restrictions. a new legislation titled a FEMA should be enacted. increase in threshold limits for various transactions under the discretionary powers of the Authorised Dealers. have been liberalised and Foreign Direct Investment policy has been simplified. fewer occasions for RBI interventions.e. but no imprisonment. in joint ventures. Also.. The new law has now only civil and no criminal consequences. which recommended many changes/ modifications in the existing Act. Capital account transactions will face restrictions that are greater than current account transactions. reduction in number of forms. fewer sections. (For private circulation only) l l l After opening up of the Indian economy and initiation of the liberalisation process during the year 1991-92. There are substantial changes. definition of NRI aligned with IT act. unless there are specific restrictions. it was felt that some measures in the existing FERA were too restrictive. 1999 is a step towards foreign exchange management as a part of the policy of Banking Briefs 239 . globalisation and liberalisation of trade. A Task Force was accordingly constituted to suggest a new legislation. (iv) rates of tariffs have been rationalised. The Foreign Exchange Management Act. It has made significant departures from former FERA (Foreign Exchange Regulation Act) and a number of changes contained therein would have far reaching effects. (v) Exim Policy has been considerably liberalised. therefore. initiated in 1991. Any contravention of its provisions will now result in a fine in monetary terms and penalty. The FEMA has at least annulled the most feared of flaws i.e. (ii) external commercial borrowings have gone up as Indian corporates are now accessing the capital markets abroad. The FEMA provides that no person will carry out transactions with foreign exchange or transactions with non-residents i. A few of these developments are: (1) participation of foreign institutional investors in Indian stock markets has increased manifold. In view of the abovesaid developments it had become necessary that the modifications and some new amendments are incorporated in the existing FERA. FERA. particularly in regard to the outlook and approach in dealing with foreign exchange issues. 1973. It will provide a mechanism for forex dealings and financial transactions in a more liberal way than that existed under FERA. significant developments in forex investment and foreign trade have take place in our country. and (vi) foreign trade and foreign exchange reserves have increased substantially. particularly the punitive provisions which it contained. (iii) Indian investments abroad.FOREIGN EXCHANGE MANAGEMENT ACT (FEMA) l l Enacted in 1999 It liberalises the dealings in foreign exchange and relaxes the punitive provisions in FERA It attracts only civil and not criminal consequences It introduces a new concept of Authorised Persons to include Ads/MCs/RMCs and OCBs Some key measures: Clear definition of current and capital account.

an Indian resident going abroad to take up employment. If these offices and branches are treated as persons resident in India. according to the FEMA as above. Thus. Further. As against this. The FEMA is surely a step towards facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. business or profession will also wait for 182 days to acquire residential status in India. as stated earlier. the provisions for normal residents would apply to them. Banking Briefs 240 (For private circulation only) . branches and agencies outside India owned or controlled by Indian residents as “persons resident in India. The effect of such provision is to be seen. The FEMA not only changes the definition of a person resident in India. will get amnesty. FEMA has made a significant departure from the FERA in regard to the definition of a “person resident in India”. overseas offices and branches of all corporates including banks in India. The FEMA no longer allows the RBI to grant “general permission” to individuals. Under the FERA regulations Indians returning to India became residents immediately on their arrival. Similarly. but has also delinked it from citizenship. these would be subject to FEMA restrictions and rules and regulations made thereunder. Section 2(v) defines “a person resident in India” to mean a person resident in India for more than 182 days during the course of the preceding financial year. It is a significant departure from the criminal law and essentially turns the contravention of the FEMA to a civil contravention. business or profession will have to undergo a gestation period of 182 days to attain NRI status. there will be delay in forex inflows from such persons awaiting the status of a NRI. It empowers the Central Government to compound offences. all offences under FERA will get amnesty and not merely some of the serious ones.An interesting provision of the FEMA is that all offences under FERA that have not been prosecuted within two years from the enactment of FEMA. This is a restriction on the powers of RBI. Section 2(p) and (q) of the FERA determines the status of a person based on the purpose or intention of stay rather than the duration of its stay. It also contains provisions that a Chartered Accountant can present the case before the relevant authority hearing an appeal on behalf of the appellant. Further section 2(v)(iv) treats offices. The rupee accounts in India of such offices/branches of Indian banks would be treated as resident accounts and cease to be eligible for settlement of international transactions. NRIs returning to India for employment.” Consequently. Under FERA. are treated as non-residents with freedom to carry on their business operations abroad. Consequently. The FEMA does away with the criminal prosecution for any violation of its provisions. It only provides for a penalty upto thrice the sum involved. corporates or to a class of persons as provided under FERA to deal in Forex.

emigration.000 or five per cent of the inward remittance per transaction. They were also allowed to open. continue to avail of educational and other loans as residents in India. (For private circulation only) Resident individuals were allowed to remit up to US $ 25. (v) advertisements on foreign television channels. whichever is higher. Resident beneficiaries were permitted to open and credit the proceeds of insurance claims/ maturity/surrender value settled in foreign currency to their resident foreign currency (RFC) domestic accounts. Facilities for Resident Individuals l Indian students studying abroad were made eligible for all facilities available to nonresident Indians (NRIs) under the Foreign Exchange Management Act (FEMA). (ii) covering expenses by artists while touring abroad. corporates. resident and non-resident individuals.000 from US $ 500. ADs were permitted to allow remittances for (i) securing insurance for personal health from a company abroad. (iii) commission to agents abroad towards sale of residential flats/commercial plots in India up to US $ 25. and (vii) use and/or purchase of trademark/franchise in India. Residents allowed to book forward contracts and hedge risk in forex market Non-residents permitted to enter into forward sale contracts with Ads in India to hedge currency risk l Capital account transactions were further liberalised during 2003-04. Relaxations were allowed for overseas investments and remittances abroad by banks. (iv) short term credit to overseas offices of the Indian companies. Exporters and Importers liberalized Listed Indian companies permitted to disinvest their investment in JVs aboroad NRIs given additional investment avenues. The limit for release of foreign exchange for employment abroad. Policy initiatives to improve the inflows of reign direct investment. resident individuals were permitted to acquire and hold immovable property or shares/portfolio investment or any other asset outside India without prior approval of the Reserve Bank. l l Banking Briefs 241 . however. They would. foreign portfolio investment and external commercial borrowings were also carried forward during the year. The limit for foreign exchange remittance by resident individuals for current account purposes other than import without documentation formalities was raised to US $ 5. (vi) royalty up to five per cent of local sale and eight per cent of exports and lump sum payment not exceeding US $ 2 million. maintain and hold foreign currency accounts with a bank outside India for making remittances without prior approval of the Reserve Bank.000 freely per calendar year for any permitted purposes under the current and the capital account Under this scheme.CAPITAL ACCOUNT LIBERALISATION l l l l l l l l l Capital account transactions further liberalized Resident individuals allowed to remit upto US$25000 freely per calendar year Indian students studying abroad given facilities available to NRIs AD s permitted to allow higher remittances Facilities to Corporates.

i. While no monetary ceiling was fixed by the Reserve Bank for remittance under ICCs.00. General permission was granted to foreign entities for setting up project offices in India. l Facilities for Corporates l Resident individuals maintaining foreign currency accounts with ADs in India or banks abroad were allowed to obtain International Credit Cards (ICCs) issued by overseas banks and other reputed agencies.000 on the basis of self declaration. Permission was also granted to foreign companies to establish branch offices/units in special economic zones (SEZs) to undertake manufacturing and service activities subject to certain conditions.00. (For private circulation only) l l l Banking Briefs 242 . They were allowed to invest in overseas joint ventures (JVs)/wholly owned subsidiaries (WOSs) up to 100 per cent of their net worth. The limit for release of foreign exchange for medical treatment abroad without estimate from a hospital/doctor was increased to US $ 1. These project offices were permitted to open foreign currency accounts with the Reserve Bank’s approval. including purchase of land incidental to this activity.000 with a minimum maturity period of one year. Balances in the exchange earners’ foreign currency (EEFC) and resident foreign currency (domestic) [RFC(D)] accounts were allowed to be credited to non-resident (external) (NRE) rupee/ foreign currency non-resident (banks) [FCNR(B)] accounts at the option of the account holders consequent upon change of residential status (to nonresident). within the overall limit available for investment overseas under the automatic route. Foreign banks operating in India were permitted to remit net profits/surplus (net of tax) arising out of their Indian operations to their head offices on a quarterly basis without prior approval of the Reserve Bank. This facility was also extended to partnership firms. Corporates were permitted to issue equity shares against lump sum fees. royalty and outstanding external commercial borrowings (ECBs) in convertible foreign currency. The automatic route for overseas investment was widened to cover investment overseas through special purpose vehicles (SPVs) and by way of share swaps with requisite approval processes. Diplomatic missions.00.000. Remittance of the net salary of a citizen of India on deputation to the office or branch of an overseas company in India was allowed for the maintenance of close relatives residing abroad.e. diplomatic personnel and non-diplomatic staff of foreign embassies were allowed to maintain foreign currency deposit accounts in India.000 from US $ 50. Resident individuals were permitted to take interest free loans from close relatives residing outside India up to US $ 250.000.. The limit for remittance towards consultancy services from outside India was raised to US $ one million per project from US $ 1. Steps were taken to encourage outflows that would enhance the strategic presence of Indian corporates overseas. the applicable limit is the credit limit fixed by the card issuing banks. This would enable Indian companies to take advantage of global opportunities and also to acquire technological and other skills for adaptation in India.maintenance of close relatives abroad and education abroad was increased to US $ 1. Resident corporates and registered partnership firms were allowed to undertake agricultural activities overseas. other than through JVs/ WOSs. either directly or through their overseas offices.

Units in domestic tariff areas (DTAs) were allowed to make payment in foreign currency towards goods supplied to them by units in SEZs.00.00. 1 lakh to Rs. sanction of ‘in principle’ limits for a period of three years with the provision of timely renewal and preference for grant of packing credit in foreign currency. subject to certain conditions. 2004 submission of declaration in form GR/SDF/ PP/SOFTEX in respect of export of goods and software of value not exceeding US $ 25.l Keeping in view the comfortable foreign exchange reserves and the prevailing strength of India’s external sector. including those in small and medium sectors. ADs were allowed to grant permission to exporters for opening/hiring of warehouses abroad initially for one year and renewal thereof. Limits for direct receipt of import bills/ documents by non-corporate importers were raised to US $ 100. faster and simpler processing of applications for credit. l The limit on export of goods by way of gifts was increased from Rs. The limit for submission of documentary evidence of all imports made into India was enhanced from US $ 25. and (ii) borrowings under the approval route by financial institutions dealing exclusively with infrastructure or export finance and also by banks and financial institutions which had participated in the textile or steel sector restructuring package. Indian companies were permitted to grant rupee loans to their employees who are NRIs or persons of Indian origin (PIO) for personal purposes. including purchase of housing property in India.000 to US $ 1. The revised ECB guidelines allowed (i) corporates to access ECBs for undertaking investment activity in India and for overseas direct investment in JVs/WOSs. The salient features of the Gold Card scheme include better terms of credit than those extended to other exporters by banks. Initiatives were taken for bringing about transparency in policy implementation and data dissemination with respect to ECBs. 5 lakh per annum. Exporters with good track record. Realisation of export proceeds up to 360 days from the date of shipment was allowed for export of books on a consignment basis. the limit for accepting exchange control (EC) copy of bill of entry for import remittances was enhanced from US $ 1.000 or its equivalent. The Gold Card holders will also be considered for issuance of foreign (For private circulation only) l l l Facilities for Exporters and Importers l l The remittance of premium made by exporters for overseas insurance of exports of sea-food and other perishable food/food products against rejection by importers was permitted. With effect from April 1.000 or its equivalent was waived. Project/ service exporters were allowed to pay their Indian suppliers/ service providers in foreign 243 Banking Briefs . have been made eligible for issue of Gold Card to ensure easy availability of export credit.000. currency from their foreign currency accounts maintained in India for execution of such projects. The maximum amount of ECB that can be raised by Indian corporates under the automatic route was enhanced to US $ 500 million in a financial year with minimum average maturity of three years for loans up to US $ 20 million and minimum average maturity of five years for loans above US $ 20 million.000 to US $ one million. Credits for imports up to US $ 20 million per transaction with a maturity period beyond one year and up to three years were permitted only for import of capital goods. a comprehensive review of the guidelines for ECBs led to significant liberalisation. For select importers.

Allotment is subject to the condition that the overall issue of shares to non-residents in the total paid-up capital of the company does not exceed the sectoral cap. subject to the limits prescribed by the SEBI. Multilateral institutions such as International Finance Corporation (IFC) and Asian Development Bank (ADB).97. Earlier. 2003.Residents l Residents were allowed to book forward contracts and participate in hedging instruments for managing risk in the foreign exchange market. Facilities for Overseas Investments l property in India other than agriculture land/ plantation property/farm houses. Effective February 2004. FXCLEAR on August 7. The CCIL offers a multilateral netting mechanism through a process of novation for inter-bank spot and forward US dollar-rupee transactions. The live operations of foreign exchange clearing. interest and other charges directly to the concerned ADs/ housing finance institutions through their bank accounts. In May 2004. NRIs were permitted to invest in exchange traded derivative contracts approved by the SEBI out of rupee funds held in India on a non-repatriable basis. Firms India registered under the Indian Partnership Act. 1932 and with a good track record were permitted to make direct investments outside India in an entity engaged in any bona fide business activity under the automatic route up to 100 per cent of their net worth.e. ADs were permitted to grant rupee loans to NRIs. The CCIL also launched its foreign exchange trading platform. borrowers’ close relatives in India were allowed to repay the instalment of such loans. During the period between April 2003 and June 2004. which commenced from November 12. housing loans availed by NRIs/ PIO could be repaid by borrowers either by way of inward remittances through normal banking channels or by debit to NRE/ FCNR(B)/NRO/NRNR/ NRSR accounts or out of rental incomes derived from the property. Authorised Dealers (ADs) were allowed to offer foreign (For private circulation only) Banking Briefs 244 .currency credit cards for meeting urgent payment obligations on the basis of their track record of timely realisation of export bills. 8. which can float rupee bonds in India..352 trades amounting to over US $ 727 billion were settled by the CCIL. l Listed Indian companies were permitted to disinvest their investment in JVs/WOSs abroad even in cases where such disinvestment may result in a write-off of the capital invested to the extent of 10 per cent of the previous year ’s export realisation. Foreign Exchange Clearing l l Facilities for Non-resident Indians (NRls) and Persons of Indian Origin (PIO) l Non-resident shareholders were allowed to apply for issue of additional equity shares or preference shares or convertible debentures over and above their rights entitlements. the CCIL began to settle cash and T+1 settlement trades in addition to spot and forward trades. i. l Forward Contracts . Foreign Embassies /Diplomats/Consulate Generals were allowed to purchase/sell immovable An important element in the infrastructure for the efficient functioning of the foreign exchange market has been the clearing and settlement of inter-bank US dollar-rupee transactions. 2002 have been satisfactory. were permitted to purchase Government dated securities.

(from only average of past three years’ turnover earlier) without any limit (US $ 100 million. whichever is higher. HoIders of FCNR(B) accounts were permitted to book cross-currency forward contracts to convert the balances in one currency into another currency in which FCNR(B) deposits are permitted. earlier). Flls were permitted to trade in exchange traded derivative contracts approved by the SEBI subject to the limits prescribed by it. l l l l l l Banking Briefs 245 (For private circulation only) . l Forward Contracts -Non-residents l Residents were permitted to book forward contracts for hedging transactions denominated in foreign currency but settled in rupees.currency-rupee options on a back-to-back basis or run an option book as per specified terms and conditions. Resident entities were also allowed to hedge their overseas direct investment exposure against exchange risk. These contracts could be completed by delivery or rollover up to the extent of market value on the due date. The eligible limit for booking of forward contracts by exporters/importers was increased to 50 per cent (from 25 per cent earlier) of the average of the previous three financial years’ actual import/export turnover or the previous year’s turnover. Non-residents were permitted to enter into forward sale contracts with ADs in India to hedge the currency risk arising out of their proposed FDI in India. ADs were permitted to enter into forward/ option contracts with residents who wish to hedge their overseas direct investment in equity and debt. Importers/exporters desirous of availing limits higher than the overall ceiling of 50 per cent were allowed to approach the Reserve Bank for permission. NRIs were allowed to invest in exchange traded derivative contracts approved by the SEBI out of rupee funds held in India on a non-repatriable basis.

which need to be hedged. bonds etc. FII money comprises of various segments such as Pension funds. forex risks . and bring in venture capital. Jardine Fleming etc. regulatory risks. the highest in 3 years volatile. India currently has about 7-8 percent weightage among the funds dedicated to Asia. Increasingly companies are using the annual reports as a medium to communicate their strategies and vision to the world. trusts. whether it was portfolio money like that of FIIs or investment flows like that of FDI. asset management companies. foreign investment was welcomed with open arms. debentures. But as far as the other segments of the FII funds are concerned they are not so volatile. etc. When an FII invests in an emergent market like India. The number of registered FIIs in India has grown over the years to beyond 500. was imperative to rebuild India. begun opening their shops in India. During 2003-04 FIIs brought US$ 10. The FIIs currently operating in India are of different types.9 billion. in terms of taking reasonably medium to longterm view of the company as also ensuring proper assessment before investing. Jardine Fleming are some examples of FIIs Advantages: Provide funds. foreign capital. it takes all these risks into consideration and decides a minimum level of return to put it on equal footing with what would have been earned by investing in a developed market. The FII investment flows grew to more than $12 bn by Dec 2000. But. FIIs bring in portfolio investment i.e investment in shares. Harbingers of transparency FIIs have brought in a set of practices and standards in terms of researching a company. Morgan Stanley. Better disclosures and corporate governance and ensuring that the decisions of the company are in consonance with the investor perceptions are the things that have changed over the last 7 years. bring in international practices. FIIs of different countries. In the case of investing in emerging markets there are country risks. promotes transparency. portfolio managers etc. FIIs along with other institutions have had a very significant role in causing these changes. taxation risks. Indian funds. The big names include: Morgan Stanley. Hedge funds would certainly be more Banking Briefs 246 (For private circulation only) . mutual funds. only a tiny segment of these registered FIIs is active in the markets. Over the year FIIs have been allowed the freedom to invest in any security including derivatives in both secondary and primary markets. In the wake of reform process. For a country that embraced free market model after having remained closed to the outside world for long. Templeton.FOREIGN INSTITUTIONAL INVESTORS (FII) l l l FIIs entry into India began in 1993 in the wake of economic reforms They provide much needed funds for development of the country Unlike FDIs. FIIs are transparent and this has made Indian Companies to follow suit. allocations pertaining to India out of Asia funds and hedge funds. SEBI. A regulatory framework was evolved by the Indian securities markets regulator. l l l The era of FIIs in India originated in 1993. They comprise of pension funds. Templeton. predominantly American. Capital International.

FIIs have also played a catalytic role in nurturing the nascent venture capital culture in of the highest in the last three years. Banking Briefs 247 (For private circulation only) . Future Role The clout of foreign institutional investors is immense. During 2003-04. While the arrival of FIIs led to greater institutionalization of the Indian market.9 billion to India.Carrots and sticks The nature of FII investment flows into Indian markets requires them to focus on medium to long-term investment horizon. Since the kind of FIIs operating in India are long-term players. They have become a force to reckon within the global financial markets. FIIs have brought in a net inflow of US $ 10. Institutionalization also helped in lending better price discovery mechanism in the capital market. their activity also provided depth to the market. Even a tiny fraction of this would mean lot of money to the emerging markets. they tend to put pressure on policy markers to ensure continuity of sound economic and business policies.

DEBATE ON FDI – FII DISTINCTION l l FII stands for Foreign Institutional investors and FDI. The distinction between FII and FDI seems to be a hangover from the days when Swaraj Paul shook corporate czars by trying to annex their fiefdom. ICICI Bank and HDFC Bank are. (For private circulation only) l l Background The debate over the FDI – FII distinction (Foreign Direct Investment. Shareholders focus on Return on investment. barring small arms. what about areas like defence and nuclear power? It may be inadvisable to admit FDI in them. FDI is reckoned as a component) for investment in Indian market is much higher than FDI. For starters. which they controlled with minuscule stakes.Singh Committee on FDI in its report submitted in 2002 recommended in favour of relaxations in FDI limits in various sectors. 70% ”foreign owned”. In most sectors. Nuclear power. the report favoured relaxation of FDI limit to 100% and suggested investment clearance under automatic route instead of through Foreign Investment Promotion Board (FIPB). it is widely accepted that professional managers run businesses. assessment of business and security considerations. This of course begs the question that. needs domestic control. do we need to distinguish between “Indian management” and others. whereas FII investment may not affect their management. What is the present Position? At the moment there are varying limits for FDI for different sectors depending on our Banking Briefs 248 . conventional shells. on the other hand. the limit allowed for Foreign Institutional Investors (FIIs) ( of which. FDI focuses on controlling interest and running the company while FII focuses on gaining profit from higher market valuation of Indian companies At present we limit the cap on FDI for security and other national considerations while for FII there is a higher limit. Thereafter we seem to have drawn a distinction between the foreign devil who wants to buy Indian businesses and run them. at a time when Indians aspire to run global businesses. Also. More FDI is required due to insufficient domestic funds and to spur growth in India. while FIIs are Foreign Institutional Investors who bring their money only to profit from the attractive valuations in the Indian market. Whether 74 percent foreign direct investment (FDI) should be allowed in companies running telephone networks started around early 2001 when the country’s security agencies warned that allowing foreign investors to hold a majority in Indian telecom companies could lead to control by foreign powers over communications in the country — a situation that throws up the threat of espionage and sabotage.Foreign Direct Investment. etc. for instance. N.K. transport vehicles. and those who want to profit from only their market valuations. But no one questions that they are “Indian managed”. Without relaxations FDI would not be interested in more investment. Normally. Most strategic defence needs of ours are imported. FDIs are by Foreign Direct Investors who are interested in acquiring controlling interest and running the company. The argument In today’s business environment.Foreign Institutional Investors) came to the fore following the government’s proposal to enhance the FDI limit in Telecom sector.

Some of the rationalizations executed by companies are driven by a need to pander to research analysts rather than to the long-term good of businesses. such as the airline industry seem to have completely sacrificed a long-term perspective. FIIs are driven by returns and shortterm considerations.Unlike FDI. and think in quarterly terms. though. to attract more foreign investment to India ( which at present is much less than countries like China) a liberal policy regime is required in this area. Banking Briefs 249 (For private circulation only) . Many businesses. Many US corporations are so “Wall Street-driven” that their managements and owners act for the moment. The FII / FDI differentiation is meant to meet the safeguards for national interest while attracting funds for our economy from the global market.

The principle followed is to bind the reduced tariffs as committed in the respective national schedules against further increase. Banking Briefs 250 . i. Objectives of the WTO l Raising standards of living and incomes Ensuring full employment Expanding production and trade Optimal use of world’s resources l l l The WTO provides a forum for interpreting established international trade laws. 1995. 1995 Has 148 member countries Provides forum for establishing an open and liberal global environment free from trade restrictions Objectives: Expand production and trade. 34 observercountries and seven observers to the General Council. IMF. for fresh negotiations among member countries.WTO AND LIBERALISATION OF FINANCIAL SERVICES l l l Word Trade Organisation came into being on Jan 1. raise standard of living and income and ensure full employment Steps taken by India under WTO: Reduction in number of items under QR. Copyrights Act. especially in levying internal taxes and domestic regulations. The underlying principles is to keep such protection at low levels. Four principles guide the trading rules: Protection through tariffs: The WTO has advocated liberal trade but recognises that members need to protect domestic production against foreign competition. amendment to Patents Act. Trade Marks law. The observers are international organisations — the UN. Tariffs and regulations must be applied to imports or exports without discrimination among members. WIPO and OECD. It has 148 members. It is committed to establishing an open and liberal global environment. It prevents discrimination among goods originating from different countries. and for settlement of trade-related disputes. UNCTAD. Bound Tariffs: Members are advised to reduce and eliminate protection to domestic production by reducing tariffs and eliminating non-tariff barriers. World Bank. optimize use of global resources. They act as advisory bodies to the WTO to fulfil its primary objective to ensure smooth trade flow. free from trade restrictions. and relaxation in investment norms The Principles The Principles of the WTO aim to create a liberal and open trading environment through which business enterprises can trade under conditions of fair and undistorted competition. It lays down a comprehensive set of regulations and guidelines covering all aspects of international trade.e. and to encourage participation of developed and developing countries in the newlyestablished Multilateral Trading System. FAO. between imported products and equivalent domestically produced goods. (For private circulation only) l l The World Trade Organisation (WTO) is the only international body dealing with the rules of trade between nations. It came into being on January 1. Most favoured nation treatment : The principle is favour one-favour all.

They act as advisory bodies to the WTO to fulfil its primary objective to ensure smooth trade flow. The Principles The Principles of the WTO aim to create a liberal and open trading environment through which business enterprises can trade under conditions of fair and undistorted competition. The Framework The WTO framework is based on legally enforceable trading rules. 1995.e. between imported products and equivalent domestically produced goods. Objectives of the WTO l by reducing tariffs and eliminating non-tariff barriers. services and intellectual property. Besides goods. It has 148 members. The principle followed is to bind the reduced tariffs as committed in the respective national schedules against further increase. UNCTAD. free from trade restrictions. and to encourage participation of developed and developing countries in the newlyestablished Multilateral Trading System. It prevents discrimination among goods originating from different countries. other issues are investments. and a platform for future negotiations. competition policy. It lays down a comprehensive set of regulations and guidelines covering all aspects of international trade. FAO. Most favoured nation treatment : The principle is favour one-favour all. dispute settlement. and for settlement of trade-related disputes. Tariffs and regulations must be applied to imports or exports without discrimination among members.The World Trade Organisation (WTO) is the only international body dealing with the rules of trade between nations. WIPO and OECD. IMF. The dispute settlement system set procedures for settling trade-related controversies within a stipulated timeframe. trade policy review mechanism. are the basis of the framework. The observers are international organisations — the UN. World Bank. which formed part of the Uruguay Round results concluded in 1994. These agreements generally spell out the principles of liberalisation and the permitted exceptions. They spell out rules of trading based on liberalisation and permitted exceptions. The trade policy review mechanism ensures that members respect their commitments. especially in levying internal taxes and domestic regulations. labour standards. The underlying principles is to keep such protection at low levels. for fresh negotiations among member countries. WTO Agreements WTO Agreements. The agreements. i. It is committed to establishing an open and liberal global environment. Bound Tariffs: Members are advised to reduce and eliminate protection to domestic production Banking Briefs 251 . services and intellectual projects. environment. etc. Four principles guide the trading rules: Protection through tariffs: The WTO has advocated liberal trade but recognises that members need to protect domestic production against foreign competition. cover goods. 34 observercountries and seven observers to the General Council. trade in services was brought under the aegis of the WTO as it accounted for more than 20 per cent of world trade. (For private circulation only) Raising standards of living and incomes Ensuring full employment Expanding production and trade Optimal use of world’s resources l l l The WTO provides a forum for interpreting established international trade laws. Commitment to lower customs tariff and other trade barriers remain a primary consideration while drawing up trading rules. covering goods. (Its predecessor GATT dealt only with trade in goods). It came into being on January 1. Besides agriculture and services.

Foreign investment in the financial sector is considered an enabling factor. The focus of FSA is market opening and foreign investment. along with telecommunications services and information technology products. In the area of mandated reviews such as TRIPs. and promote competition and efficiency. Implementation issues: India has been emphasising that implementation of existing agreements need to be addressed so that imbalances and inequities in their implementation can be rectified. imbalances in the TRIPS Agreements. 1999. In July 1995. trade in services was included in the ambit of the World Trade Organisation (WTO) under the General Agreement on Trade in Services (GATS). the developed countries are interested in market access through the FSA so that their large financial firms can take advantage of business opportunities and higher rates of return in the dynamic emerging economies. In December 1997. market access for financial services and a mechanism for dispute settlement. thus providing for increased market openings in banking. The FSA has come into effect from March 1. Financial services is one of the three major sectors. The entire world dynamics is in a fast changing mode towards greater and greater (For private circulation only) Banking Briefs 252 . which gives high protection to industrial products but does not recognise the rights of countries of origin.The agreements are under 3 broad groupings viz. the prime concern is strengthening the financial system’s ability to evaluate and manage risk. the General Agreement on Trade in Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). For example. However. including issues relating to future work of the WTO. developing countries are more interested in foreign capital flows to accelerate growth in their domestic economies and are less interested in the financial markets of the OECD countries. while review of the Dispute Settlement Mechanism of the WTO should recognise constraints of the developing countries. while granting patents on products develped countries. On their part. wants greater flexibility and autonomy in determining its agricultural policy to take care of our primary concerns of food secrutiy and rural employment. The Uruguay Round decided to bring financial services within the purview of WTO and put in place a legal framework for cross-border trade. for promoting growth and development. The focus is on efficient financial systems. Financial firms in developed countries have technologies that have reduced transactions cost. because foreign institutions bring new skills and products. Therefore. but the maturing markets at home have lesser opportunities for growth. the General Agreement on Tariffs and Trade-GATT 1994 (for goods). Therefore.. India has pressed for transfer of technology at reasonable rates to developing countries and protection of farmers’ rights. risks of possible financial crises and perhaps loss of national control of a strategic sector can offset the benefits of financial liberalisation. along with other developing countries. the Financial Services Agreement (FSA) was reached and 102 WTO members made commitments to open their financial markets to international players. Seattle Ministerial Conference The Ministerial Conference is the highest decision making authority of the WTO and it meets every two years or so to discuss and take decisions on various issues and proposals made by member countries. India. where multilateral liberalisation agreements were reached in the WTO in the last two years. insurance and other financial services. rather than totally free capital investments.

producers of phonograms and broadcasting organisations. Computer programmes to be protected as literary works. Layout Designs of Integrated Circuits l Washington Treaty. 1999. Copyright Act. Geographical Indications. India does not have any specific law on grographical indications. Patents.. Patents (Amendments) Act. Layout Designs of Integrated Circuits and Protection of Undisclosed Information (trade secrets) and enforcement of these. To increase the term to 50 years. is in accordance with international law. rights of performers. which obtain patents after 01.competitiveness. 1999. a bill was passed by Parliament in Dec. it is definite that WTO rules and directives are likely to get modified. 1957 as amended in 1994 meets requirement of TRIPS agreement except in case of protection of performer’s right. Decided to enact a new law on the subject to take advantage of provisions of TRIPS agreement. rights of performers and producers of phonograms should not be less than 50 years. whether products or processes. Countries that do not implement product patents in certain areas can delay provisions of product patents for another five years. in its essential features. on negative list. As per India’s obligation. shall be patentable if novel. to which India is a signatory. 1999 was passed in March 1999 to provide for exclusive marketing rights. Trade Marks law. Bill to amend TMMA in order to provide for protection to service marks was passed by Parliament in Dec. over a period of six years. covers protection of intellectual property in respect of layout designs that are original in nature Obligations include national treatment to foreign right holders and term of protection of 10 years.01. and the surfacing of many implicit issues together with the changing composition of emerging giants of the world economy and developing countries increasingly becoming conscious of their rights. involve inventive step and capable of industrial application Present term provided for in TRIPS l l l Trade Marks l l Patents l Geographical Indications l l l Banking Briefs 253 . Terms of protection for copyrights. 1958. (For private circulation only) l In 1997. With China’s entry in WTO. India decided to phase out QRs on imports for 2714 items. Trade and Merchandise Act (TMMA). Agreement requires compliance with provisions of Berne convention in area of copyrights and related rights i. However they have to provide exclusive marketing rights for products. A bill was earlier introduced in Parliament to make these changes and has been referred to Joint Select committee of Houses.95. Industrial Designs. INDIA’S COMMITMENTS TO THE WORLD TRADE ORGANISATION (WTO) Quantitative restrictions (QRs): l agreement is twenty years. Basic obligation is that inventions in all fields of technology. with its trading partners. All developing countries provided a transition period of five years in order to implement TRIPS agreement. Copyrights l Trade Related Intellectual Properly rights (TRIPS) l TRIPS agreement requires minimum standard of protection to be adopted on Copyrights.e. Trade marks. At present.

Among the ‘three pillars’ of Agri negotiation (Export subsidies. l l l l l Trade Related Investment Measures (TRIMS) l l Under this agreement.l Bill in this regard passed in Dec. l l Next Ministerial conference is slated to be held at Hong Kong in 2005. 1911 needs updation and amendment Bill prepared by Department of Industrial Development in this regard was passed by Rajya Sabha in Dec. 1999 and will now have to be passed by Lok Sabha. Fresh negotiations to begin on investment.Significant developments The meeting couldn’t reach any agreement due to sharp differences in the views and positions. Fifth Ministerial Meeting of the WTO at Cancun. Post-Cancun consultations focused on four negotiating areas (Agriculture. domestic support and market access) market access was viewed as the most important issue. In the meeting held in Mar 04. on relating to local content requirements in production of certain pharmaceutical products and other for dividend balancing requirement in case of investments in 22 categories of consumer items. EU (European Union) agreed to phase out farm export subsidy In the Framework Agreement adopted in Aug 04.. 1999. Singapore issues and Cotton). Mexico (Sep 2003) and PostCancun. Continuation of the flexibility for developing countries in providing certain subsidies for export of agricultural products for a reasonable period. competition. delegates agreed on the need to allow developing countries to accord special treatment for agriculture. l l l l l l Doha Conference (November 2001) Significant developments in Doha Conference : l l Transition period to introduce the new drug patent regime remains at year 2005 for India. Agreement requires that independently created designs that are new and original shall be protected. market access for non-agri products.12. l Industrial Designs l India wanted that protection of geographical indications should be made available to Basmati and other bio-resources. the following major decisions were taken: Eliminate all forms of subsidies in agriculture by an end date Reduce all trade distorting domestic support as per a ‘tiered formula’. In Seattle Ministerial Conference. 258) (For private circulation only) l Banking Briefs 254 . Action plan for 40 implementation issues should be chalked out by member countries by the end of 2002. India notified two measures. provided they were duly notified. government procurement and link between trade and the environment. Designs Act.99 during which they were allowed to retain measures inconsistent with Agreement. (NOTE: for 'SINGAPORE ISSUES' refer Page No. developing countries have a transition period of 5 years up to 31. no final decision was taken on the request of developing countries to extend transition period for elimination of notified TRIMS.

selling and using an invention and also authorising others to do so. spread over eight years. the exclusive privilege of making. 1970. by implication. an underlying process patent continues to subsist. or a product which allows him a period of exclusivity to exploit the invention. It must have novelty and utility. manufacturers can make the product without contravening any law as long as they do not use. Process vs. involved a process of give and take for the 125 countries. 1995. finally decided to sign the final Trade Related Intellectual Property Rights (TRIPs) Agreement during April 12-15. 1970 protects processes and not products. which confers on the grantee. it must be the inventor’s own discovery as opposed to mere variation of what is already known before the date of patent. but the two coexist. Article 65 of the TRIPs Agreement provides the developing countries including India. which provides greater patent protection The amended Patent Law will promote investment in research. As the name suggests. 1995) of WTO. or permit others to do so on licence. a patent is granted only for an invention which must be new and useful. Typically. by January 1. for product patents for pharmaceuticals and agro chemicals will be required to accept product patent applications for these products from the date of establishment (Jan 1. a period of 5 to 10 years to implement the TRIPs regime. Patent Law in India According to the Patents Act. It means. while a Banking Briefs 255 . 1995. and the process patent. product patent is protection given to the product itself. which replaced the General Agreement on Tariffs and Trade (GATT) since January 1. 1994. for a limited term. It has amended patent law to fulfill its obligations as a member of the World Trade Organisation (WTO). a patent is a form of protection given to the discoverer of a process. It would also help in conversion of knowledge into wealth process patent protects the process by which the product is made. Product Patent Simply put. That is. of course. For practical purposes. any one can make or sell the same product using minor change in processes Also. a product patent is filed as soon as the company has made a new chemical entity which it feels is a good thing. patent is a grant from the Government. India. Patent protection in India is for lesser duration while WTO insists 20 years Government has enacted the amended Patent Law. product patents do not replace process patents. the patented process. later. In India.PATENT LAW – VITAL ISSUES l Intellectual Property Right (IPR) is the right for exclusive use of new knowledge by an Individual/firm/company Indian Patent Law. that in a country which recognises process patents and not product patents. implies that after the product patent has expired. It is a protection given to a patentee for his invention for a limited term by the Government in consideration for disclosing his (For private circulation only) l l l l The negotiations on Intellectual Property Rights (IPRs) in the Uruguay Round. This regime further stipulates that member countries which do not provide. and commercialization of invention. or infringe. This.

An EMR of a product is approved for marketing prior to 01-01-2005 in (For private circulation only) Banking Briefs 256 . on review the patent on turmeric was cancelled after two years. The TRIPs agreement requires patent protection to cover both products and processes in every field of technology. drugs and chemicals. The US Patent office also granted patent for ‘Haldi’ for wound healing properties. Though an application for patent will be considered only in 2005. The grant of exclusive. Articles 70. The US has been taking undue advantage of the low level of patent awareness and laxity in enforcement of law. The CSIR protested that the patent did not fulfil the criteria of novelty and non-obviousness which are two of the three prime perquisites for granting patents. roots and grains. and. drugs and chemicals. The US Patents Office when granting patent for ‘Neem Oil’ for anticeptic use. Patent registration is rather slow. the WTO requirement is 20 years. It will take about seven years to obtain a patent as opposed to the global standard of two to three years. a patent is a legally-created entry-barrier. Even after protracted procedure of registration. Deficiencies in the Indian patent System The Indian patent system is inefficient and defective in many respects. India has been accused for the failure to adequately and effectively protect TRIPs. as an interim measure. The right of priority is to be determined at the time of granting full-fledged product patents. The argument was accepted. For practical purposes.9 of the agreement require India to provide a ‘mail box’ as an interim arrangement till the new law is enacted. the applicant can be granted Exclusive Marketing Rights (EMRs). patents have blatantly been allowed in the US for Indian plants. The Patents Act. As far as life of the patent is concerned. taking the original process (which as freely available in literature) and tinkering with it by altering a pathway here or there. The administration is defective.8 and 70. 1970. the validity of the patent can be challenged in the courts. applications for new inventions (disclosed after 01-01-1995) will go into a black-box that will be opened up in 2005. medicines. the Council of Scientific and Industrial Research (CSIR). urged for re-examination of the case. being a party to the WTO regime. albeit temporary. and. no product patent granted in any WTO country before01-01-1995 will be valid in India. but without success. For practical purposes. on the other hand. medicines. not the final product — food.invention. It fails to protect inventors’ rights by patenting a particular process. the duration of process patents for food and medicine is five years from date of sealing or seven years from date of filing and the duration in respect of process patents for all other inventions is 14 years. It is alleged that Indian companies could get products patented abroad at a fraction of the cost. On the one hand. Under the Indian Patents Act. The whole controversy stems from the contention that patent protection is inadequate in India. allows process patent and does not allow product patent for food. As far as drug companies are concerned. any product patent obtained after 01-01-1994 in another WTO signatory country will be valid in India if the patent application is filed after 01-011995. A mail box is a black-box into which product patent applications are filed for recognition of product patents by the country. has to comply with the new patent regime by 2005. rights over the invention blocks the entry of potential competitors in that area of commercial activity. However. however. Implications of TRIPs Agreement India. There is growing backlog of over 20.000 patent applications.

protection of patents will be the surest way of survival and growth. Better patent protection will facilitate technology transfer. but knowledge. Obviously. More fruitful collaboration between universities and corporates. (For private circulation only) l l l l l l l Banking Briefs 257 . labour or capital. Patents held by the parent multinational companies will be recognised in India. It has also decided to accede to the Paris Convention for the protection of Intellectual Property and. the Patent Cooperation Treaty. The Government has now come out with a revised Patents Bill. extension of term of protection. The process of liberalisation has thrown open hitherto-closed markets. the new patent law will have following implications: l l The shift from process patents to product patents will transform the pharmaceutical and biotechnology industries. Companies will use patent database to keep a track of worldwide technology developments. or till the product patent is granted or denied. Research results will be patented before publication. by extension. Commercialisation of research will earn royalties. Conclusion For India. Farmers will buy the high-yielding variety of seeds only if increased yield will justify higher prices. simply because patents will convert knowledge into wealth. The amended legislation provides for grant of new rights. applications or new strains for profit. Pharma companies will get geneticallyengineered products patented. The most important factor of production will not be land. Software companies will be able to establish patent rights over customised products. Patent protection will promote original product development and violation of patent laws will become more difficult. This calls for capitalisation on scientific and technical strengths to convert innovation into property and transform research into profit. and. 2002 was adopted in parliament in May 2002. The future wars on economic front will be fought with and for knowledge. Indian scientists and farmers can patent original products. Joining the Convention will also make India eligible to join the Patent Cooperation treaty. thus doing away with the need for EMRs. whichever period is shorter. The Bill recognises product patents from 2000. l l l l l Patents will be powerful instruments for converting knowledge into wealth. conditions for compulsory licences and provision for patent infringement. 1998.any WTO signatory country. According to the Global Competitiveness Report. the marketer will be allowed to sell the product exclusively for a period of five years in India. the patent law will be full of opportunities and challenges. Indian companies will increase R&D budget and the emphasis will shift from technologyseeker to technology-provider. Technologies developed will be licensed out and marketing of technology will become a viable business. India ranks first out of 53 nations in terms of the availability of competent scientists and engineers. Global products of better quality will be easily available to consumers. The patents (Second amendment Bill). But India ranks 51st nation in terms of commercialising research and turning brilliant ideas into profits. In the emerging scenario. This will enable Indian entrepreneur patent protection in all member-countries at a single point.

As for government procurement. involving 28 countries. trade facilitation. Similarly. these issues would need to be incorporated. Trade facilitation refers essentially to simplifying procedural hassles in international trade. to take just one example of how it affects trade. What is the rationale behind discussing these issues as part of trading negotiations? Many nations that are members of the WTO felt that for international trade to be genuinely free and fair. look at is cartels in various industries. for instance. trade facilitation and transparency in government procurement. that clearly would affect trade. between subsidiaries of the same MNC or between a subsidiary and its headquarters. Yet. trade and competition policy. In the opinion of the members. as much as one-third was trade within companies. if at all they are held. and transparency in government procurement. because it was at the first ministerial conference of the WTO in Singapore in 1996 that they were first brought up as possible areas on which the multilateral body could initiate negotiations. Where do various countries stand on the issues? There is by and large a divide between the developed and the developing countries on whether these issues ought to be part of the WTO’s negotiating mandate at this point or not and also on the contours that such negotiations should take. These four issues have collectively come to be known as the Singapore issues in the context of the WTO. as things stand. in relation to the World Trade Organisation (WTO). l l The term refers to areas of trade and investment. the focus has now shifted to other areas where there is scope for agreement. in terms of the documentation required by customs departments and so on. There are four issues namely trade and investment.SINGAPORE ISSUES l l The term is used in connection with WTO negotiations. there is no multilateral agreement on how to deal with foreign direct investment. but the attempt is to reach an agreement between all 148 WTO member countries. They pointed out. on the other hand. Here again. that of the total global trade in goods and services of $6. which are estimated to cost developing countries billions of dollars a year. there is a “plurilateral” agreement.100 (UNCTAD estimate) bilateral investment treaties. if a government offers an incentive for the level of indigenisation in procuring a good. India and other developing countries. these are the issues which affect world trade and hence need consensus Since there are large disagreements on these issues. for instance. One of the things an international agreement on competition policy would need to Banking Briefs 258 (For private circulation only) . competition policy would also have an impact on the volume of trade. trade and competition policy. Obviously. Japan and South Korea were the ones that first pushed for the Singapore issues in 1996 and to varying degrees most of the developed world has gone along with them. therefore. Clearly. this too has an impact on trade. there is a considerable link between trade and investment. The EU. due to overpricing. while there are as many as 2. are cautious about taking up these issues for negotiations.1 trillion in 1995.

with too little room for manoeuvre in directing investments into areas of national priority. On the issue of transparency in government procurement. India has argued that once again while the idea is unexceptionable. What is the state of play on these issues? As of now. on the specific issue of competition policy as applicable to “hardcore cartels. there is no formal decision on whether or not there will negotiations under the aegis of the WTO on these issues. of course.What is India’s objection? On issues like investment and competition policy. The Organisation of Petroleum Exporting Countries (OPEC) is perhaps the best known example of an export cartel. India feels that having a multilateral agreement would be a serious impingement on the sovereign rights of countries.” India has pointed out that there is no clarity on whether these would include export cartels. developing countries may not have the resources — by way of technology. this is inherent in any multilateral treaty. but investment is seen as an area in which ceding sovereign rights would leave governments. there cannot be a universal determination of what constitutes transparent procedures. the Indian position is that while the principle is entirely acceptable. particularly developing country governments. Indications from Cancun are that those pushing for their inclusion are using other areas like agriculture as leverage to persuade the developing countries into agreeing to negotiate on these areas. These are concerns that many other developing countries also share. there is a dispute on whether the consensus is required only on what modalities are to be followed or whether even the inclusion of these issues for negotiations is subject to such a consensus. In addition. All that has been agreed is that negotiations can proceed only on the basis of an “explicit consensus” on the modalities of negotiations. Banking Briefs 259 (For private circulation only) . Here too. that rigs prices by fixing production ceilings. On trade facilitation. or otherwise — to bring their procedures in line with those in the developed world over the short to medium term. To an extent.

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ECB refers to commercial loans availed from non-resident lenders. ECB can be accessed under two routes, viz., Automatic Route and Approval Route ECB proceeds should be parked overseas until actual requirement in India Prepayment of ECB up to USD 100 million is permitted without prior approval of RBI i) Eligible borrowers Corporates registered under the Companies Act except financial intermediaries (such as banks, financial institutions (Fls), housing finance companies and NBFCs) are eligible. ii) Recognised Lenders Borrowers can raise ECB from internationally recognised sources such as (i) international banks, international capital markets, multilateral financial institutions (such as IFC, ADB, CDC etc.,), (ii) export credit agencies and (iii) suppliers of equipment, foreign collaborators and foreign equity holders. iii) a) b) Amount and Maturity ECB up to USD 20 million or equivalent with minimum average maturity of three years ECB above USD 20 million and up to USD 500 million or equivalent with minimum average maturity of five years ECB up to USD 20 million can have call/put option provide the minimum average maturity of 3 years is complied before exercising call/put option.

ECB are a key component of India’s overall external debt which includes, inter alia, external assistance, buyers’ credit, suppliers’ credit, NRI deposits, short-term credit and Rupee debt. ECB refer to commercial loans, [in the form of bank loans, buyers’ credit, suppliers’ credit, securitised instruments (e.g. floating rate notes and fixed rate bonds)] availed from non-resident lenders with minimum average maturity of 3 years. Any legal entity such as a corporate / financial intermediary is an eligible borrower. In view of its implication for potential systemic risks, ECB availed by financial intermediaries need to be distinguished from those availed by corporates. Banks have the facility (i) to borrow from its head office or branch or correspondents outside India up to 25 per cent of its unimpaired Tier-I Capital or US$ 10 million, whichever is higher, (ii) to borrow from its head office or branch or correspondents outside India without limit for the purpose of replenishing Rupee resources (not for investment in call money or other markets) and (iii) to avail lines of credit from a bank / financial institution outside India without any limit for the purpose of granting preshipment / post-shipment credit to its constituents. ECB can be accessed under two routes, viz., (i) Automatic Route and (ii) Approval Route. (A) AUTOMATIC ROUTE ECB for investment in real sector -industrial sector, especially infrastructure sector-in India, will be under Automatic Route, i.e. will not require RBI/Government approval.


iv) End-use a) ECB can be raised only for investment (such as import of capital goods, new projects. Modernization / expansion of existing production units) in real sector industrial sector including small and medium enterprises (SME) and infrastructure sector - in India. Infrastructure
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sector is defined as (i) power, (ii) telecommunication. (iii) railways, (iv) road including bridges, (v) ports, (vi) industrial parks and (vii) urban infrastructure (water supply, sanitation an sewage projects); b) Utilisation of ECB proceeds is permitted in the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares. Utilisation of ECB proceeds is not permitted for on-lending or investment in capita! market by corporates. Utilisation of ECB proceeds is not permitted in real estate. The term ‘real estate’ excludes development of integrated township as defined by Ministry of Commerce and Industry, Department of Industrial Po(icy and Promotion, S!A (FC Division), Press Note 3 (2002 Series, dated 04.01.2002).

(B) APPROVAL ROUTE The following types of proposals for ECB will be covered under the Approval Route. i) Eligible borrowers a) Financial institutions dealing exclusively with infrastructure or export finance such as IDFC, ILFS, Power Finance Corporation, Power Trading Corporation, IRCON and EXIM Bank will be considered on a case by case basis. Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government will also be permitted to the extent of their investment in the package and assessment by RBI based on prudential norms. Any ECB availed for this purpose so far will be deducted from heir entitlement. Cases falling outside the purview of the automatic route limits and maturity period indicated at paragraph 2 (A)(iii) (a) and 2 (A) (jii) (b).





v) Guarantees Guarantee/standby letter of credit or letter of comfort by banks financial institutions and NBFCs relating to ECB is not permitted. vi) Parking of ECB proceeds overseas ECB proceeds should be parked overseas until actual requirement in India. vii) Prepayment Prepayment of ECB up to USD 100 million is permitted without prior approval of RBI, subject to compliance with the stipulated minimum average maturity period as applicable for the loan. viii) Refinance of existing ECB Refinancing of existing ECB by raising fresh loans at lower cost is permitted subject to the condition that the outstanding maturity of the original loan is maintained.

ii) Recognised Lenders Borrowers can raise ECB from internationally recognised sources such as (i) international banks, international capital markets, multilateral financial institutions (such as IFC, ADB, GDC etc. ). (ii) export credit agencies and (iii) suppliers of equipment, foreign collaborators and foreign equity holders. iii) End-use a) ECB can be raised only for investment (such as import of capital goods, new projects, modernization/expansion of existing production units) in real sectorindustrial sector including small and medium enterprises (SME) and infrastructure sector-in India. Infrastructure sector is defined as (i) power, (ii) telecommunication. (iii) railways, (iv) road
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including bridges, (v) ports, (vi) industrial parks and (vii) urban infrastructure (water supply, sanitation and sewage projects); b) Utilisation of ECB proceeds is permitted in the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares. Utilisation of ECB proceeds is not permitted for on-lending or investment in capital market by corporates except for banks financial institutions eligible under paragraph 2(B)(i)(a) and 2(B) (i) (b); Utilisation of ECB proceeds is not permitted in real estate. The term ‘real estate’ excludes development of integrated township as defined by Ministry of Commerce and Industry, Department of Industrial Policy and Promotion, SIA (FC Division), Press Note 3 (2002 Series, dated 04.01.2002).

v) Guarantees Guarantee/standby letter of credit or letter of comfort by banks, financial institutions and NBFCs relating to ECB is not normally permitted. Applications for providing guarantee/ standby letter of credit or letter of comfort by banks, financial institutions relating to ECB in the case of SME will be considered on merit subject to prudential norms. ECB proceeds should be parked overseas until actual requirement in India. vi) Prepayment Prepayment of ECB up to USD 100 million is permitted without prior approval of RBI subject to compliance with the stipulated minimum average maturity period as applicable for the loan. vii) Refinance of existing ECB Refinancing of outstanding ECB by raising fresh loans at lower cost is permitted subject to the condition that the outstanding maturity of the original loan is maintained.



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Corporate Governance means monitoring the functions of a company to ensure enhancement of shareholders’ value through ethical conduct of business CG aims to provide positive effect on all stakeholders such as customers, employees, suppliers, regulatory bodies and community at large Essential elements of CG: Adequate disclosure, distribution of power; supervision and audit of executive functions and performance; expertise of the Board Birla Committee recommendations provide institutional framework for CG. managers and their Board of Directors have in enhancing the shareholder value thus contributing for the greater image of the company by following the moral code of conduct. Why Corporate Governance : Liberalisation, privatisation and globalisation of economies followed by the establishment of World Trade Organisation (the WTO Agreement) to which India is a signatory, ushered in a new era of global economic corporation, reflecting the widespread desire to operate in a fairer and more open multilateral trading system. The implication of this WTO Agreement for developing countries is removal of tariff and nontariff barriers to improve market access for partner countries signifying that protectionism has become a thing of the past. Though, different concessions, relating to time frame and tariff/ non-tariff barriers, have been given to developing countries like India, it is a fact that India will be able to gain from the global free-trade, marked by reduced barriers, only when the Indian corporates learn to govern and manage their financial and non-financial affairs more efficiently. With these liberalisation/globalisation measures, facilitating increased flow of foreign direct investment in different sectors of the economy, Indian corporates would not be able to avoid the rigours of international regulation and many of the best business practices prevalent in developed countries.
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Good governance is an essential element for any organisation that wishes to maximise its effectiveness. This is true in all the private/public sector commercial and noncommercial organisations, not-for-profit organisations, and the economies representing different states. The areas of discontent in corporate management cluster around the following:

Low ethical and professional standards leading to poor performance and a loss of value in the various organisations. Double standards allowing practice to differ from stated ideals. Failure of commercial organisations as a result of inadequate controls or unsatisfactory checks and balances.



Corporate Governance : Some Definitions

Corporate Governance means doing everything better; to improve relations between companies and their shareholders; to improve the quality of outside directors; to encourage people to think longer term; to ensure that information needs of all stakeholders are met; to ensure that executive management is monitored properly in the interests of shareholders, such as through audit and other com­mittees, and so on. Corporate Governance is nothing but the traditional responsibility the corporate


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Good corporate governance enhances the image/reputation of the corporation and helps it, as a user of the capital, to build long term relationship with the suppliers of capital. With the transnationalisation of financial markets, it is used as a marketing tool to tap international capital markets to raise required capital at lowest possible cost. Cadbury Committee recommendations


discuss the matters arising from the audit with the external auditors

In India, SEBI has prescribed that the mandatory recommendations of Kumar Mangalam Birla Committee be complied with by listed companies. For Birla Committee recommendations please refer relevant chapter under “Committees”. PROCESS OF CORPORATE GOVERNANCE

There should be a clearly accepted division of responsibilities at the head of a company which will ensure balance of power and authority, such that no one individual has unfettered powers of decision. A Director’s term of office should run for no more than three years without shareholders approval for reappointment. The Board should monitor the Executive Management. Where the Chairman is also the CEO, there should be a strong independent element on the board with an independent leader. Non-Executive Directors of the Board should significantly influ­ence Board decisions. Directors should have access to independent professional advice at the Company’s expense. There should be an Audit Committee in every organisation. The terms of reference of the audit committee should inter-alia include the following:

Improving the relationship between companies and their sharehold­er and other stakeholders (including banks etc.) Improving the quality of outside (Non Executive) directors. To encourage the people to think long term. To enable markets to value the shares properly by improving the quantity, quality and frequency of financial and managerial disclosure. To improve the monitoring mechanism (inside the company) by improving the quality of information that managements share with their boards. maintaining excellent relationship with customers and suppliers. Improving compliance with applicable legal and regulatory re­quirements. Consideration and care for the interest of the employees and local community.




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review the draft annual accounts prior to their approval by the board review the compliance with statutory and stock exchange requirements for financial reporting discuss the scope of the audit with the external audit

Corporate Governance in Banking Sector Basel Committee Publication ( Sep 1999) In the opinion of the Committee there are four important forms of oversight that should be included in the organisational structure of any bank in order to ensure appropriate checks and balances: (1) Oversight by the board of directors or supervisory board; (2) Oversight by individuals not involved in the day-to-day running of the
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various business areas; (3) Direct line supervision of different business areas; and (4) Independent risk management and audit functions. As regards the role of the Board, the Committee sets out the following:

Narayana Murthy Committee report on Corporate Governance (appointed by SEBI) The Committee submitted its report in Mar 04. Some of the recommendations made by the Narayana Murthy Committee are:

Establishing strategic objectives and a set of corporate values that are communicated throughout the banking organisation. Setting and enforcing clear lines of responsibility and accountability throughout the organisation. Ensuring that board members are qualified for their positions, have a clear understanding of their role in corporate governance and are not subject to undue influence from management or outside concerns. Ensuring that there is appropriate oversight by senior management. Effectively utilizing the work conducted by internal and external auditors, in recognition of the important control functions they provide. Ensuring that compensation approaches are consistent with the bank’s ethical values, objectives, strategy and control environment. Conducting corporate governance in a transparent manner. Ensuring an environment supportive of sound corporate governance.


Whistle Blower Policy: Personnel who come to know about unethical or improper practices should be able to approach the company’s audit committee ‘without necessarily informing their supervisors’. Whistle blowers should be protected from ‘unfair termination and other unfair prejudicial practices.’ Corporates should take steps to see that the right of access to audit committees is communicated to all employees through internal circulars. The audit committee members should be non-executive directors. The management should give their views and auditor’s comment on management views regarding contingent liabilities should be given in the annual report Regarding reports of security analysts, the SEBI should make rules for ‘disclosure whether the company that is being written about is a client of the analyst’s employer or an associate of the analyst’s employer, and the nature of services rendered to such company, if any and also whether the analyst employer hold or intend to hold any debt/equity of the issuer company.










Developments in the last 3 years Task Force set up by Department of Company Affairs and CRISIL rating The task force of the Study Group set up by the Department of Company Affairs in May 2000 suggested setting up of a centre for corporate excellence in order to promote good corporate governance.. CRISIL has volunteered to rate the corporate governance of companies, even though the rated companies can choose to disclose it or not.

Ganguly Committee Recommendations Report of the consultative group of Directors of Banks/Financial Institutions set up by RBI under the Chairmanship of Dr.A.S.Ganguly submitted in Apr 02 made 31 recommendations. Some of the key recommendations relate to carrying out due diligence of directors, creating a pool of talented and professional persons for induction as non-executive directors, qualification and expertise of Board, separation of the office of Chairman and M.D, periodical and rigorous
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review of performance by the Board, setting up of Supervisory Committee of the Board and expansion of eligibility of Chairman of Audit Committee to include specialization in Banking and Finance. Naresh Chandra Committee Recommendations The Enron and Anderson debacle resulted in the enactment of Sarbanes-Oxley Act, 2002 in U.S. The Act besides providing for setting up of a Public Company Accounting Oversight Board contains rigorous provisions for regulating the relationship between a Company and the Audit firms. The Act provides for penalty of imprisonment up to 5 years for CEO and CFO for violation of Security Exchange Act. Consequent to this, Department of Company Affairs set up a committee in Aug 2002 under the Chairmanship of Shri Naresh Chandra. The Committee made a number of recommendations relating to company-audit firm relationship, certification of accounts by CEO and CFO etc. Some of the key recommendations of the Committee are disqualification for audit assignments, list of prohibited non-audit services, compulsory rotation of audit partners, disclosure of contingent liabilities, consultation of audit committee for appointment of auditors, certification of statements by CEO and CFO, proposal for setting up of Corporate Serious Fraud Office in Department of Company Affairs (Cabinet has since approved the same), setting up of independent quality review Board, minimum board size, disclosure of timing and duration of Board meeting, provision of tele conferencing and video conferencing of the Board, indemnity for non-executive directors and provision of training for Board members Corporate Governance in State Bank of India


There are four committees of directors namely Executive Committee, Audit Committee, Asset-Liability Management Committee( now called Risk Management Committee), Shareholders’/Investors’ Committee and a Special Committee of Directors for monitoring of Large Value Frauds (of Rs. 1 Cr and above) The Audit Committee is headed by a Non executive Director. Its functions include oversight of audit of the bank, review of internal inspection/audit functions, Obtention and review of half-yearly reports from compliance department and follow up of issues raised in the Long Form Audit Report (LFAR) Shareholder/investors’ Grievance Committee of the Board looks into the redressal of shareholders and investors complaints regarding transfer of shares, non receipt of Balance sheet, dividend/ interest etc. Board of Directors meet regularly; and the date and attendance of the meeting are published in the Annual Report. The Bank has a well documented and transparent management process. Board has free access to all needed and relevant information The Bank communicates its financial performance to the public through publication of quarterly, and half yearly results.







Conclusion In sum, Corporate Governance aims to maintain a high level of business ethics and to optimize the value for all stakeholders. Corporate Governance facilitates effective management and control of business. Corporate Governance has become a corporate business imperative. Since banks deal with public money, proper implementation of corporate governance practices in banks would safeguard depositors’ interest while ensuring better returns for stakeholders.
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The Bank has articulated its corporate governance objectives, which are disclosed in the Annual report.

Banking Briefs


systems and processes. and sharing the results of performance in pursuing those goals. Customer. It helps to promote goal-oriented behaviour relative to each of these perspectives: l The Learning and Growth Perspective l The Business Process Perspective l The Customer Perspective l The Financial Perspective What is Balanced Scorecard? Performance Management is the use of performance measurement information to effect positive change in organisational culture. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. the balanced scorecard approach provides a clear prescription as to what companies should measure in order to ‘balance’ the financial perspective. collect data and analyze it Customer: To achieve our vision how should we be seen by our customers? (For private circulation only) Banking Briefs 267 . allocating and prioritizing resources and informing managers to either confirm or change current policy or program directions to meet those goals. it attempts to link the vision. it has to raise the following questions on the four perspectives: l l l Background Balanced Scorecard (BSC) is a management decision tool for performance measurement and management. When fully deployed. To put it differently. the BSC is a conceptual framework for translating an organisation’s vision into a set of performance indicators among the four perspectives namely the Financial. The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. Mission and Strategy. customer survey reports etc measure performance on multiple dimensions and hence are not balanced in providing better view of performance. They named this system the ‘balanced scorecard’. Traditional perfomance measurement tools such as financial reports . sales reports . by helping to set agreed upon performance goals. customer. Internal Business Processes and Learning and Growth as mentioned above.BALANCED SCORE CARD l l l Developed by Dr Robert Kaplan and David Norton of Harvard Business School It is a performance measurement and monitoring tool Through measurement monitors. production reports. The balanced scorecard suggests that we view the organization from four perspectives. After a company has articulated its Vision. mission and values of the organisation for application by employees Four perspectives namely business process. A new approach to strategic management was developed in the early 1990’s by Drs. Strategic Perspective of Balanced Scorecard. It helps management make right and fast decisions on what to improve and celebrate. and to develop metrics. Robert Kaplan (Harvard Business School) and David Norton. the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise. The Balanced Score Card is a set of financial and non-financial measures relating to an organization’s critical success factors. Recognizing some of the weaknesses and vagueness of previous management approaches. financial and learning.

delivering housing loans in ‘7’ days. The BSC is a wonderful tool not only to effectively communicate the strategy of the organisation to all its people but also to achieve excellent results by focusing their energies towards the ultimate goal of the organisation. (For private circulation only) On each perspective. the following measures may be set for excellence in customer service: l Customer satisfaction rate of ‘Excellent’ in at least 90% of the cases. we have to further define what excellence in customer service means through select objectives and measures which would indicate our definition of excellence.especially at the top level l Develop organisational goals l Offer training in improvement techniques l Establish a reward and recognition system to foster performance improvements l Break down organisational barriers l Coordinate Headquarers and Branch Responsibilities l Demonstrate a clear need for improvement l Make realistic initial attempts at implementation l Integrate the Scorecard into the organization l Change the corporate culture l Institutionalise the process.l Financial: To succeed financially what kinds of financial performance should we provide to our investors. This can be obtained through customer feedback. the organisation has to set objectives. Many Fortune 100 companies have reportedly used Balanced Scorecard with success. The authors of BSC suggest that normally one can have 4 to 5 measures under each perspective so that the number of measures does not exceed 20. We find in most organisations Vision. measures. Conclusion The Balanced Scorecard attempts to align employee behaviour with the organisation’s vision. vision statements remain as show pieces without directing appropriate behaviour among employees. The processes should be tuned to meet this standard. Mission and Values are neither known to most employees nor understood. The measures should be set.. l l These measures must be communicated to the stakeholders. strategy and values. For example. let us look at one of our mission statements: “Committed to excellence in customer satisfaction”. targets and initiatives so as to achieve its stated vision and mission. Measures would promote right behaviour and serve to numerically define the meaning of ‘Success’. communicated. Let us also look at one of our values: “Excellence in customer service”. Internal Business Processes: To satisfy customers where and how should we excel in our processes? Learning and Growth: To achieve our vision. It is an instrument through which organisations can nurture goal-oriented behaviour and institutionalize performance culture through measurement matrix. Implementing a Balanced Scorecard The following steps are essential for effective implementation of Balanced Scorecard: l Make a commitment at all levels. monitored and improved. Customer grievance redressal in ‘4’ days. To understand it better. and give targets (benchmarks) to various functionaries to achieve them. Processing of credit products within the set Turnaround Time (TAT). Measures are important to align employee behaviour with mission. how will we sustain our ability to change and grow? l l In the absence of measurable targets. For example. It places organisation’s strategic vision at the centre of the performance assessment structure. Banking Briefs 268 . mission and values. According to BSC. We then have to track progress by seeing the action of each stakeholder and initiate suitable corrective action to reach the desired outcome.

Objective of the process should be to capture : (i) experience and expertise of the organisation embedded in its people. 3. Enablers or best practices : (i) 10. Knowledge capturing and Knowledge sharing Some Key Benefits: Creation of a knowledge-based structure. Achievement of uniformity in the knowledge and skill levels in all branches What is knowledge management ? Knowledge management is a process in an organisation which values and acknowledges knowledge as its primary competitive advantage. Using multimedia mode(audio and video) to attract people for using the knowledge base. Electronic management/governance of the organisation marked by speed and quality of the management processes. (For private circulation only) Banking Briefs 269 . improvement in quality of decision making (ii) Evaluating and rewarding people on the basis of their contribution to relevant and reusable knowledge — essential for building intellectual capital of the organisation (iii) Continuous updation and improvement in the richness of the content (iv) Top management providing momentum to the initiative. 5. iii. availability of knowledge anytime/anywhere. 6. Knowledge mapping : Process of identification of sources of knowledge in the organisation. Aggregation/integration of knowledge scattered in different locations for distribution.KNOWLEDGE MANAGEMENT l l l KM is the active management of intellectual capital in an organization It is done through knowledge Mapping. and upto-date knowledge base helping shared beliefs/goals. encourages continual learning. Availability of corporate knowledge and learning at all levels and at all locations. creation of corporate memory. 8. systems and procedures for continuous conversion of tacit knowledge into explicit knowledge and vice-versa. 9. Creation of a corporate memory. Benefits : 1. Reduction in training needs of the people and saving in the training expenditure. Creation of corporate instinct for knowledgebased growth and risk-management Availability of required knowledge anytime and anywhere — influencing the behavioural pattern of the people in a manner that is beneficial to the organisation. which is intimately connected to organisational concerns and effectiveness. by converting their experiential knowledge (also known as tacit knowledge) into explicit knowledge. Putting IT systems in place — to provide connectivity (death of distance) and speed (death of time) — for fast and efficient transfer of knowledge. reduction in training needs of employees . 4. Knowledge capturing and sifting : Process of capturing of knowledge and sifting the same in terms of value and priority. Encouraging individuals to use this knowledge(also known as explicit knowledge) into experiential/tacit knowledge. Availability of aggregate knowledge which will remove bias in decision-making. Creation of a knowledge-based structure. 7. and (ii) create intellectual capital out of human capital Knowledge sharing : Process of sharing knowledge across the organisation. Asking people to declare their knowledge producing capacity and the areas ii. Encouraging people to create(document) knowledge. and actively manages its intellectual capital. Process of knowledge management : i. 2.

This does not mean that employees work for free. not decreasing. Third. There are five tools for increasing competence within a unit (firm. current investments in intellectual capital are misfocused. a low score on either competence or commitment significantly reduces. increased obligations. bought and borrowed by organizations Commitment can be fostered by reducing employee demands and increased deployment of resources to meet demands Leaders should raise standards. borrow. Tools for Increasing Competence There are two primary challenges in increasing competence: First. What is Intellectual Capital? While many agree that intellectual capital matters. embedded in how each employee thinks about and does work and in how an organization creates policies and systems to get work done. fewer Banking Briefs 270 . Both should exist in an employee for organizational effectiveness Competence should align with business strategy Competence can be built. Intellectual capital-the commitment and competence of workers. Second. equipment as machinery. plant. and so on) begin to depreciate the day they are acquired. employees’ overall competence should rise but that competence alone does not secure intellectual capital. A manager’s job is to make knowledge productive. This equation suggests that with a unit. competencies must align with business strategy. Fourth. Under the name “corporate citizenship. Appropriately using all five ensure a stable flow of competence. employees with the most intellectual capital are often the least appreciated. they are less interested in economic return than in the meaning of their work. employees with the most intellectual capital have essentially become volunteers. the importance of intellectual capital increases. and pressures exerted from almost every other modern management practice. Second. intellectual capital is a firm’s only appreciable asset. few can explicitly quantify it. Service generally comes from relationships founded on the competence and commitment of individuals. A simple. to turn intellectual capital into customer value. Intellectual capital requires both competence and commitment. yet measurable and useful definition would be: intellectual capital = competence x commitment. First. increased global competition.” many senior executives talk about work-family issues. knowledge of work is increasing. set high expectations and demand more performance and provide corresponding resources to meet high demands management layers. build. (For private circulation only) l l l l In the ongoing debate about where managers should focus their attention something has been missing: a focus on intellectual capital. In the aftermath of downsizing. business. site. Fifth. Most other assets (building. Because the equation multiplies rather than adds. Sixth. employees’ work lives have not always changed for the better. because the best employees are likely to find work opportunities in a number of firms. and bind. competencies need to be generated through more than one mechanism. As the service economy grows. customers’ higher requirements. Volunteers are committed because of their emotional bond to a firm. many managers ignore or depreciate intellectual capital.INTELLECTUAL CAPITAL l Intellectual Capital is the product of commitment and competence. Intellectual capital must grow if a firm is to prosper. or plant): buy.

Demands will inevitably be high in globally competitive firms.Buy: Managers can go outside the unit to replace current talent with higher quality talent. Third. leveraging. Helping them separate legitimate from groundless demands and then removing the unnecessary ones may balance their lives. However. A build strategy for intellectual capital works when senior managers ensure that development is more than an academic exercise. Intellectual capital comes from employees’ competence and commitment. Leaders interested in investing. Regardless of how many demands are removed or reduced. employees may cope better with increased demands. when action learning occurs. (For private circulation only) Banking Briefs 271 . demands on employees will continue to increase. Reduce Demands: Employees have many demands of varying importance. Even with priority setting. Employees commitment often comes from a leader who shares a clear vision that passionately communicates agenda and intent. managers invest in outside vendors who bring in ideas. They must also provide resources to help employees meet high demands. and reengineering. Many executives articulate visions or directions that give employees resources and add to their resolve to cope with increase demand. and demand more of employees. and hourly workers also matters because investment made in individual talent often take years to pay back. they are likely to be more committed. Managers may use control as a resource by creatively and flexibly answering: where is work done? How is work done? What work is done? When is work done? Who does what work? As long as employees understand and are committed to the goals. frameworks. practices. and design work in a way that people too close to the work would not have done. Both must exist together for intellectual capital to grow. In sharing power and giving up control. Bounce: Managers must remove those individuals who fail to perform to standard. borrowing competence is a viable way to secure intellectual capital. and when systemic learning from job experience occurs. How to Foster Commitment A company can foster commitment in three ways. Companies are learning that sharing the economic gains of reaching targets helps employees stay motivated to reach increasingly difficult goals. Buying involves staffing and selection from the entry level to the officer level. A firm should systematically and courageously remove the bottom percentiles in performance. When the line of sight between work and reward is clear. Business demands accompany a firm’s desire to compete in tough markets. Keeping senior managers who have vision. First. and actions the company takes to respond to demands. it can reduce demands. equate to failure. it can turn demands into resources. and retaining technical. Second. Certain resources may counterbalance demands. and expanding intellectual capital should raise standards. focusing. Build: By building. and tools to make the organization stronger. direction. competition continues. Effectively used consultants or outsourcing partners may share knowledge. Increase Resources: Not all demands can be reduced. when training is tied to business results not theory. When employees see that a particularly demanding project results in economic payback. operational. managers invest in the current workforce to make it stronger and better. in many cases. create new knowledge. they can share the way goals are accomplished. and competence is important. Employees will become engaged and flourish. managers implicitly trust that their employees have the skills and motivation to do a good job. appropriately used. Managers must make difficult personnel decisions decisively. it can increase resources. set high expectations. Having control demonstrates trust and builds employees commitment. Bind: Retaining employees is critical at all levels. and the organization’s intellectual capital will become its defining asset. Resources represent the values. Walking away from competition would. Borrow: In borrowing.

Daniel Goleman. Intelligent Quotient is only a threshold competence. l l l l l Social Awareness: l Empathy: skill at sensing other people’s emotions. manage emotions of self and others. and deeply satisfying relationships in life. Self-Awareness : Emotional self-awareness: l l l Self-management: l Self-control: the ability to keep disruptive emotions and impulses under control. social awareness and Social skill Accurate self-assessment: a realistic evaluation of your strengths and limitations. It is one of the differentiating factors for success and a study of 15 global companies attributes 85 to 90% of leadership success to emotional intelligence. and navigate politics. contribute to effective performance in the job and developing satisfying relationship in life Most leaders succeed because of EI Four essential capabilities: Emotional self awareness. and the like. l Banking Briefs 272 . l l l Emotional Intelligence is the key ingredient which distinguishes star performers from performers. Trustworthiness: a consistent display of honesty and integrity. self-management. (For private circulation only) l The ability to read and understand one’s emotions as well as their impact on work performance. Emotional competence is twice as important as cognitive abilities for all jobs. understanding their perspective. It helps to motivate oneself. Initiative: a readiness to seize opportunities. build decision networks. Emotional intelligence can be learned. for motivating ourselves. Self-confidence: a strong and positive sense of self worth. Adaptability : skill at adjusting to changing situations and overcoming obstacles. and taking an active interest in their concerns. outstanding leadership. Organisational awareness: the ability to read the currents of organisational life.EMOTIONAL INTELLIGENCE l Emotional Intelligence is the capacity to recognise one’s own feelings and those of others. Building one’s emotional intelligence cannot and will not happen without sincere desire and concerted efforts. and for managing emotions well in ourselves and others. Conscientiousness: the ability to manage yourself and your responsibilities. but it is emotional intelligence that distinguishes start performers from others. Service orientation: the ability to recognise and meet customers’ needs. Emotional intelligence is the capacity for recognising our own feeling and those of others. author of the book Emotional Intelligence describes four fundamental capabilities of people who are high in emotional intelligence. for all roles. It contributes to effective performance at work. relationships. Achievement orientation: the drive to meet an internal standard of excellence.

so that one can be more responsible for ones emotions. the map (of emotional journey and experiences) is not the same for all of us. but with commitment. beliefs and assumptions that are responsible for each emotion. Conflict management: the ability to deescalate disagreements and encourage resolutions. for motivating ourselves. Self management or the ability to manage one’s emotions coupled with conscientiousness. The mindset for a better EQ would be to remember that all feelings are telling us something.Social Skills: l Visionary leadership: the ability to take charge and inspire with a grand vision. only feedback. As one becomes more aware emotionally . Change catalyst: proficiency in initiating new ideas and leading people in a new direction. Team work and collaboration: competence at promoting cooperation and building teams. The highest level of emotional awareness is Interactivity. Communication : skill at listening and at sending clear. Emotional regulation aims at examining the Banking Briefs 273 (For private circulation only) . Building bonds: proficiency at cultivating and maintaining a web of relationships. people have within them all the resources they need. and for managing emotions well in ourselves and in our relationships can be learnt. and mind and body are part of the same system. Developing others: the propensity to bolster the abilities of others through feedback and guidance. which is a cornerstone of Emotional intelligence. there is no failure. l l l l l l l All these four capabilities and their competencies are interlinked and interdependent. values. and trying to find a way to manage the emotion. convincing and well tuned is able to see what causes these emotions and learns empathy – the awareness of others emotions. where one is sensitive to the ebb and flow of emotions around one. Influence: the ability to wield a range of persuasive tactics. Thus emotional intelligence. adaptability and initiative is also essential for Emotional Intelligence. diligence and practice. Emotional awareness is only the first step towards emotional literacy. which refers to the capacity for recognising our own feelings and those of others.

which can be so helpful in getting a product off the ground. The Internet has features that make it ideal for niche marketing. it is assumed that one has invented a fantastic sports drink and want to develop the market for his product. Three Steps of Niche Market First off. Launching a product into a niche market is far cheaper than launching a mass-market product. it’s too expensive and usually a very difficult task to try and develop one’s own niche. and that is not owned by one established vendor already. Through its mailing lists and newsgroups it gathers electronically in one spot of cyberspace precisely those groups of customers with similar interests that are a niche marketer’s dream. In each discussion group there can be as many as regular readers with a special interest in that topic. and out of that mass market there ultimately emerged some niches.NICHE MARKET l A niche market is a group of potential customers who share common characteristics that make them receptive to a particular produce or service Launching a product into a niche market is far cheaper than launching a mass-market product The Internet has features that make it ideal for niche marketing to find another niche product. For example. it did not expect it to become a mass-market product. A niche market is thereby a focused. targeted portion of a market. it did. Conversely. Yet. that is growing fast enough. The trouble with niche markets that do not develop into mass markets is that they soon reach their maximum size. Niche markets often develop from mass markets and mass-market manufacturers sometimes choose to launch niche product as well. Mailing lists and newsgroups focus on specific topics. This characteristic may be no more complicated than the fact that they have run out of socks without holes. Here are the first three steps to find niche: 1. what are expected to be niche markets sometimes develop into mass markets. By definition. (For private circulation only) l l A niche market is a group of potential customers who share common characteristics that make them receptive to a particular produce or service. a business that focuses on a niche market is addressing a need for a product or service that is not being addressed by mainstream providers. When Apple came up with the PC in the early 1980s. Manufacturers have Banking Briefs 274 . such as the educational PC market. for instance. or another market in which to sell their existing product. A niche. can soon become a straitjacket. Assess self and determine what areas of life are most interested and how it will interface with product. It’s better to identify and plan on addressing an existing niche that has good potential for using unique product or services. The potential customers are easier to identify and to target. The trick to capitalizing on a niche market is to find or develop a market niche that has customers who are accessible. One can think of a niche market as a narrowly defined group of potential customers.

3.century journey from mass marketing to one-to-one marketing. The whole world has started moving from mass marketing to segment d marketing to niche marketing to tomorrow’s world of one to one marketing through Internet in the 21st Century. Banking Briefs 275 (For private circulation only) . little league boosters.2. Assess potential market to determine if there is an area that could use services. then it needs to be determined whether the same can be comfortable with the anticipated income from it. There was one kind of Coca-Cola soft drink for the thirsty. Once a promising niche is found. An easy way to make this determination is just to talk to the people in targeted community. The 50s and 60s were the heyday of mass marketing. It was followed in the early 80s by intensified niche marketing that sliced market into smaller and smaller groups of consumers. and soccer clubs or at car racing activities. one kind of Holiday Inn hotel for the traveler. Another is to join groups of people who have similar interests such as health clubs. The 70s became a decade segmentation and line extension. A brief history: Some have seen niche marketing as a phase in a 20th .

call centres and internet delivery. behaviour modelling (managing customer data to acquire new business and influence customer behaviour) and delivery (meeting customer expectations through product service proposition. with supermarkets such as Sainsbury’s and direct organisations like Virgin chipping away at traditional participants’ market share. regardless of their degree of profitability. segmentation modelling. with the top 20 percent of a bank’s retail customer base often delivering 80 percent of its profits. upto half of bank’s customers may be destroying shareholder value. drawing on everything from psycho-demographics to branch redesign. data mining. So far. customer value management. increasingly. These include customer lifestyle changes. Market research shows that many customers crave a relationship with their bank based on convenience. loyalty schemes. globalisation. and under pressure to sell. dynamic. But overall transaction volumes have soared. banks tend to treat all customers equally. The cost per transaction has declined as full service branches have been replaced in part by telephone service. In this model the integrated management and use of customer information is key. (For private circulation only) l l l l Retail banking is faced with major external challenges. the emergence of new competitors. However. Customer Centric Management (CCM) is an integrated model for the retail banking industry. delivery channel management and relationship management). CCM focuses on knowledge acquisition (the acquisition and storage of customer data covering static. Despite this. By contrast. these approaches have tended to be scatter-gun: banks have tried any or all of these approaches in an unstructured manner. trust and intelligent proactivity on the part of qualified.CUSTOMER CENTRIC MANAGEMENT (In Retail Banking) CCM is the integrated management of a company with the customer as its focus It has three stages namely knowledge acquisition. accountable staff who know and value the customer. personal banking. financial and external data feeds). behaviour modeling and Product/ Service delivery All functions of the company are aligned towards customer needs It disaggregates customers based on their contribution to profits and thus helps in focusing on key client base At the same time. Banking Briefs 276 . which will completely restructure the industry. deregulation. the internet. Competitors are entering from unexpected fields. ATMs and. and fail to provide any sense of personal contact. cross selling. the impact of technology. data warehouses. making it more expensive for banks to meet customer demand and giving them more distribution channels to manage. New distribution channels have proved to be a mixed blessing. the banks have adopted a fragmented approach to improving customer service. and convergence in the market place between banks and other service providers such as insurance companies. Many banks are failing to deliver this: they appear uninterested in the customer.

Banks need to ask themselves what trapped value they are losing. they should address the key question of the size of the lost opportunity. customer service quality is an obsession. Overall.The bank must then be reshaped around customer priorities. Business strategy ensures the integration of the customer in corporate strategy and communication of that strategy. For top performers. Banking Briefs 277 (For private circulation only) . why the bank is not tapping that lost value and what it must do to get there. how they intend to capture it and how they should set about building a sustainable customer centric organisation. why they are losing it. Business strategy and financial management must flow from knowledge acquisition. Only then can banks start delivering true customer service. feeding information through to appropriate areas of the bank and the technical platforms supporting information flow. Financial management focuses on the depth and quality of financial information needed.

The essential elements of banking as product knowledge. taxation. Situational factors. Customer relationship is a prelude to achieving greater success and profitability. availability of expertise rather than location. the manufacturer and trader and joint stock companies. While the financial processes and products are essential to banking. l l l Traditionally and as of today. saver/investor or advance seeker. Counteracting Customer Disloyalty: Economic ties: Are the most obvious since banks are utilitarian Institutions. Banking Briefs 278 (For private circulation only) . All forms of banking-retail. process and technology CRM aims to optimize profitability through enhanced customer satisfaction Relationship Banking helps in cost reduction. With the growth and spread of banks came new form of banker-client relationships. Convenience is still a factor but what influences the customer is the customer service rather than the premises. CRM integrates people. As system users. the relationship began to change with the formation of Jt. corporate and internationalinvolves relationship banking. borrower. are no longer restricted by geography as to the branch or even the bank they use. During the latter part of the nineteenth century. bank timing suited to the customer rather than inflexible Banking hours. for others two and for another all three. customers relate to their banks in three ways. Bankers have to bring about the transformation in the minds of customers not by marketing ploys. the essential role of the banker is to provide financial wherewithal to enable individuals and businesses to create wealth through achieving their financial goals. l l l the aristocracy and the landed gentry. banking has had to be sensitive to authoritarian relationships. Banker has to bring about a refreshing re-thinking of old ideas and nurture them with true care for bank and the customer. the invisible factor of relationship is however is not given much thought or the deserved attention. which determined past relationships have changed. For each of these relationship there may be a dominant mind-set. In some there may well be only one basis of relationship. Banks were essentially community based. Customers fell into three broad segments. foreign exchange and other types of dealings are equally important in achieving and retaining satisfied customers. A customer can relate to the bank in the mode of transactor. as product consumers and clients. Customers. Stock companies. in one bank/one service provider. accounting. legislation. Bankers invariably knew his clients better than their vicar or doctor. No longer the banker could retain personal contact will all customers. both present and future. There is therefore a danger in thinking of banking being divided into ‘transactions’ and relational. better use of data and increased opportunity for cross-selling Three tiered relationships: In this new era of banking. Brief history of banking relationship: From the earliest beginnings.RELATIONSHIP BANKING l l Relationship Banking means maintaining a long and enduring relationship with clients It aims to have 100% of a clients’ business.

banks must realise the full potential of every customer relationship they have. data warehousing and data mining which focus on decision making. Moral dimensions of banking are the values and beliefs. This is psychological aspect of the banking relationships. CRM enables people within the organisation to interact with the customers. which underlie the transactions of banker and customer. rather than enabling customers to interact with the organisation.Contractual ties can be powerful in retaining customer presence but not necessarily customer loyalty. The banks must create conditions for relationship strategy awareness among its employees. provide right kind of leadership initiatives. The relationship enables the bank to provide a proactive service process to selected customers. etc. Traditional concepts of fidelity. call center for customer service. trust. It involves process. CRM is a strategy by which companies’ optimise profitability through enhanced customer satisfaction. sales force automation. we say that a high value relationship is one in which the bank has all of a customer’s business now and in the future. But banks rarely have all of their customers business. technology and people issues. High-value relationships are customers who have consolidated total bank product usage in one bank. When the idea of a lifetime customer is included. Customer Relationship Management (CRM) in Banking CRM covers a wide range of products and interfaces (Front office customer touch points to Back office integration and everything in between)-Marketing automation. CRM follows both business and technology trend. It is an enterprise wide effort . The relationship banking strategy aims at capturing the customer relationship so that the customer consolidates all products and services with a single provider. adopts a product driven method. Satisfaction of banking relationship: To survive in today’s competitive financial services marketplace. All the three together really captures what CRM is. Economic benefits of Relationship Banking a) Firstly it is a fact that retaining profitable customers is five times cheaper than attracting new ones. Traditional implementations. Capturing a 100% share of wallet-high value relationship banking-is in fact a realistic objective for banks. Reduced marketing costs Better use of database Increased opportunity for cross selling e) Enhanced reliability of new customers introduced by existing clients. attempting to sell single product or product bundles to a customer incrementally over a time. b) c) d) Banking Briefs 279 (For private circulation only) . converting them into highly profitable clients.a fusion of CRM and ecommerce. care and dependency are being revisited and revised in all places including banks. instead focussing on capturing the whole relationship at once. In e-CRM handling transaction becomes a seamless part of the relationship lifecycle say from e-marketing to esales to e-commerce to e-service. Motivating employees-Internal relationship in banking Relationship banking needs to balance strategic aspirations with internal resources-Banks will need to involve employees at all stages in developing a relationship banking strategy. ensure job satisfaction and empowerment to its employees and above all have proper coordination at the organisation level.

Those who take this stance may miss the essence of relationship banking. l l l l All of this may be thought of as too far distant to require attention. l Shared lifestyles and values rather than income levels social class will be one of the stronger bonds in banking relationships. Information access. Banking Briefs 280 (For private circulation only) . Virtual banks will takeover from the more substantial edifices.Future of relationship banking A few of the changes affecting relationship banking are given below which would portend the trends in future. Customers will credit-score the banks as well as be subjected to credit scoring by their banks. Instant gratification. Digital money or E-cash will replace traditional money in the same way plastic cards replacing cheques. Financial products and services will need to be redesigned to enable customer to cope with the three ‘ins’ of modern living — Instability.

To achieve this. The underlying is the cost advantage of selling to an existing client. According to Money magazine. In a situation where banks are stepping on the accelerator to expand their customer base and The prime point for cross selling is the cost factor. search thyself (customer mining) will give definite clues for cross selling. it costs a bank five times less to cross sell an existing client than to acquire a new one. it costs a bank five times less to cross sell an existing client than to acquire a new one Cross selling helps banks to plan. but how to succeed better than others is a the business objective. 82. and so on. Banking Briefs 281 (For private circulation only) . systematic cross selling of assets is happening in some banks. The technology advantage boasted by the foreign and new gen private banks has also evened out. The result is evident from the growth in numbers in retail asset expansion of scheduled commercial banks by almost 50 per cent and the amount went up by more than 130 per cent from Rs. 28. In other words. net interest margins. retail asset explosion. Why should banks cross sell? l l l l INDIAN banking industry is chanting the retail moola(h) mantra for its tech initiatives. profits. In the present day retail banking scenario. customer base expansion. Now. Another finding says that it costs four times as much to get a new customer as it does to keep an existing one. all banks are fighting the retail battle. It zeroes in on the cost of new customer acqisition for asset expansion and the cost of cross selling to an existing customer. but in most others. what can banks do? One of the answers to this question is “Search thyself”. education and consumer loans and other niche products to add volume to their retail asset book.CROSS SELLING l it is selling an additional product/service to an existing customer and fosters brand loyalty. auto. it is generating new/additional retail asset(s) from a liability. the relevant product to the customer develop and implement strategies to bring additional customers involving additional cost. are following standard strategies with a slew of housing. implement and maintain better customer relationship management programmes The success of cross selling depends on offering at the right time. trying to expand the customer base and achieve their retail asset targets and profits. What is Cross selling What is cross selling? In simple terms. The success depends on how far they are able to translate the strategies into business.000 crore between March 1997 and March 20002 (CMIE data) All are successful is a general statement. it is selling an additional product/service to an existing customer. an integrated approach to retail asset expansion through cross selling is still at a nascent stage. Relating it to the retail asset expansion scenario. including those with the public sector. then it is cross selling.000 crore to Rs. Almost all banks. if the bank is able to sell an asset product (housing/ car/educational loan) to a saving/current/deposit account holder successfully. targeting the prospective customer universe with almost similar strategies and insignificant product/value differentiation.

It will be a futile exercise to cross sell a product which is not needed or relevant for the customer. in general. the relevant product to the customer. The strategy has to percolate from the corporate to the branch level based on customer database across geographies. price and value offerings by the bank for the total product solutions to the customer. Assuming that we have a marketing plan to sell one more product (say a credit product). a broad mapping of the customer profile and retail products to be cross sold has to be done. Strategies for effective cross selling l l l l A robust customer’ database is foremost for effective cross selling.000/. Cross selling fosters brand loyalty. If a customer having a savings account has taken a consumer/ personal loan. Selecting the target customer group is essential for cross selling success. Cross selling an asset/additional asset product to an existing customer improves the profits.l The second important reason is the profit. Selling the right product to the right customer improves the relationship. 45.000).than transaction-based. This is almost 4 times the projected growth of advances in ‘P’ segment for the year 2004-05. 50. The internal customers should be trained to effectively cross sell and convert the initiatives into business Cross selling is a team effort and success depends on the attitude and involvement of al! the staff concerned. The reasons may be for convenience. he takes a housing loan or any mortgage product. in particular.000 crore (90. l Based on the customer relationship history and the cross selling model. The mapped data has to be sliced and diced to develop specific asset related cross selling information.000 x 50. the chances of switching to another bank is less than when he has only savings account. Cross selling is more relationship. The above are only some illustrative strategies and success depends on the bank management’s belief and commitment in retail asset expansion through cross selling as a viable tool and also customer acceptance of the initiatives by the bank. Apparently there exists a huge potential in cross selling. A customer who has availed himself of more than one product from the bank is drawn closer to the bank than a customer who has taken only one product. the cross selling initiative by the line staff should not be an irritant for the customer. l l l l l Research studies have established that the percentage of loyalty increases with the number of products the customer takes. have 90 million customer accounts. 282 Banking Briefs (For private circulation only) . The database the core on which the entire cross selling strategy is built. The cross selling information has to be put in place for staff (internal customers) to view and communicate to the target customer group. and profits per customer.00. At any point of time. He additional credit business moved work out to our 10% of the clients. service. the chances of bank hopping reduces further. l l Cross selling helps banks to plan. implement and maintain better customer relationship management programmes as it gives clarity to developing plans based on the customers’ relationship profile. Dynamic feedback from the line level should be taken cognisance of for fine-tuning /retuning the strategies. The success of cross selling depends on offering at the right time. with an average size of Rs. in addition. l l Potential for crossing selling Let us work out an hypothetical example to explore the potentials of cross selling. If. We in SBI.

its own political structures. who has a reasonable amount of organizational influence. It aims to restore the normal cognitive abilities in people. someone of less experience and status in order to help the person to become more effective. The ‘Should’ and ‘Should nots’ in any organization are sometimes at variance with what any individual has experienced before joining the organization. Counseling: Counseling addresses the emotional problems of mentees. The Protégé is the person who is being helped ( otherwise termed as ‘mentee’). one of the important functions of the mentor is to create the awareness in the mentee about these norms and values. for the social order. counselling. the political climate and culture of any organization are unknown to new recruits or new role holders. which a new entrant is ignorant of. unpublished. considering the benefits of mentoring. at home or at work. The new recruits many times are unable to reconcile the dilemma between competition and collaboration. many organizations have introduced formal mentoring processes in their companies. Activities in mentoring Following activities form part of the mentoring process: Coaching: Coaching enables the mentee to correct performance problems and find new ways of approaching the task. providing guidance. and yet vital. and who is willing to develop a personal working relationship with Banking Briefs 283 . Since most ancient experiences in mentoring are informal. These and many other processes are clarified through a process of mentoring. experience and perspectives that are needed by the organization. which (For private circulation only) l l l Background Every organization has its own culture as defined by formal and informal organization. these are mostly unstated. which people may encounter affecting their job performance. Besides this. listening skills and skills in paraphrasing so that the affected person is able to view the problem and initiate redressal providing political guidance: every organization has its own norms and values. Advantages: Higher performance of employees. What is Mentoring ? Mentoring has been a recognized form of personal development for thousand years. generate positive feelings of pride and satisfaction Institution of formal mentoring process would benefit organisations. It involves imparting knowledge and skills to the protégé for improving the quality of output. The main focus is task-centred. temporarily shut by emotional disturbances. Mentoring is a process of making a person (generally new recruits or new role holders) more effective in the profession by developing personal working relationship. Effective counseling needs the counselors to have empathy. social and emotional support are some of the ways.MENTORING l It is a process of making an employee more effective in his job through developing personal working relationship. building a better organisational climate. which manifest itself into a culture. where the new recruit can approach the mentor without the fear of putting his/her career at stake. Coaching. A mentor is someone with the skills.

it pays to the organization to develop and strengthen the mentoring competencies of their senior functionaries and create a formal structure for mentoring. This in effect would result in building a new climate in the organization founded on closer inter-personal relationship. skill to generate alternative solutions besides deriving satisfaction as a mentor. He should also have other traits such as awareness of the self. Mentoring is one of the potent tools for strengthening human capital and building a company with emphasis on ‘human care’. anger and sadness before the mentor. as the latter takes on new challenges. The mentor should create a climate where the mentee feels safe to air grievances. ability to deal with the feelings of people. the ‘dos’ and ‘don’ts’ and how the power is distributed in a particular organization. Learning new skills. Therefore. Providing Social and Emotional Support: The Mentor besides the above must provide continuous encouragement to the mentee. It helps to tap the latent potentials for mentoring in many of the senior functionaries of the organization. comfortable relationship with peers and seniors. mentor should himself be seen as an ideal role model. For discharging the afore-mentioned activities effectively. ability to generate positive feelings of pride. organizations need to find effective ways to build their human capital. through a network of protégés and mentors. highly positive and loyal to the organization. Banking Briefs 284 (For private circulation only) . Advantages of Mentoring The organization gains through higher performance of the protégés. With the complexity of businesses growing at rapid pace with each passing day.govern group behaviour. Thus mentoring promises organizations a higher accretion of human capital. satisfaction. patience. strengths and weaknesses. recognition from peers and superiors. The advantages to mentors are many. happiness and commitment and finally the capacity for higher contribution to the organization and the world at large. It would nurture present protégés to become able mentors in future. loyalty and support from protégés. Sensing this potential. He should be held in esteem. the development of the ability to see things in new light. many organizations have set up a formal mentoring process in their institutions.

Being capable alone does not have any significance unless one can prove it. Motive: A fundamental and often unconscious driver of thoughts and behavior for example. This technique has not provided the desired outcome. concern for excellence. What is Competency? Competency is underlying skills. Personal characteristics are hard to develop and it is more cost-effective to select people having the desired personality traits. The main purpose is to decide whether candidates possess knowledge. of competencies for requirement. Knowledge: Information that an individual has in a particular area. of competencies for the jobs and the extent to which the employees possess these can be determined. Skills: An individual’s ability to do something well. assertiveness. Personal Characteristics Traits: A typical way of behaving such as taking initiative. A person may be capable of doing things which may bring in a paradigm shift in the industry and make you a leader but only if they are provided an opportunity. A formal implementation of the system will help organisations to save on costs and improve performance. For example. Behavior: Action of a person in a given situation. Competencies exist at different levels of personality. or motive demonstrated by various observable behaviors that contribute to outstanding performance in a job. In fact. and aggressiveness etc. skills. behaviour and personal characteristics There are different tools including psychometric tests used to map competency. Scanning competencies of applicants will provide the company a pool of employees with a great potential for performance excellence. Competency is a combination of knowledge. even after recruitment the threshold requirement. skill. personal characteristics. the extent to which a person is adjustable. some companies believe in conducting psychometric tests so that they can identify the competencies of the candidates for recruitment and selection. Mapping the two helps the company to determine the training needs also. Different kinds of personality tests are also applied to know the various personality attributes such as introversion. attitude and ethics which match with those that the company needs in the job for which they are recruiting. capable of (For private circulation only) Banking Briefs 285 . Knowledge and skills are easy to develop so training is cost-effective. The various levels are: l Have you ever tried to assess the human asset you have? You might find excellent potential in them. resourceful.COMPETENCY MAPPING l l l l aims to match the competency of the employee with those of the job requirement. Companies usually design job descriptions and then search for the best people mainly on the basis of qualification. l l l l l What is Competency Mapping? Competency mapping involves the determination of the extent to which the various competencies related do a job are possessed by the person. extraversion. In view of this.

the performance of the company depends not on the human assets but the human asset having right match of competencies and their levels for performance requirements. and behaviors required for that job. It is actually a model. (For private circulation only) l l l Banking Briefs 286 . Competency Mapping and Developmental Needs This model tries to find out many things. A person may be perfect in one aspect and may lack in others. To select the employees with right match for performing the job efficiently. So this too is used for setting standards and checking the employees standing on the various competencies’ platform and further the training needs of a person can also be identified. career planning. l Behavioral competencies tell us the kind of behavior one should have to perform a particular job. But the relationship of this technique to select people for the optimum performance from them is not even 10%. An employee rates himself on a particular competency and then the functional head also rates him on that particular competency. At least it can make the person aware about the new concepts which he is totally unaware. This helps in finding the missing links between the two (keeping in view the minimum level to which that competency should be present in the employee). fear etc.working efficiently under stress. The comparison enables us to know the suitability of a person for a job. anger. performance appraisal. If the knowledge in which a person is a master is shared by all. and succession planning as measures to further improve the performance of the employees. If the right match of competencies is available with the employees. Technical competencies relate to the techniques required for performing a particular job. in order to improve performance. Emotional and Conceptual competencies. work environment and incentives which help them to give their best performance. The competencies required for a job may be identified by head of that functional department or a team which has core knowledge and experience of that area? This team or head of the functional department tries to identify the skills. the companies must pin their confidence on better and more reliable techniques and identify the right competencies and their levels. This is compared with the extent to which the various competencies are required for a job. attitude. finding solutions and contributing in innovations. Company can use goal setting. Competencies may be classified into four different areas: Behavioral Technical. Therefore. Conceptual competencies relate to the information and concepts for performance of the job. capable of anticipating threats. A company can save a lot of cost on training by efficiently using Knowledge Management. For every operation and machine there is a human being and it is the quality of the man behind the machine or the process which determines the performance of the company. In view of this. then that will reduce the cost of training. A comparison is then made of each of these ratings with the minimum level required. If the difference is more. incentives. Emotional competencies relate to the emotions like anxiety. Competency and Performance One of the major objective of every company is to improve its performance every year and set new standards and norms. then it is their motivation. jealousy. it is considered that employee needs training. which finds out relationship between competencies required for a job and competencies being displayed by the person performing that job. companies recruit people based on qualifications and conduct interview for final selection.

Banking Briefs 287 (For private circulation only) . Some competencies which are extremely essential for a job can be stated as Core Competencies which relate to the Key Responsibility Areas (KRA) and are required to a very high degree in an individual. The degree to which these competencies are required also matter a lot. This provides us the missing links or gaps which can be bridged by training. The drawback of this model is that the competencies required in a person performing a particular job are defined by the Head of Department (HOD) who might have more inclination towards some specific competencies. every methodology has certain merits and demerits. Then a comparison is made between the competencies that head of the functional department was looking for and the competencies being displayed by the employee in that job.HR department designs a performance appraisal method to check what all competencies and to what extent are being displayed by the employee during his job. Just as every coin has two sides.

may vary significantly. + Builds bridges with others. 5. aptitudes and skills that are required in our jobs. A typical assessment center test may have group exercises as well as individual exercises. which most managers acquire through work experience/ training. 7. Assessing the ability to lead/work in teams and solve problems collectively Assessing ability to plan. ‘-‘ means negative behaviour in an assessee): Criteria for Team Work Exercise: + Presents idea sensitively to maintain harmony with the group. functional expertise. and delegate Assessing the decision making capability on scientific basis Assessing communication skills. how we manage/lead people in work settings. Just to give an example. manage.Waits to be invited to draw out his/her ideas + Allows others to give their views . palpating the managerial possibilities that lurk within them. 4. Again.Prefers working on his/her own + Cooperates effectively . Competencies that are measured could be a few or all of the following: 1. Assessing the negotiating skills. Typically. organize. the technical component of their role gets reduced and human skills and conceptual skills assume an integral part of their job component. Criteria for Leadership + Acts as a focal point for the group’s ideas . today's executive is required to have multiple skills beyond functional abilities to succeed in Assessment centre.. aptitudes and skills required in the job Used for higher level executives Some of the competencies assessed are leadership. which enable them to perform more effectively.Shows little influence on the group working + Directs the group to achieve objectives . Assessing the ability to handle uncertainty. probing their leadership qualities. Technical skills. The Assessment Centres. changing office environment and stress. decide. this is a tool that devises an intensive laboratory to run tests on candidates for promotion/or evaluating their training needs etc. patience and interpersonal skills Assessing the market orientation l l As Managers rise higher and higher in an organization. ability to persuade and ability to compromise. they are expected to develop new competencies.e. the following criteria and descriptors may be looked for (‘+’ means positive behaviour. 6.ASSESSMENT CENTRE l Assesses the adequacy of various critical attributes.Plays a passive role. prodding their ability to innovate. functional expertise. As managers become executives in an organization.Presents ideas aggressively. Apparently. . are not enough to handle the complexities of higher roles in an organization. As against the above. teamwork. and process observation is made by experts to find evidence of particular behaviour / traits amongst the assessees. the competencies required for different roles. and make an assessment of the adequacy or otherwise of the same through the use of various structured experiences and administration of instruments and in-basket exercises. i. certain criteria and descriptors are selected. (For private circulation only) Banking Briefs 288 . communication skills and market orientation 3. These must be supported by human skills. 2. identify the various critical attributes. decision making capability. dominates.

In fact. focuses more on intrinsic qualities and strengths than on achievements promotes team work and voluntary self change. behavioral traits. creates an atmosphere of openness and improves inter-personal relations. The 360-degree appraisal technique now being applied in most well-known organizations proves to be an open worthwhile system of performance appraisal. customers. anyone who has useful information on ‘how an employee does the job’ may be one of the appraisers. familiarity. The trend is towards greater transparency and increased participation while evaluating an individual’s effectiveness in a organization. Awareness of the system needs. Infosys. Most of the appraisal systems are designed to evaluate past performance and stress less on future requirements such as employees career aspirations. Thermax and Thomas Cook are all using this to know everything about their managers. thereby diluting system effectiveness making it as mere annual ritual. Godrej Sops. career planning training & development requirements to take up higher assignments. The personality of each manager-his talents. (RIL). tempers. He focuses on achievements rather than the intrinsic qualities and strengths. values. ethical standards. It is used for multiple objectives.360–DEGREE TECHNIQUE l l l l seeks to measure the performance of employees on the job from multiple stakeholders. no serious attempts are made in implementation leading to delays and haphazard Banking Briefs 289 . The traditional 90-degree performance appraisal done by the immediate boss judges the outcome of an appraisee’s efforts but ignores the road taken. Reliance Industries Ltd. be it as a change management tool for leadership development or as a tool for assessing the potentials of participants or sometimes for appraising senior managers. The flattening of hierarchies in modern corporations has also broken down the age old methods of assessing the performance of employees. Limitations of Traditional Appraisal Performance appraisal has long been regarded as one of the most critical yet troubling area of human resource management. reports. In many organizations. review session and counseling are mostly absent proving it to be a sheer drudgery of paper work. Moreover. peers and self. potential latent skills identification. derived from a number of stakeholders-the stakeholders being the immediate supervisors. Corporations like General Electric India (GE). appraisal systems from other organizations have been copied and implemented blindly without any linkage with organizational requirements and its people’s need. loyalties-is to be scanned. Initially it started as fact finding self-development technique. Crompton Greaves. perhaps in future it will be linked with reward system. sorted out and stethoscoped. Methodology The methodology used involves collecting responses through standard assessment forms (For private circulation only) Over the last few years. 360-degree Feedback The 360-degree feedback is understood as systematic collection of performance data on an individual or group. there is increased awareness among the Indian leaders and managers for enforcing the power of 360-degree feedback. appraiserappraisee meets. Wipro. team members.

peers and subordinates. For 360-degree feedback to work. People should be prepared mentally to adapt to the system. System should be introduced only after a thorough study of the organizational climate and the requirements of the system in a given set up. The results could be uneven. This is a powerful tool for self-development especially at the senior level. 290 l Banking Briefs . There should be full transparency about its mechanism. recognize talents. They need to have confidence in the intentions of the assessor. 360-degree feedback technique holds brilliant promises provided it is used with utmost care keeping in view the following guidelines: l The 360-degree assessment program will be effective only when the top management backs it with the assurance to managers that the exercise will be used exclusively for individual development and benefit only. l l l Despite the above criticism. Linking records to findings can prove to be unfair. training needs and career planning. provide scope to express individual view and opinions. namely: l The system may be utilized to humiliate people. 360-degree feedback system should not replace the existing appraisal system of the organization but it should be done as an addition to that system. Each manager is assessed by a minimum of nine persons-at least two of them being his bosses. two or three of them peers. It reveals the strengths and weakness of their managing style. Data collected is analyzed and graphed by computer. They cover several parameters of performance as well as behavior. Teamwork develops once peer group assessment is included in the methodology. Indeed nothing excluded from the ambit – even values. Benefits If 360-degree appraisal is done in a systematic manner. The forms are designed in a way to elect one of the three responses to the subject’s rating on the parameters – strengths. The responses are presented collectively to the appraiser. it will contribute to motivation of employees. weakness and improvement required. placement requirements. The gap between self-assessment and the views of one’s colleagues is reduced. ethos. which is where one tends to get isolated. nor should it permit any single assessor to carry too much weight. counseling sessions are held to solve the specific problem and the weaknesses are identified by 360-degree appraisal. Responses from the people tend to be biased.about a manager from his bosses. The merits of the technique are: l l Inflexible managers are forced to mitigate self-change. (For private circulation only) l l The organization gains from heightened self-awareness of the top managers. l l l l l Empowerment is facilitated. Depending on the interpretations of the data and findings. there are some difficulties in the approach. employees need to believe that the data is unbiased and objective. Facts about organizational culture and ambience are brought to light. Of course. fairness and balance courtesy. Their doubts must be clarified. and two or three of them subordinates. reveal role of employees. The system must not reward individuals who abuse it.

Assessors should discuss their observations and evaluation with other assessors. improved inter personal relations and teamwork. They should begin with by using it for development only and then gradually make it part of formal appraisal with a pilot group. more and more number of companies are using 360-degree feedback. Recipients of the feedback should use it as the basis for a communication with their assessors about development targets. Receiving feedback on performance from multiple source can be intimidating. l 360-degree feedback works best in organizations where the environment is open and participatory. Besides. The better they understand what to look for and who to record critical incidents (specific things the assessee said or did) that can be used as examples to support their ratings. where giving. It is essential that the organization should follow the above-mentioned guidelines and create a conducive environment by emphasizing the positive impact of the technique on employees’ performance and development. It makes employees feel more accountable to the internal and external customers. It enables an employee to compare his or her perceptions about self with the perceptions of the assessors. Assessors should be trained in what and how to observe. Notwithstanding. there might be difficulties in getting objective feedback due to personal differences and biases. l l l l Banking Briefs 291 (For private circulation only) . Progress about their target then can be periodically tracked. Further. Organizations considering 360-degree feedback should start small and move slowly. selecting the assessors. designing questionnaires and analyzing data may be cumbersome and time consuming tasks. These discussions can trigger thoughts and combat selective memory. the better the quality of information that will be collected. 360degree feedback creates an atmosphere of more openness. In addition.l Assessors should encourage open discussion. Assessors should also be required to provide a rationale for their ratings to other assessors. 360-degree assessment form should contain those items only that assessors are capable of observing and are competent to assess. People need to get comfortable with the idea of multisource feedback as a development tool before they could accept it as a part of formal performance management process. there are drawbacks associated with 360-degree feedback. However. and receiving feedback is seen as valuable source of information and development. Conclusion The 360-degree feed back provides a broader perspective about employees’ strengths and weakness: It facilitates greater self development to employees.

000 defects out of 10. So it pays to adopt Six Sigma to retain customers and deliver customer satisfaction. their price. we are missing the point.FOR QUALITY l l l l l It is a quality tool. Six Sigma therefore implies being right almost 100% of the time. l At Six Sigma level.4 defects in 10 lakh operations. CAG has successfully implemented it for issue of LC.000 230 3.000 3. Similarly.00.3000 Crores) to the bottom line. To eliminate waste: Six Sigma helps to trace wasteful activities in order to eliminate them. WHY ADOPT SIX SIGMA? l What is Six Sigma Sigma is a mathematical term that represents a measure of variation around the mean. the defect levels for other sigma would be as under: SIGMA One Two Three Four Five Six l Defects Per Million 7. l Thus the main thrust of Six Sigma is to reduce errors and waste in every kind of business endeavour to please customers (For private circulation only) Banking Briefs 292 . quality improvement is a means to an end and not an end itself.6% 0. It helps to measure how many mistakes a company makes in doing whatever it does. which means that it is doing things right 30 % of the time.4 Defects Percentage 70% 30% 6. Later the concept was later taken up by Jack Welch.E have implemented this with success Helps in customer satisfaction and retention.000 employees making fibres. processes from inventing and commercializing a new product to billing and collecting after they deliver the product. it is reported that many of the Fortune 500 companies have adopted Six Sigma.4 defects(called DPMO.00.SIX SIGMA . In 1995 GE’s operating margin was about 13.000.7 per cent. it was up to 16. there will be 3. If a company works at one sigma level. Today. It denotes tolerance of only 3.Defects Per Million Operations) out of 1 million parts produced. the CEO of General Electric. This increase represented a $600 million bonus (Rs. l Six Sigma as a Quality tool was first introduced by Motorola in 1988 with tremendous success. a company with 70. elimination of waste and reduction in cost In our Bank. from manufacturing steel to delivering Pizza at the customers’ doorstep. Six Sigma helps to enhance profits of the firm. a number Welch previously thought was impossible.7% 0. Bossidy applied Six Sigma to every one of the business In Six Sigma.000034% To eliminate errors for Customer Satisfaction and retention: Six Sigma helps in measuring the level of error in order to perfect the processes.5 per cent. it will have 7. after adopting Six Sigma. If we improve quality by losing money without satisfying or adding value to customers.000 6.00. but to make customers happier and add money to the bottom line. Six Sigma improved Allied Signal’s products. plastics and aerospace and automotive parts. the former CEO of Allied Signal.0002% 0.000 67. It helps to determine how good or bad the performance of a process is. By 1998. customer satisfaction and cash flow significantly. Companies like Motorola and G. who got the idea from Lawrence Bossidy. To improve the bottom line: By focusing on wastes and redundancies. The goal of Six Sigma is not simply to improve quality for quality sake.00.

and fatten the bottom line. Find out what the customer wants Take one problem at a time Golden Rule: Pick the problem that gives us the most trouble. where and how and how often the defects occur it would facilitate us in remedying the problem. the one that is making customers unhappy. In our Bank. from software to hardware. Measure: The next step is measurement. the one that is costing the company most. Control: Like all management processes. we may not stand to gain much and hence can move to some other problem. If the gap is not great. l l l Define the problem. we have to implement the changes which will improve performance. (For private circulation only) l Banking Briefs 293 . operations. if we wish to improve our despatch processes. Where it can be applied Six Sigma can be used in the service industry. Unless the problem is measurable it would be difficult to quantify and much more difficult to effectively implement change initiatives. For this. we need to measure as to how many opportunities for defects the current process presents. Benchmarking is essentially finding out how our competitors perform in this area in order to set our standards against those benchmarks. benchmarking may also be useful. the better are the chances of hitting the bull’s eye. Improve: Having identified the processes ‘critical to quality’ and the defects in it.that is those that have the most impact on the outcome in order to work on them. Getting Started. Wrong and incomplete definition of the problem results in wastage of money and effort. This would help us to adopt a new process. CAG. During this phase. which would not lend scope for congenital Experience in Service Industry In the Services sector. we need to identify processes which are ‘critical to quality’ (CTQ). it is important to measure the actual performance against the expected in order to implement corrective action when there is a deviation. some insurance companies such as MetLife and non-banking finance companies in the USA have very successfully achieved Six Sigma status. Six Sigma is one of the potent tools in the hands of organisations in this mission.the one that will reward us the most if we can fix it. we need to define on how many occasions our letters are delivered wrongly. we need to define our problems in numbers. How to go About it Idea Generation l l l defects.everything from accounts receivables to automobile spare parts. This would help us to know the maximum results possible if everything is perfect and also how far our company is falling short. the more precise will be our target. as other methods are subjective and hence impossible to measure performances and achievements. Problem definition is the biggest challenge in any problem solving effort. Mumbai has successfully implemented Six Sigma for issue of Letter of Credit. In this step.the Five Steps (DMAIC Cycle) Find out the number: It is important to know where we stand and where we want to go. To cite an example. While doing this. The more accurately we define the problem. Since customer expectation and competition is intensifying every passing day many service companies are exploring new ways to enhance their service quality. Six Sigma aims to give customers excellent products and excellent services at an acceptable price. manufacturing. Analyse: This is done to find out how well or poorly the processes are working compared with what is possible and with what the competitors are doing. If we can answer when. In this phase. we need to raise questions such as why are the errors committed and how to fix them. Numbers bring clarity.

This management philosophy of ‘tireless striving towards perfection’ is gaining wide acceptance as evidenced by the explo­sion of published material on the topic. c. A set of methods systematically applied for a period of time which are properly planned. Improvements from the present standards. Nothing can happen from the blue. a positive and perfect frame of mind and ‘do it right at the first time’ approach would culminate into full quality culture and in turn full customer satisfaction. rationalism in work place. However during 1990s. Embodied in this definition are three main ingredients necessary for TQM to flourish in an organisation: a. The focus of TQM is to satisfy the needs and expectations of customers Zero defects. Participative management Continuous process improvement and Use of teams Participative management comes about by practicing TQM. The employees are aligned with the organisation’s goals for improvement. checked and acted upon will eventually result in total quality control circle. motivation. done. benchmarking are its key approaches be turned on. It is an evolutionary process of trust and feedback which develops over time. TQM is a science and not a witchcraft. quality assessment. To stay ahead of the competi­tion. It recognises that substantial gains can be achieved by the accumulation of many seemingly minor improvements whose synergies yield tremendous gains over the long run. goaloriented work. In developed countries. recognition and job security. Finally TQM involves teams. the interest in quality extends to every competitive business and industry. incremental gains as a step in the right direction towards quali­ty. (For private circulation only) Banking Briefs 294 . TQM DEFINED TQM is a co-operative form of doing business that relies on talents and capabilities of both labor and management to continu­ally improve quality and productivity using teams. Continuous process improvement means accepting small. This personal commitment is achieved in exchange for individual and team rewards. productivity. Kaizen (continuous improvement). the organisations sell quality as a value added service introducing revolutionary ideas into a very traditional business. ESSENTIALS OF TQM l The Management gurus in the 1970s and 1980s were engaged with the theme of profit maximisation which was seen as the main agenda of an enterprise. the focus has shifted to customers and frontline employees and are expanding their reach into service management and service quality resulting in the growth of knowledge about TOTAL QUALITY MANAGEMENT (TQM).TOTAL QUALITY MANAGEMENT (TQM) l l l l l TQM means ensuring error free functions all around in the organization It aims to continually improve quality through employee and management participation. b. Unlike a switch. The concept of TQM is increasingly recommended as the means of satisfying the needs and expectations of their custom­ers. It attempts to increase productivity through building teams. The sum total of an error-free function all round — knowledge of the work. it cannot simply The importance of management: Commitment of managers at all levels is essential for sustained improvements. functional assessment — is Total Quality Management.

the concept of Total Quality Management has to be applied throughout — top to bottom. Focus on prevention rather than inspection: Instead. (For private circulation only) l l l Banking Briefs 295 . — recognising the customer’s perception and apologising. Continuous improvement . l l l l Benchmarking l Benchmarking is comparing oneself with the standards of the best in a particular field though the comparison need not be with a compet­itor or even with an organisation in the same line of business. Recovery: Recovery means acting quickly when the customer is not satisfied by. horizontally. we mean the customers. Meeting the needs of target customers: This means adjusting the services to the requirements. vertically. Service design is a way of avoiding inbuilt faults in the system from the start. TQM philosophy creates an opportunity which does not require in-depth cost justification to convince the rank and file. functional and cross functional — just with one aim that is total customer satisfaction. employees. In order to be effective and successful. The focus should be on customer through management commitment. commitment and responsibility of everybody: When we talk of everybody being involved. It is a challenging blueprint for corporate-wide change. needs and expectations of identified special groups of customers thereby avoiding dissatisfied consumers.‘Kaizen’ approach: The Japanese practice the concept of KAIZEN widely which means “ON-GOING IMPROVEMENT” involving every one including management and workers. Zero defects are in rela­tion to the specifications laid down and grounded in the custom­ers’ needs. it is a continuous process — never ending. The concept originated in manufacturing. In other words. — ensuring that the problem does not occur again. — compensating the customer for the inconvenience. The quality strategy should be part of the business strategy in the market. The systematic methods form the architecture that links quality to customer satisfaction. Quality as strategy: This means that the organisation must recognise the importance of quality and evolve a strategy for improving quality. total participation and systematic analysis. Kaizen stresses the value of progress on a continu­ous basis. for example. but is now a key part of TQM for services also. It is the responsibility of the serv­ice provider to educate the public so that the customer does not have unrealistic demands and expectations of the service. it is a matter of preventing poor quality at the earliest point. all of whom can affect quality.l The involvement. Quality by design: Old services need to be redesigned with the customer’s needs overriding back office needs. — giving the customer a reasonable explanation for what had occurred. Quality in all processes: Processes cut across departments and the right quality depends on the right relations between departments and organisation. marketing should be oriented to avoid creating wrong and often excessive l expectations in customers. CONCLUSION The TQM approach addresses tough issues and describes costs and rewards of implementing the change process. investors. Total Quality Management is not a programme. Zero Defects: It means doing the job right at the first time.

func­tion or process and then comparing one’s own performance to theirs. Pressures of international competition and market globalisation are such that organisations intending to become corporate leaders should aim to be the best in class in the key areas that sustain competitive advantage. operational or business management level. (For private circulation only) l l l Today most organisations operate in a business climate in which uncertainty. In effect.BENCHMARKING l It means observing Best Practices in competitors or companies in other industries in some activity. in order to compare the firm’s strengths and weaknesses in meeting customer’s expectations relative to the best performers. internal yardsticks that measure current performance in relation to prior period results. Customers are becoming more informed and more demanding of their suppliers. risk and complexity in the external environment are becoming fundamental facts of life. processes and services that result in total customer satisfaction and competitive advantage. The strategy consultants McKinsey & Co viewed benchmarking as a skill. internal. Moreover. at strategic. products and services. There are four types of benchmarking activity when seen from the perspective of organisations/divisions in relation to whom the benchmarking is done. not merely on improve­ment. The measurement of relative performance takes place along the three components of a total quality programme- Banking Briefs 296 . Normally the measurement is done along three components. Being externally focused. competitive and generic. companies must focus increasingly on product and service development and on consumer and market research. an attitude and a practice that ensures an organisation always has its sights set on excellence. or the results of the other units within the company rarely have such an eye-opening effect. beyond what they would have thought possible. They are. This requires the ability to focus externally. Processs/Procedure and People. This externally oriented approach makes people aware of possible improvements needed.Products/Services. To continue to succeed. current budget. Benchmarking leads to setting higher standards. In contrast. This brings about changes that lead to quantum and continuous improvements in products. Benchmarking involves observing competitors or companies in other industries that exemplify best practice in some activity. it implies setting benchmarks for excellence and working towards it. Benchmarking enables the organisation to enhance its competitive advantage by learning from practice of others internally and externally. these internally focussed comparisons have the disadvantage of breeding complacency through a false sense of security and of stirring up more energy for intramural rivalry than for competition in the market place. It also requires targeting in weak areas within the organisation for specific improvement activities. Benchmarking is a continuous management process that helps firms to identify the benchmark and to use that knowledge in designing a practical plan to achieve superiority in the market place. business processes and procedures and people. The market place is rapidly changing and consumer’s expectations continue to rise. function­al. function or processes and comparing one’s own performance to theirs.

Making the measurements objective and truly comparable.An effective benchmarking process has the following six steps. Taking small steps at a time by focusing on a few key processes initially. in sharing information and in pro­viding feedback. l Banking Briefs 297 (For private circulation only) . standar­disation versus customization. business processes in all departments and the organisation. Set the key standards and variables to measure Measure regularly and objectively Develop an action plan to gain or maintain superiority. rather than internally. l l Understanding customer needs and own internal business process­es. Involving the people who will make the changes. Identify the most relevant competitors and best-in-class compa­nies. Key operational issues which have been identified in service are: productivity improvement. batch versus unit processing. Determine the key performance areas to be benchmarked. customers. Identification of the right performance variables to benchmark. l Commitment to the aims and the process throughout the organisa­tion. Experts cite the following keys to successful implementation of benchmarking initiatives. managing queues and capacity management. Being honest in assessment. focused. l l l l l l l l l l In the service industry environment critical business processes are similar and capable of being benchmarked in the same way as in manufacturing environments. Focus on the bottom line A successful approach to benchmarking involves a clear focus on the business and bottom line and continuing emphasis on being externally. implement and monitor ongoing performance. Focusing on the processes first and the metrics second. Specify programmes and actions to close the gap. They may include product and services. business culture and the calibre and training of employees. job design.

National standard bodies of different countries are members of ISO. What is Quality Interestingly. Publication as an International Standard requires approval by at least 75% of the member bodies casting a vote on draft International Standards. Registrar and Consultant It is pertinent to note that while ISO adopts standards it does not give certification. It was later revised in 1994. However. Establishment Standards The work of preparing International Standards is normally carried out through ISO technical committees. Earlier different countries followed different standards and hence there was no uniformity. Each nation has a National Body. It is a worldwide federation of National standards bodies. In case Quality standards as accepted by the users are not maintained. track record and experience. Switzerland. (For private circulation only) What is ISO ISO stands for International Organisation for Standards. it should continuously strive for progressive improvements in it. ISO was first established in 1985 when around 85 countries became signatories to this universal standard. These National bodies in turn empower Registrars for issuing certificates to user Institutions on its behalf. The Headquarter of ISO is in Geneva. periodical inspections are conducted to review Quality Management in a span of 6 to 9 months. the ISO standard does not prescribe any rigid measure of quality. The present version ISO 9001:2000 is adopted in 2000. The Registrars issue ISO certification on behalf of the National body to various institutions. By implication this means that while each institution can define its own measure of quality. However ISO demands that there should be ‘continual improvement’ in quality. quality is defined as ‘The degree to which a set of inherent characteristics fulfill requirements’. According to ISO. infrastructure and the expectations of customers across countries. in liaison with ISO. Registrars are designated by the National bodies based on the their competency. Revision The ISO standard was first adopted in 1987. governmental and non-governmental. which is an accredited member of ISO.ISO 9001 l l l l ISO 9001 is an international quality standard and adopted first in 1987 Latest version is in 2000 and is called ISO 9001:2000 The standard aims to promote quality and continual improvement in organizations The certification is issued by Registrars the difficulty in prescribing the uniform measure of quality due to inherent differences in resources. Each member body interested in a subject for whom a technical committee has been established has the right to be represented on that committee. The certificate is valid for three years. International organisations. ISO seeks to establish universal standards of quality and thus help in bringing about quality improvement worldwide. also take part in the work. The standard is revised at periodical intervals in order to reflect the changes in the environment and to update the provisions based on experience. The definition takes into account Banking Briefs 298 .

This exercise helps not only in regular rectification of irregularities but also in familiarizing the people in office with the quality management practices of the user institution. A consultant is one who guides the certification-seeking institution. the users themselves should conduct periodical internal audit through their own staff designated for the purpose. for a fee. Besides this. As already mentioned. The fee charged by different Registrars are different. Banking Briefs 299 (For private circulation only) . Auditing Auditing is necessary for maintenance and improvement of any systems and procedures. Registrars charge a fee for certification and for conducting periodic audit. ISO Certification will institutionalize a culture of Quality in the organisation.Registrars have the right to cancel certification. periodical auditing is done under ISO certification by Registrars. in obtaining certification.

ISO 14000 l l l l ISO 14000 is a quality standard for environmental management The standard is voluntary It can be obtained for the whole company or a department It helps in reduction of energy consumption. reducing liability and risk and improving compliance with legislative and regulatory requirements.Life-cycle assessment (ISO 14040. in any fashion. But it may end up being a requirement for conducting international trade. Rather. 14011/1. Objectives and targets are to be documented and must be consistent with the goals of the environmental policy.A terms-and-definitions standard (ISO 14050) harmonizes the language among the others. liability and risk and improves compliance to legal and regulatory requirements an environmental management system. 14042.14004). it is a systems-based standard that gives the company a blueprint for managing environmental impacts. ISO 14001 can be implemented piece meal. 14041. The list of reasons companies are now adopting Banking Briefs 300 . 14043). But you must commit to following the laws of the land and preventing pollution. Procedure to ensure compliance should be consistent with the environmental policy and include legal and other requirements. What are the major requirements ? The standard’s first requirement is that a company should have a publicly available environmental policy articulated by top man­agement. The standards can be classified according to their focus: Organi­zation and process evaluation standards-Environmental management system (ISO 14000. It is not a performance-based standard that prescribes levels of emissions and releases. Product-oriented standards . Definition standard . and ISO 14001 in particular. from the corporate level to the single-unit level. 14024. It’s voluntary ISO 14001 is not a mandatory requirement: it is voluntary. Implementation Worldwide interest in these standards among both countries and governments is growing. 14025) and environmental aspect in product standards (ISO 14060). environmental auditing (ISO 14010. Establishment and maintenance of procedures to identify significant environ­mental aspects and their associated impacts are also envisaged. ISO has 111 member countries represented mainly by industry and government standards groups. the environmental management system specification. includes identifying areas for reduction in energy and other resource consumption. including continual improvement and pollu­tion prevention. It is the backbone of the series. environmental labelling (ISO 14021. ISO 14001. ISO 14001 is not a product standard. 14012) and environmental performance evaluation (ISO 14031). is intended as the only standard establishing requirements against which companies will be audited for certification. It should be appropriate to the nature of the organiza­tion and include commitments toward pollution prevention. (For private circulation only) What is ISO 14000? The ISO 14000 standards are voluntary environmental management system standards being created under the auspices of the International Organization for Standardization. Many countries and companies have already started implementing ISO 14001 with an eye toward certification.

Prior . where. analyse and solve work-related problems in their work area. 4. 2.distribution of agenda to members will enable them to think in advance and participate in Q. After ideas are exhausted and brain storming completed. Pareto analysis helps in identifying the vital few from the trivial many at a glance. listed after brain storm­ing and data collection. who meet regularly to identify. It facilitates fixing the priorities for selection of the problem to be taken up serially.C. implementation has to be given priority after securing the necessary approvals. To enable flow of ideas each can ask himself. each idea shall be taken up for detailed discussion and consensus ar­rived at on those which are valid and vital. analyse and solve work related problems. at solutions/recommendations to resolve each cause individually. brainstorming is undertaken to arrive 6. when projected using column graph named after Pareto. Ishikawa who conceived Quality Circles. The members identify problems. deliberations. asked for ideas. Leader shall help in summarising the idea and enable clarity of expression by members.What. l l Quality circle is a small group of employees in the same work area. who meet regularly to identify. IMPLEMENTATION: Following the recommendations of the QC. (For private circulation only) Banking Briefs 301 . 8. BRAIN STORMING : 1. This technique was devised by Dr. help from specialists can be taken. Before taking up a prob­lem for detailed study it is necessary to list down all the possible causes through brain storming so that no important cause is missed. If non members drop in during brain storming. 7. Method and Material. PARETO ANALYSIS. No evaluation of ideas shall be done during the process of brain storming. in rotation. ISHIKAWA OR FISHBONE DIAGRAM. more effectively and purposefully. who and how ? No idea shall be dismissed as irrelevant/ stupid . Keep a record of the brain storming for future reference. This has to continue until all ideas are exhausted. a systematic arrangement of all possible causes which give rise to the effect are made. why when. they may be allowed to join in. In this diagram. Pareto is an Italian economist.Free flow of ideas shall be allowed. Pareto Analysis and Fish Bone Diagram are the key techniques used. The causes are generally divided into the four major sources (groups) viz Man. OPERATION OF QUALITY CIRCLE l l l l l l l l l Identity Problems Prioritise the problems Choose one problem for the project Analyse the causes of the problem Develop solution Present it to Management for approval Implement solution Review implementation and results More over to next project 5. After the Ishikawa diagram. Each member will be. If necessary. develop solutions and implement them Brain Storming. MANAGEMENT PRESENTATION: It is the culmination of the Quality circles’ project study and helps in making the recommendations based on the solutions to the problems chosen. Each source is ultimately divided into sub-sources.QUALITY CIRCLES l QC is a small group of employees in the same work area. prioritise the most important problem to be addressed. 3. Machine.

corporate finance officers. analysis into elements and empirical testing (in the form of financial modelling and sensitivity analyses). Lower costs have in turn increased the availability of information. It has also been seen in a trend towards the recruitment of staff with scientific rather than financial training. compliance officers. among London investment banks and is the product of several parallel develop­ments. Other innovations. The term ‘financial engineering’ was coined in the mid 1980s. statisticians. It is also frequently used to exploit anomalies in the tax. in particular. It reflects the more rigorous application of the scientific method to finance. which bring together traders. which has extended the range of opportunities for financial engineering to exploit. mathematicians. Advancement in IT and telecommunication has strengthened financial engineering Increasing volatility of prices and interest rates underline the importance of financial engineering in at­tributing cause and effect in this area. Financial Engineering involves the application of derivative instruments such as swaps and options. Financial engineering is the product of the growing sophistication of risk management techniques. lawyers. mainly in the field of telecommunications. Through the process of decomposition of financial instruments into forward and option contracts and synthesising them into new combinations. by undermining the effectiveness of regulation. the PC and spreadsheet software. care needs to be taken Banking Briefs 302 . Multi-disciplinary approach Financial engineering straddles several traditional financial markets. the objective of Financial Engineering is achieved. programmers and other spe­cialists. accounting and regulatory frame­works within which markets operate. tax specialists. financial analysts. accountants. syndication staff. Financial engineering is therefore conducted by ‘teams’. The competition it has unleashed has encouraged the process. The increasing volatility of prices during the 1970s and 1980s increased both the need to hedge risk and the opportunities for taking risk. have reduced the cost of generating and delivering the information. The emergence of both derivative instruments and financial engi­neering has only been possible because of the development of new information technology. Financial engineering has played a part in encouraging liberalisation. (For private circulation only) l l l Definition Financial engineering is a multi-disciplinary approach to the management of risk and return which involves the use of deriva­tive instruments to decompose standard financial transactions into their elements and then synthesise these elements into inno­vative cross market structures customised to the particular re­quirements of counter parties. An important force behind the emergence of financial engineering has been the trend towards liberalisation of financial markets which began at the end of the 1970s. These innovations have provided a fast and flexible means of managing the large volumes of information which are necessary to construct complex transactions. in particular. The removal of official barriers has permitted the cross-market activity that characte­rises financial engineering.FINANCIAL ENGINEERING l Financial Engineering is a sophisticated management technique aimed to manage the risk and return of financial transactions It uses derivative instruments to hedge (counter balance) risks. However.

110/-. Under this method. subsidy etc.e net of) the investment cost and the adjusted future income IRR is the rate of return at which the adjusted future income equals investment. This measures the rate of return generated by the project Weighted cost of capital is the average cost of all components of capital Adjusted PV is used to evaluate the effect of different components like interest shield. It can also be stated that Rs. 100 (P) is invested for a period of one year at a rate of interest (r) of 10 per cent per annum.NPV. Why is it so? It is the value of time. we derive the discount­ing rate at which the aggregate of the PVs of all future cash inflows equals the present cash outflows for the proposal. Applying the compound­ing formula over the number of years to work out the present value (PV) of a future flow of income. the formula will be recon­structed as PV = P/(1+r/100)n Where P is the amount to be received in future (number of years = n) and r is the annual rate of interest. IRR & APV l Net Present Value (NPV). The investment at the end of one year will be equal to Rs. therefore. it is the rate at which the net present value of the investment is zero. The real value of a rupee in your hand today is much more than that of a rupee which you will earn after a year. 500 to be received at the end of five years discounted at 10% rate of interest. has to be discounted in order to be associated with the current outflow of funds in the investment. the value of a business equals the expected future cash (For private circulation only) l l l l l l The concept of DCF is based on the premise of the ‘’time value of money’. Two methods of appraisal of investment project are based on this concept. 310. manufacturing unit or a product line is the discounted cash flow (DCF) methodology with weighted average cost of capital (WACC) as the discounting rate. In other words. Under this method. like the NPV. These methods are used to evaluate investment projects NPV is the difference between (i. the most widely used method for valuing operating assets like a business entity.100 today. It is called internal rate because it depends solely on the outlay and proceeds associated with the project and not on any rate determined outside the investment. Internal Rate of Return (IRR) & Adjusted Present Value (APV) are calculated by discounting future cash flows Discounting cash flow implies adjusting future cash flows at a select rate of interest. IRR. Adjusted present value Presently.110 in one year’s time is worth only Rs. cash flow of Rs. The future income. Net Present Value Calculation of the net present value of future income can be related to the understanding of the compounded rate of interest or the general formula of compounding.50 Internal Rate of Return The Internal Rate of Return is another method under the Discounted Cash Flow technique which is used for appraising the investment proposals. Suppose a sum of Rs. Suppose we want to know the PV of Banking Briefs 303 . These are Net Present Value method and Internal Rate of Return method. takes into consideration time value of money and also the total cash inflows and outflows over the entire life of the project. The PV will be: 500/(1+10/100)5 = Rs.

2. This approach is referred to as the ‘adjusted present value’ or APV and relies on the principle of ‘value additivity’: APV not only assists in analyzing how much an asset is worth. a better alternative for valuing business operations would be applying the basic DCF relationship to each of a business’s various cash flows and then adding upto the present values. subsidies. APV also assists in finding the values associated with value creation incentives like inventory liquidation. The five basic steps in executing an APV analysis are : 1. In contrast to the WACC methodology. Customizing the analysis to fit the requirements (rebundling of components). WACC bundles all these financing side effects into the single discount rate. all components of value are unbundled which facilitates analysis of individual components.flows discounted to their present values at the weighted average cost of capital. but also shows where the value comes from. value of interest tax shields and sale of nonproductive assets. on the other hand. Evaluation of the financing side effects (Unbundling of components happens in 2 and 3) 4. Adding the subcomponents to get initial APV 5. other costs. hedges. DCF methodologies involve forecasting a series of risky cash flows stretching into the future and dis­counting them to their present values at a rate that reflects their riskiness. APV = Base case value (value of the project as if it were entirely financed through equity)+ value of all financing side effects (interest tax shields. steps taken for margin improvements. in which each is weighted by the fraction of capital structure it represents. Discounting base-case cash flows and terminal values to present values 3. Preparation of performance forecasts and base-case cash flows (the components are all bundled together) Banking Briefs 304 (For private circulation only) . WACC = Weighted-average of the all after-tax costs of different sources of capital. This kind of breakup cannot be had from using WACC. In an APV analysis. issue costs.

There are however. it is said to be creating wealth for its shareholders. EVA is the difference between the rates at which the company is earning from its operations and its cost of capital. It has emerged as a useful tool in corporate finance to the extent that it is able to capture the cost of capital employed. This is because any changes in depreciation policy. where liquidity is a major factor. What EVA actually depicts is the notional value created by a business. calculating EVA for any company involves hundred of adjustments to arrive at a credible figure of operating profit. 100000/-. It looks at the rate at which the assets are put to use and compares the cost of such capital. Sales. The EVA looks at how well the company has deployed it capital to get optimal returns. Another dangerous myth about EVA is that it is an ideal measure for comparing value creation across companies and industries. The most recent market mantra is ‘economic value-added’ (EVA). net profit. One of the myths about EVA is that the only complication in calculation of EVA is the estimation of the cost of equity to arrive at the Banking Briefs 305 .500000 and Cost of Capital is 12% then EVA= {100000. EVA by definition is biased against companies which are capital intensive. EPS growth and so on. the CVA (Cash Value Added) could better depict value creation. book value. More so for companies that are cash sensitive and where shortage of cash can lead to bankruptcy of the company. inventory valuation policy or in accounting for deferred taxation as also lease adjustments can have a major impact on profits and all these factors need to be adjusted.40000 Capital includes both equity and debt. That explains why many software companies which show high EVA in their books of accounts could still be on the verge of bankruptcy if their cash sensitivity is factored in. But for cash sensitive companies or companies in the growth stage of the business cycle. Simply put.ECONOMIC VALUE ADDED (EVA) l l l EVA helps to measure the extent of value created for shareholders EVA= Net Operating Profit After Tax (NOPAT) – (Cost of capital * Operating Capital) Eg: If NOPAT is Rs. (For private circulation only) l l Various indications are used to identify companies which are investment worthy. it is the difference between the net operating profit after tax (NOPAT) and the operating capital employed times the cost of capital. EPS. If the company is able to earn a return which is more than its cost of capital. The last and perhaps greatest myth about EVA is that companies with high EVA are cash rich. some popular myths which one need to be aware of to understand EVA more effectively. and determining cost of equity is difficult The speciality of EVA is that it takes into account Capital employed and the risk as measured by cost of capital cost of capital. return on capital employed. This is because EVA only considers the capital outlay necessary for creation of physical assets and ignores the implicit capital outlay involved in the creation of intangible assets. have enjoyed popularity at different times. EVA as a measure has an edge over traditional measures like earnings per share (EPS) and return on equity (ROE) which are pure return functions and do not factor in risk. To that extent. Mathematically. EVA provides a more refined barometer of value addition after defraying the costs of owed and owned funds. It has no relation to the liquidity requirements of the business. EVA is the ideal measure for matured companies or matured industries. In reality. dividend yield. Return on networth.(500000 * 12%)= 100000-60000= Rs. Capital employed is Rs.

Hence. Banking Briefs 306 (For private circulation only) . it is possible to determine market value. the best alternative would be to use the book value as market value. it is difficult to determine the market value of equity. it is defined as the sum of the current market value of debt and equity. as term loans from banks and financial institutions constitute 75-80 per cent of the total borrowings by companies. there is no secondary market and.MARKET VALUE ADDED (MVA) l MVA is defined as the excess of the market value of the Company over the value of investors’ capital Thus MVA= (Market value of debt and equity – Book Value of debt and equity) Book Value of equity is the equity plus retained earnings MVA is similar to Price Earning Ratio except that MVA indicates an absolute figure while PER is a ratio Conversely. it is difficult to determine the market value. This is also not the cost to the company as it may be able to borrow at a rate that is significantly different from the market rate in the past. l l l Another parameter. assuming the current interest rates. which is the same as a positive MVA. In the case of equity. it is possible to find out the market value if the shares are regularly traded in the stock exchange. How much additional information does MVA give to the shareholder? The MVA is defined as the excess of the market value of the company over the value of the investor’s capital. as the secondary market is not well developed. less the economic book value. MVA. A price-to-book-value of more than one indicates that the company has created value in terms of market valuation. For such term loans. it is possible to find out the theoretical market price assuming the current interest rate and the rate at which the company has borrowed. The MVA of a company is determined by two factors: The market value of the capital employed and its economic value. is not applicable to such companies. The MVA is same as the price-to-book-value figure. what would be the price. But this may indicate only the theoretical market value and not the true value. it is not possible to determine the market price. In other words. This is what many companies which give MVA finally boils down to the difference between the market value of equity and its economic book value. Hence. In the case of unlisted companies or infrequently traded companies. Mathematically. hence. A company creates value in the market if its MVA is positive. In the case of debt. This would mean that the company has created more wealth than it has raised from its shareholders as well its retained earnings which have been reinvested. Where the borrowers have issued debentures. is the market value-added concept. which are listed. The former is the difference between the market value and the economic value whereas the latter is the ratio between the two parameters. used by many companies to show how they have rewarded their shareholders. if the total borrowings were listed in the market. but even then the rates may not reflect the price. as a concept. Benchmarking these borrowings against the current interest rate may not reflect the true cost to the company too. It quantifies the premium the market is willing to pay for the value created by the company. its credit rating and the risk perception of the company.

A number of US companies are in favour of outsourcing to India purely on economic grounds. however. The European Union observes that BPO is good for India and good for the world economy. begun to view the outsourcing of ITES-BPO as a loss of domestic employment. sales. It has also raised productivity and growth significantly. banking. Certain developed economies have. influential views in the US that feel that the fear of job losses due to outsourcing is exaggerated. improves quality by 3-8 per cent and increases productivity by 20-150 per cent. HR etc. insurance. energy. skilled yet low cost labour force. transportation and retail sectors located in developed countries would be outsourced to developing countries in the near future. India renders more than two-thirds of all offshored ITES worldwide. India is expected to maintain its lead as the best offshore outstanding destination. Out of every $45-1. The BPO activities have benefited India by generating substantial job opportunities in the country and augmenting export earnings. India’s comparative advantage in the outsourcing business is on account of availability of well developed telecommunication network and advanced technological infrastructure. transparent and open market and would not put up barriers on the BPO. Globalisation and outsourcing work both ways. particularly for the US and European companies.47 value created.14 Banking Briefs 307 . The UNCTAD has called upon developing countries to bring a legislation relating to BPO under the General Agreement on Trade in Service (GATS) in the wake of the legislative measures in the US. banking. The BPO activities encompass not only ITES but also a wide range of areas comprising services relating to manufacturing . marketing. Outsourcing abroad has proved profitable primarily for jobs that can be routinised. The outsourcing has reduced the prices of IT hardware by 10-30 per cent due to the diffusion of IT throughout the US economy. Raising of barriers by the US to worldwide outsourcing would not only slow down its economy but also (For private circulation only) l l India is a leading destination for outsourcing of Information Technology Enabled Services (ITES) and other related Business Process Outsourcing (BPO) activities. BPO activities have benefited India by generating substantial job opportunities goes to the US and India receives only 33 cents.BUSINESS PROCESS OUTSOURCING – ISSUES INVOLVED l India is a leading destination for outsourcing of Information Technology Enabled Services (ITES) and other related Business Process Outsourcing (BPO) activities BPO activities encompass wide range of areas comprising services relating to manufacturing . insurance. $12-1. Currently. More and more traditional industries like manufacturing. utilities and human resources. Several States of the US have introduced legislations seeking a ban on outsourcing of various economic activities from India. There are. on the other hand. A study by Global Insight reveals that the majority of job losses to offshore outsourcing between 2000-03 occurred due to factors such as the slowdown in the US and the bursting of the telecom and dotcom bubbles. widespread use of English language. The US outsourcing from India reduces costs by 4060 per cent. Several studies have indicated that offshoring of US business to India provides greater benefits to the US economy than to the Indian economy. and India’s location in a different time zone from the United States (US) enabling a 24hour service. The UK is in favour of free.

Indian entities should strive to diversify their markets to other countries rather than depending only on the US market. South Africa. Australia. which would help to achieve cost efficiency and competitive price advantages. Banking Briefs 308 (For private circulation only) . particularly from the emerging East Asian countries. the Philippines. which works out to 5 per cent of the total FDI inflows of US $20 billion during the period.reduce the number of new jobs available to American workers. India would also have to continuously innovate and maintain its low-cost niche in order to compete with competitors like China. This could be achieved through increased mergers and acquisitions. India needs to set up more foreign affiliates in the IT segment to provide services offshore. Malaysia. The Indian BPO market should also strive to attain maturity through consolidation to withstand the competitive threat. The BPO segment in India attracted US $1 billion worth of FDI during 19962002. and Singapore. which would pacify the protectionist reactions by developed countries. besides attracting more FDI to undertake BPO activities in the country. not only in India but also in developed countries.

The debacle also exposed how a bank with such a long tradition of more than 200 years can be brought down by a few negligent decisions. Barrings’ failure exposed the woeful inadequacy of internal controls. The problem in Brazil began when one of the State Governors declared a 9-day moratorium on payment of the State’s US$14 billion debt with the Centre.DEBACLES. In the face of hyperinflation Brazil abolished its currency ‘Cruziero’ and replaced it with a new currency ‘real’ in 1994. Nick Leeson bought between 15000 to 20000 derivative instruments worth $190000 each totaling nearly $650 million beginning end Banking Briefs 309 . Towards the end of August 1998. unauthorized dealings by its Singapore trader. Barrings’ collapse also shows how derivatives. It was running very well until the wrong investment strategy followed by its dealer Nick Leesson resulted in the collapse of the bank in February 1995. Reason: Huge current account deficit. This resulted in the erosion of more than half its capital base. Barings Bank Debacle Barings Bank is the oldest investment bank in Britain started 225 years back. it rewarded the investors handsomely and returned a substantial portion of captial to them. (For private circulation only) l l l l Long Term Capital Management (LTCM) Debacle Long Term Capital Management (LTCM) is a hedge fund and an investment partnership that started in 1994 in the US. The other State Governments followed suit. It borrowed huge money disproportionate to its capital and used them for purchase of securities in different markets using arbitrage operations by applying complex mathematical techniques. the firm had undertaken heavy risk exposure and as the market became illiquid it could not reduce the size of its positions and strategies. can muliply losses. Brazilian currency Crisis Brazil is the biggest economy in the Latin American region and is the eighth largest economy in the world. Barrings is a victim of losses caused by massive.4% of GDP. if wrongly used. In this background. 1999 the real was devalued and allowed to float freely. decline in export growth and large volatile flow January 1995 hoping massive profits-but gamble failed. The macro economic situation was already fragile with fiscal deficit at more than 8% of GDP and current account deficit at 4. Some of the mistakes committed by the fund were excessive risk taking. Brazillian government’s effort by increasing the interest rate to as high as 41% to defend the currency did not yield enough result. over leverage and failure to take corrective action at the appropriate time. Encouraged by its performance. CRISES AND LESSONS l Long Term Capital Management (LTCM) Fund in US failed due to excessive risk taking and huge borrowings Barrings Bank despite 225 years tradition failed due to reckless trading by Nick Leeson and lack of internal control Brazilian crisis was triggered by excessive reliance on foreign investments without proper fiscal discipline Mexican crisis was caused by low reserves accompanied by heavy imports Asian Currency crisis was triggered off in Thailand. the investor confidence became weak resulting in flight of capital and collapse of stock market. On January 15.

the Government devalued the peso by 15% on December 20. Mexico’s foreign currency reserves fell from $25 billion to $6. Foreign investors lost confidence and hence did not invest in short-term dollar denominated securities issued by Government. This resulted in steep fall in profits of foreign investors in dollar terms. the foreign invetors fled with their capital. As though it is not enough.65%. Creation of independent back office with strict separation of trading and back office operations.Reliance on external funds to defend exchange rate without proper fiscal discipline was the central cause of Brazillan Currency Crisis. 1997. the real reason for crisis was the inability of the system to manage large volatile flows.12%.5 billion barely sufficient to cover import bill of two months.for the second time since 1992. Mexican Debt Crisis The Mexican economy witnessed a deep economic crisis .44% the Malaysian ringgit by 31. A sound financial system is essential for efficient intermediation of capital flows and to ensure that these are directed into the most productive areas. Lessons for India A great emphasis is needed on internal control and risk management. The persistently high current account deficit resulted in a speculative attack on the currency. We should not defend pegged exchange rates with external support system. The traders in derivatives should be well trained and appraised of the complexities of derivatives. The crisis was triggered of by an armed rebellion though the problem began much earlier. Outside credit alone cannot shore investor confidence. periodic marking of the portfolio to market. high economic growth rate and a high savings rate of over 30% of GDP. low inflation. Philippines and resulted in Asian Currency crisis. decline in export growth and large current account deficit. building an early warning system and stipulation of capital adequacy norms for firms dealing in derivatives are prerequisite for entering into the world of derivatives. With imports flooding the country. the Thai bath fell by 56. the Thailand currency crisis immediately spread to neighbouring countries such as Malaysia. Unless fiscal discipline and political will are in place high interest rates alone cannot stabilize the currency and instead would only undermine economic growth and fuel fiscal deficit. the Philippine peso by 28. Banking Briefs 310 (For private circulation only) . Indonesia. In order to regain competitiveness. Though Thailand had a low fiscal deficit. Some of the reasons for Mexican Debt crisis are hasty implementation of full convertibility when the current account deficit was high. Between July 1 and November 15. Asian Currency Crisis The currency crisis in Asia was triggered off following the run on the Thai ‘bath’ in early July 1997. The immediate cause was misalignment in exchange rate. 1994. heavy reliance on imports and less domestic savings. Fall in currency value led to the crash of stock market and outflow of short-tem foreign portfolio funds.16% and the Indonesian rupiah by 42.

The Bank tried to bring in New Bridge Capital . The Bank. Road to Crisis The Bank’ s priorities from the beginning were lopsided. Its Banking Briefs 311 . real estate . to form UTI Global Bank.FALL OF GLOBAL TRUST BANK l l Established in 1994 and imposed moratorium in July 2004 High deposit rates. high cost of funds. The Bank launched on an aggressive marketing campaign using excellent publicity. who certified the accounts. It offered higher rate of interest for deposits in order to attract huge funds and lent them to capital market. GTB along with other New Generation Private Banks came to the market in the liberalized banking environment with the promise of redefining banking experience for the Indian consumers using state-of-the-art global practices. integrity of officials. 16. premature withdrawal of deposits. Its auditors. The merged entity would have had a deposit of Rs. declaration of dividend. Way back in Mar 2001. Shareholders have lost their investment Lessons: Need for strong systems and procedures. Gems and Jewellery business by taking high risk. were some of the reasons for the fall Amalgamated to Oriental Bank of Commerce. Financial Express rated GTB as the Best Bank in India. wellqualified and trained professional and plush retail ambience for the consumers. Its bad loan aggregated to Rs. RBI advised the Bank to change its auditors and take steps for cleaning up the Balance sheet. Attempts to salvage the bank GTB has been accumulating non-performing assets due to overexposure to sensitive sectors like equity market and real estate. It had good foundation initially in the form of equity partnership by IFC (International Finance Corporation). negatives include the high risk attitude of the top management. For the Year 2001. RBI declined it due to regulatory concerns. which promised to invest about Rs. The Chairman was also accused of colluding with Ketan Parekh. The Bank in a short time gained the notoriety for resorting to short cuts to earn quick profits through highrisk exposure. there were attempts to merge UTI Bank with GTB. RBI advised the Bank to infuse fresh capital either through domestic route or from foreign partnership. high cost of lending. The Bank entered with tremendous public confidence as revealed by the over subscription of its Initial Public Offer by more than 60 times. 19. negative capital and faulty asset classification. adverse selection of borrowers due to higher lending rates. were accused of unprofessional conduct. 1500 Cr – nearly 45% of its loan portfolio. stockbroker in rigging the share prices of GTB in 2001.000 Cr and asset of Rs. lending to sensitive sectors. poor credit appraisal and credit management. advertisement and promotional campaign. well –established norms and practices for high-risk exposure. RBI kept a strict watch by imposing restrictions with regard to exposure to capital markets. PriceWaterhouse Coopers.000 (For private circulation only) l l Global Trust Bank (GTB). a new generation Private Sector Bank was established in the Year 1994 in Hyderabad under the chairmanship of Ramesh Gelli. in fact. The inspection of the Bank by RBI revealed inadequate provisioning. proper credit appraisal and credit management. brought in excellent technology. an internationally reputed private equity fund. 920 Cr.

which had also generously lent to the group. though they are entitled to the residual surplus. 1949. after 12 years following the liquidation of impaired loans.000 Cr deposits. The shareholders of GTB have. in exercise of its powers under Banking Regulation Act. imposed moratorium on GTB on 24 th July 04. 250 ATMs. lost their money. 7. RBI acted swiftly and concluded the amalgamation of GTB with Oriental Bank of Commerce. 800 Cr profit in its books ( though there are provisions of tax rebate etc) and got more than Rs. This was dropped following the report of price rigging of GTB shares. Ketan Parekh and his associates have been accused of manipulating the share prices of GTB. The Bank reportedly funded Ketan Parkeh to buy GTB shares and to keep the scrip afloat. common technology platform and high networth clients. Moratorium LESSONS The fall of GTB provides the following lessons for the bankers: l Bad Corporate Governance is harmful One has to be very cautious when taking high risk especially while lending to sensitive sectors. one million customers. much beyond the prudential levels. Integrity of the top management and officials is critical for bank’s safety Attracting funds at high cost increases lending rates and therefore forces compromising on the quality of lending Focus on short-cuts and quick gains may affect the long-term stability and viability of the bank.Cr. however. A large bank requires strong internal systems and procedures with enough checks and balances l l RBI. For OBC. a branch network of 130. entry into south. it has taken an immediate hit of Rs. l l l Banking Briefs 312 (For private circulation only) . if any.

After considering alternative benchmarks like the inflation rate. Rakesh Mohan). it recommended discontinuance of National Savings Certificates (VIII Issue). National Savings Certificates (VIII Issue). a fixed illiquidity premium of 50 basis points over the average benchmark yields was also retained on similar lines as suggested by the Reddy Committee. signal a measure of expected (rather than past) inflation and would facilitate rationalisation of interest rates on various schemes. Furthermore. the Committee recommended that the benchmark could be calculated on a weighted average basis.DR.5 per cent Gol (Tax Free) Savings Bond (2003). in the interest of rationalising existing saving schemes. bank deposit rate. Kisan Vikas Patra year and 0. which submitted its report in May 2004. the Committee decided to continue with Government securities (G-sec) yields as the most suitable benchmark in line with the suggestion made by the Reddy Committee as they are mostly market determined. (ii) rationalising existing saving schemes particularly in respect of tax treatment in the light of the recommendations made by the Expert Committee to Review the System of Administered Interest Rates and Other Related Issues (Chairman: Dr. However. Accordingly. viz. Y. However. and (iii) designing a structure of the proposed DadaDadi (Senior Citizens) Scheme as announced by the Finance Minister on January 9. Bank Rate. with weights of 0. could lead to potential (For private circulation only) l l l l l The Advisory Committee to Advise on the Administered Interest Rates and Rationalisation of Saving Instruments (Chairman: Dr. and yields on Government securities... (i) suggesting appropriate benchmarking and spread rules for administered interest rate. The Committee also recommended the discontinuance of the Kisan Vikas Patra in which tax is not deducted at source and therefore. Deposit Scheme for Retiring Employees and 6.67 to G-sec yields for the previous Banking Briefs 313 .33 to yields for the year before that. The Committee expressed concern over the sharply falling yields over the past few years due to excess liquidity in the financial market and suggested an inter-year movement of interest rate fluctuations within a band of 100 basis points to address the immediate concern of savers. the Committee recommended discontinuance of a few saving instruments offered by the Government where investments are primarily motivated by tax benefits available under Section 88 and Section 10 of the Income Tax Act. 2004.5 per cent Gol (Tax Free) Savings Bond (2003). V. addressed three broad issues within its overall terms of reference. Reddy) in 2001 . in order to impart stability to the benchmark. The Committee was in favour of continuing most of the small saving schemes as these are popular in rural and semi-urban areas due to convenience. habitual preference and ease of transactions as well as more intensive penetration of post offices as compared with the branch network of commercial banks.RAKESH MOHAN COMMITTEE on the Administered Interest Rates and Rationalisation of Saving Instruments Report submitted in May 2004 Suggested appropriate benchmarking and spread rules for administered interest rate rationalises existing saving schemes particularly in respect of tax treatment designs a structure of the proposed Dada-Dadi (Senior Citizens) Scheme recommended discontinuance of a few saving instruments viz. Deposit Scheme for Retiring Employees and 6.

observed that the Public Provident Fund (PPF). The Committee. particularly in rural and semi-urban areas. ipso facto. obtain higher returns. The Committee recommended a structure for the Dada-Dadi Scheme designed to improve the welfare of senior citizens. Similarly. however. other post office schemes catering to the needs of small savers.difficulties from the viewpoint of tax management. An individual ceiling of Rs. were recommended to continue in their present form. 20 lakh was proposed on investment. which also enjoys similar tax benefits. In this respect. especially in the unorganised sector. The tenor could be shorter at three years to ensure liquidity. the Committee also emphasised the need to explore ways and means of making tax deductible at source (TDS) provisions effectively applicable to taxable bonds. The Scheme would be taxable in terms of Section 80L of the Income Tax Act so that senior citizen at the lower end of the tax bracket. The interest rate on the Scheme could be 100 basis points higher than the average benchmark for other small saving instruments. Banking Briefs 314 (For private circulation only) . could be retained in its present form for sometime as it provides income security.

SIDBI (SFCs and SIDCs) and NABARD (state co-operative banks. l The major recommendations of the Group are set out below: l Banks may be encouraged to extend high risk project finance with suitable Government support. Considering the nature of business of development financing. As a market-driven business model of any DFI is inherently unsustainable. the Reserve Bank may divest its ownership in NABARD and NNB. NBFCs and RNBCs should be withdrawn for public financial institutions. DFIs. Public deposit mobilisation by RNBCs should be capped at 16 times the net owned fund (NOF) as an initial measure and finally to the level for other NBFCs in five years. DFIs which have been constituted as companies and are performing developmental roles should be classified as a new category of NBFCs called ‘Development Financial Companies’ (DFCs) and subjected to uniform regulation. The Reserve Bank should continue to regulate the Exim Bank. Concessions in the form of according “approved investment” status to paper issued and a lower risk weight of 20 per cent allowed for exposure by banks. DFCs may be permitted to maintain 9 per cent CRAR as against 15 per cent prescribed for NBFCs in general. As there is a scope for conflict of l The Reserve Bank may ensure that the standards of regulation and/or supervision exercised by NHB (in case of Housing Finance Companies). as recommended by the Narasimham Committee. Regulation of DFIs should ensure that overall systemic stability is not endangered.SADASIVAN WORKING GROUP on Development Financial Institutions Report submitted in May 2004 l l l Banks encouraged to extend high risk project finance DFIs must convert to either a bank or a NBFC DFIs which have been constituted as companies and are performing developmental roles should be classified as a new category of NBFCs called ‘Development Financial Companies’ (DFCs) interest. The rest of the DFIs must convert to either a bank or a NBFC. DFIs which convert into banks could be accorded certain exemptions/relaxations for a period of 3-5 years after conversion. a detailed social cost benefit analysis should identify activities which require development financing. SIDBI and NHB which would continue to function as DFIs. NABARD. This should be accompanied by deregulation in the quantitative restrictions (alongside more stringent quality criteria) on the asset side. district central co-operative banks and RRBs) are broadly at par with those maintained by the Reserve Bank. l l l l l l Banking Briefs 315 (For private circulation only) . as many of them have become financially weak and act without any assurance of Government support.

5 note totally. l l l l l l l l l Banking Briefs 316 (For private circulation only) . A Systems Study of Banking Hall arrangements in the Mumbai Office of the Reserve Bank to be commissioned with the help of a specialised agency to resolve the bottlenecks in the smooth flow of transactions. Authorised bank branches to exhibit prominently a notice that soiled/mutilated currency notes are freely exchanged at the bank branch. and Stringent action to be taken against violation of instructions by banks on exchanging soiled mutilated notes.on Procedures and Performance Audit on Public Services Report submitted in 2004 l l TARAPORE COMMITTEE Transparency in currency management Currency Chest Agreement to be revised to incorporate a provision for monetary penalty for non compliance with the Reserve Bank’s instructions The Reserve Bank Note Refund Rules to be written in easily understandable language l l The major recommendations of the Committee which have been accepted by the Reserve Bank. The Reserve Bank Note Refund Rules to be written in easily understandable language. Citizens’ Charter for Currency Exchange Facilities be made available to customers visiting the Banking Halls of the Reserve Bank officers and bank branches. Transparency in currency management. Early introduction of Rs. Currency Chest Agreement to be revised to incorporate a provision for monetary penalty for non compliance with the Reserve Bank’s instructions. are: l The practice of pasting of mutilated notes at the time of tendering for exchange should be reviewed by the Reserve Bank.10 coin Phasing out of Rs. Suitable measures to separate location/time for services to money changers and other individuals.

within a period of four years with an interim target of 1 2 per cent in two years. Reduction in cost of agricultural credit through enhancing the cost effectiveness of agricultural loans. l Expanding the outreach of banks in rural areas by enlarging retail lending to agriculture. offering hedging mechanisms to the farmers. revolving credit packages. especially in terms of cost of raising funds. greater use of information technology. Vyas) submitted its report in June 2004. Impediments to the flow of credit to disadvantaged borrowers to be mitigated through reduction in cost of borrowing.S. l l l l l The Reserve Bank’s Advisory Committee on Flow of Credit to Agriculture and Related Activities from the Banking System (Chairman: Prof. transaction cost and risk cost. providing legal backing to tenancy to facilitate access to credit. procedural simplifications and modifications m the service area approach. procedural simplifications.within a period of four years The share of small and marginal farmers in agricultural credit to be raised to 40 per cent of disbursements Reduction in cost of agricultural credit through enhancing the cost effectiveness of agricultural loans Non-performing asset (NPA) norms in agricultural credit to be attuned to the cash flow of the farmer. organizational innovations. A road map for public sector and private sector banks to reach a level of direct lending at 13.within the overall limit of 18.0 per cent of total agricultural lending . coinciding with the harvesting/marketing of the crop.5 per cent of net bank credit within the overall limit of 18. capacity building of borrowers.0 per cent of total agricultural lending . Special Agricultural Credit Plan (SACP) to be restricted to direct lending and extended to private sector banks. externalising retailing through corporate dealer networks.VYAS COMMITTEE on Flow of Credit to Agriculture and Related Activities from the Banking System A road map for public sector and private sector banks to reach a level of direct lending at 13.5 per cent of net bank credit . l l l l l Banking Briefs 317 (For private circulation only) . Non-performing asset (NPA) norms in agricultural credit to be attuned to the cash flow of the farmer. coinciding with the harvesting/marketing of the crop. The major recommendations of the Committee are: l A comprehensive review of mandatory lending to agriculture by commercial banks to enlarge direct lending programmes for greater integration of investment credit and production credit. V. involvement of Panchayafi Raj institutions and extension of micro finance. The share of small and marginal farmers in agricultural credit to be raised to 40 per cent of disbursements under the Special Agricultural Credit Plan (SACP) by the end of the Tenth Plan period.

adopting new technologies. l Rating mechanism for designated industrial clusters. l Revival of State Financial Corporations. Medium . In pursuance of these recommendations. the SIDBI. 2 . (For private circulation only) l Definition of the small and medium enterprises (SMEs) sector to be based on turnover.up to Rs. l Lending to SMEs in identified clusters. IBA. l Proactive role by CIBIL to serve as an effective mechanism for exchange of information between banks and financial institutions for curbing growth of nonperforming assets in the SME sector. designed jointly by CRISIL. A special group is formulating a mechanism for debt restructuring for medium enterprises on the lines of the Corporate Debt Restructuring (CDR) scheme.10 cr. and the IBA. SIDBI and SSI Associations. Banks could also contribute to the corpus created by the SIDBI (on risk-sharing basis) or alternatively. 2 crore and up to Rs. 25. l Special dispensation for the North-East region and other backward areas such as adoption of model of mutual credit guarantee to address the problem of collateral. technology bank for SMEs. 10 crore. the Reserve Bank instructed the CIBIL to work out a mechanism.10 crore and up to Rs. Tiny. l Promoting and financing special purpose vehicles (SPVs) by banks in the form of micro credit agencies dedicated to servicing SME clusters. 2 cr. set up their own venture financing instruments. where village council guarantee is available. banks may also contribute to the corpus of the proposed Technology Bank to ensure its commercial viability and play an active role in enhancing the capabilities and credit worthiness of the SME sector. small and medium enterprises could be redefined in turnover as under: SBI has defined SME as one with turnover upto Rs. setting up of dedicated SME development fund. Small : Turnover of above Rs. Coverage of all SSI units without any ceiling (of Rs. 50 crore. Small . proactive role by CIBIL.25 lakh) under the Credit Guarantee Fund Trust for Small Industries (CGTSI) scheme. l Measures to promote corporate-linked SME cluster models by banks and Fls.GANGULY WORKING GROUP On Small and Medium Enterprises Report Submitted in 2004 l l Report submitted in 2004 SME classification to be based on Turnover : Tiny . Such micro credit intermediaries in the form of NBFCs (funded by individual or a group of banks but not permitted to accept public deposits) could credit rate and assess risk and serve as instruments for extending quick credit to SME clusters accredited to them. l Setting up of an independent technology Bank for the SMEs by the SIDBI to facilitate technology transfer and provide services such as project evaluation. risk assessment and mitigation to SMEs Banking Briefs 318 . and Medium : Turnover of above Rs.Rs. 2 crore.Rs. l Setting up of a dedicated national level SME Development Fund by the SIDBI for exclusively undertaking venture and other development financing activities for SMEs.50 cr Major recommendations : measures to promote corporate linked clusters. in consultation with the Reserve Bank.10 . Tiny : Turnover up to Rs.00 crores. Besides the SIDBI. to develop a system of proper credit records to facilitate appropriate pricing of loans to SMEs.

as per the amendments proposed in the preamble to Regional Rural Banks act.CHALAPATHY RAO WORKING GROUP on Regional Rural Banks l l Capital adequacy norms. The number of Directors may not be fixed uniformly for all RRBs as at present. Capital adequacy norms. The area of operation of RRBs need to be extended to cover all districts. In order to strengthen the RRBs to cater to the needs of the rural economy for all kinds of financial services. some sponsor banks may be eased out and some Fis and other strategic managing partners may take over as sponsor institutions. with due adaptation. diversification of their business needs to be encouraged without losing focus on fulfilling the financial needs of the rural poor. Prescribed minimum level of shareholding should be at 51 per cent for sponsor institutions. RRBs may have a minimum of five and a maximum of eleven Board members. needs to be widened. needs to be introduced in RRBs in a phased manner along with RRBspecific amount of equity based on their riskweighted asset ratio. differentiated ownership structures should be allowed. including the Chairman. needs to be introduced in RRBs Prescribed minimum level of shareholding should be at 51 per cent for sponsor institutions. As part of consolidation process. Various IT-based innovations may be adopted by RRBs at different stages of their development for providing competitive customer services in a cost-effective manner. Keeping in view the regional character and distinct socio-economic identity of issues. with due adaptation. The induction of technology in RRBs may be monitored by a national-level Standing Committee that may guide RRBs on various issues arising out of the implementation of computerization plans by various RRBS (For private circulation only) l l l l l l l l l Banking Briefs . The area of operation of RRBs need to be extended to cover all districts. The regulatory framework for RRBs must be on the lines of those for commercial banks with provision for such bank-specific 319 l l l Half-yearly financial audit may be introduced in the RRBs. relaxations as may be necessary for specific time period. l l l The scope of financial services to be provided by RRBs. RRBs may avail of all the services of their sponsor banks / institution or other established and authorized public sector portfolio management service providers based on their own judgement of costs and benefits for professionalisation of the investment function for achieving optional returns on the bank’s resources. RRBs falling in one socio-economic zone may be amalgamated so as to create one or a few RRBs in each State. 1949 within a specific time period. Based on financial health of RRBs. RRBs may also be subjected to the statutory norms of licensing and each RRB should be required to obtain a license from the Reserve Bank under the provisions of the Banking Regulation Act. 1976.

with a view to speeding up the process of project implementation Change Government’s Rules of Business to empower Foreign Investment Implementation Authority (FIIA) to expedite the process of administrative and policy approvals The aggregate FDI target for the Tenth Plan should be set and disaggregated in terms of sectors and for relevant administrative ministries/departments to increase accountability. sale from (For private circulation only) l l l l To suggest policy and governance reforms necessary for attracting private investment. States to enact special investment law. Exit barriers on sale of shares by one foreigner to another foreigner. enactment of Foreign Investment Promotion Law. To suggest changes in institutional apparatus and organisations in Centre and States for attracting FDI flows. removal of exit barriers RECOMMENDATIONS l l l l GENESIS India’s share in FDI inflows among developing countries has been varying between 1 and 2 per cent of GDP. To identify factors which inhibit higher FDI flows and suggest remedial steps. States should enact a special investment law relating to infrastructure to expedite all investments in infrastructure sectors. TERMS OF REFERENCE Remove entry barriers for FDI and also caps on Sectoral FDI. The Department of Industrial Policy and Promotion. Planning Commission.K. The Planning Commission. SINGH COMMITTEE ON FDI Report submitted in 2002 Report submitted in 2002 Purpose: To attract Foreign Direct Investment to India Some Key Recommendations: Removal of entry barriers for FDI.9% in 2001.K. Andhra Pradesh Infrastructure Act could be used as a reference for the purpose.Singh.N. To examine policy reforms towards mergers and acquisitions for attracting FDI. Our FDI is currently around US $ 4 billion while China has more than US$ 40 billion. To examine the factors responsible for the success of other countries like China in attracting FDI and make suitable recommendations based on the experience of other successful countries l l l l l l l Banking Briefs 320 . constituted a Steering Committee on Foreign Direct Investment (FDI). in August 2001. Among developing countries this is the lowest in the world. reduction/elimination of sectoral caps. as against the Directorate of Enforcement through FEMA. to suggest measured for attracting FDI. should administer the law. both domestic and foreign. FDI as a percentage of our country’s total Gross GDP was only 0. which had 12 members and was headed by N. Consider the enactment of a Foreign Investment Promotion Law for promotion of FDI. Member. sectoral FDI targets to be set. Empower the Foreign Investment Promotion Board (FIPB) to give initial Central level registrations and approvals wherever possible.

The special economic zones (SPZs) should be developed as the most competitive destination for export related FDI by simplifying applicable rules. urban infrastructure and real estate sectors and decontrol/delicensing should be expedited to promote private domestic and foreign investment l PROPOSED CHANGES IN SECTORAL LIMITS ON FDI SECTOR Manufacturing Petroleum Refining-PSEs Oil Marketing Mining & Quarying Coal and Lignite Infrastructure Services Civil Aviation Basic & Mobile Telephone Pipepline: Oil and Gas Financial Services Banking (Pvt) Insurance Investing Companies Currently Banned Sectors Plantations Real Estate.Complexes Individual house building/shed0% 0% 0% 49% 100% 100% FIPB Automatic FIPB 49% 26% 49% 100% 49% 100% Automatic Automatic FIPB No change No change Automatic 40% 49% 51% 49% 74% 100% FIPB FIPB FIPB Automatic No change Automatic 50% 100% Automatic Automatic 26% 74% 100% 100% FIPB FIPB Automatic Automatic EQUITY LIMITS Present Proposed ENTRY ROUTE Present Proposed Banking Briefs 321 (For private circulation only) . and rules regarding minimum sale price in the case of unlisted companies should be removed. rule regarding premium on publicly listed share price cannot exceed 25 per cent.non-resident to resident. The Foreign Investment Promotion Council (FIPC) should be reformed to implement this strategy. l l The strategy for attracting FDI should not be one of scattergun but of getting specific companies in specific sectors. laws and administrative procedures and reducing red tape Domestic policy reforms in the power.

Internal Check and Internal Control : There must be a system of internal check and internal control in the system management and reporting. appropriate incentive system. The Terms of Reference : (a) To define financial fraud and lay down procedural law to deal with financial fraud including the need for a special enactment in this regard. prepare a Best Practice Code (BPC) for its officers and staff to provide detailed rule based procedural system in customer related matters and application of judging power. (b) To examine the process of investigation of bank frauds and prosecution of persons involved therein and suggest measures for improvement. liability of audit and accounting profession. Internal check and control.MITRA COMMITTEE (On Legal Aspects of Bank Frauds) Report submitted in 2001 l l Report submitted in 2001 Purpose: To define financial fraud. Vice Chancellor. Banking Briefs 322 . data on exercise of discretionary power. System of internalization of BPC. 3. and 2. Development of Best Practice Code : Each bank and financial institution and intermediary must. In case of exercise of judgment power (discretionary power). National Law University. system of credit registration and credit sharing. Recommendations : 1. 4. suggest measures for dealing with them. System of internalization of BPC : There has to be adequate in-house trainingretraining system for internalizing the BPC and all directives of the Institution and the Regulator. an explanation should be needed about the circumstances (For private circulation only) l BACKGROUND The Board for Financial Supervision (BFS) of the Reserve Bank of India constituted a committee on Legal Aspects of Bank Frauds in August 2000 under the Chairmanship of Dr. and responsibility of RBI in frauds. N. Legal Compliance Audit. (d) To examine the need for special provisions for frauds perpetrated by staff of public sector banks. L. examine the process of investigation of bank frauds. Mitra. Legal Compliance Certificate: A legal compliance certificate needs to be mandated in all transactions exceeding a value limit. within the time-frame indicated by the regulator. Jodhpur. Legal Compliance Certificate. and the role of RBI with regard to frauds reported by banks Key recommendations: Development of Best Practices Code (BPC). (e) To examine the role of Reserve Bank of India with regard to frauds reported by banks. (c) To examine and suggest measures to operationalise the recommendations of the Narasimham and Andhyarujina Committees relating to legal aspects of bank frauds.

8. find anything susceptible to be fraud or fraudulent activity or use of excess power. 9. 6. Incentive and promotion system in an organization may have some correlation with the data of exercise of judgmental power and the rationality and appropriateness of such decision. he should refer the matter to the Regulator. Data building on the exercise of discretionary power and monitoring the same : Discretionary power is the judgmental power that is exercised in circumstances only when it is essentially needed and there is no other method left. every institution should build up data of its management and staff exercising discretionary power recording all the reasons for such exercise and the consequences. System of credit registration and data information sharing : Legal support to quality improvement of credit system. Such information sharing system among the constituent institutions shall also simplify the evidential process and enforcement. 10. The response of the RBI to frauds of different values in different banks should take into account the whole picture.requiring the exercise of discretionary power and the manner in which the same is exercised with a comment as to whether all due diligence care been taken or not. The Committee is of the view that the reporting system for frauds needs to be rationalized so that there is no duplication of efforts and that the reporting is done only in respect of information necessary for the Reserve Bank of India in exercising its regulatory/supervisory responsibilities. A very close monitoring shall reveal how people use the power and with what result. Legal Compliance Audit : Every institution should have legal compliance and due diligence audit every year . 7. The record of registration of the credit data would in itself improve the quality of information and reduce the chances of financial fraud.Mitra Committee for implementation. priority determination and enforcement is poor.L. Liability of the accounting and auditing profession : If an accounting professional.N. 5.and submission of the report to the regulator and to the shareholders. Reserve Bank of India has accepted many of the recommendations of Dr. Responsibility of Reserve Bank of India in Frauds reported by banks: The Committee felt that the present system for monitoring fraud and its investigation is burdened by too many layers imposing large regulatory costs on the banks. whether in course of internal or external audit. Banking Briefs 323 (For private circulation only) . It is not wild and fact-divorced speculative power or an arbitrary power. As such. Further more. Any failure should be considered as professional incompetence and be made liable. A review of such monitoring could be made at the time of the periodical inspections of banks. individual monitoring of frauds could be left to the banks themselves. or smell any foul in any transaction. Appropriate incentive system : Use of discretionary power must be result oriented either positively or negatively.

6. Kumar Mangalam Birla (a chartered accountant himself). Made 25 recommendations of which 19 are mandatory. (For private circulation only) On May 7. 2000 l l l l Report submitted in Mar 2000. The finance director and head of internal audit and when required. The Audit Committee should meet at least thrice a year. The chairman of the Audit Committee should be present at the Annual General Meeting to answer shareholderqueries. The Audit Committee should invite such of the executives. and there should be a minimum of two independent directors. 2. The listed companies are obliged to comply with these on account of the contractual obligation arising out of the listing agreement with stock exchanges. and to secure attendance of outsiders if necessary. Dealt with Corporate Governance aimed to protect investor interests. The board of a company should set up a qualified and an independent Audit Committee. The board of a company should have an optimum combination of executive and nonexecutive directors with not less than 50% of the board comprising of non-executive directors. chaired by Mr. setting up of audit committee. all being non-executive directors. The chairman of the Audit Committee should be an independent director. The Audit Committee should have minimum three members. mainly with a view to protecting investors’ interests.KUMAR MANGALAM BIRLA COMMITTEE (On corporate governance) Report submitted in March. to obtain outside legal or professional advice. 5. 4. Banking Briefs 324 . The company secretary should act as the secretary to the Committee. a representative of the external auditor should be present as invitees for the meeting of the Audit Committee. whichever is higher. 7. and with at least one director having financial and accounting knowledge. regular meeting of board and redressal of shareholders’ complaints. 1999 SEBI constituted an 18-member committee. to seek information from any employee. 19 of them ‘mandatory’ in the sense that these were enforceable and the rest non-mandatory. but on occasions it may meet without the presence of any executives of the company. Mandatory Recommendations: 1. The recommendations of the Committee are applicable to all the listed companies. The Audit Committee should have powers to investigate any activity within its terms of reference. with the majority being independent. on Corporate Governance. Some recommendations: Board to have atleast 50% non-executive directors. The quorum should be either two members or one-third of the members of the Audit Committee. The Committee made 25 recommendations. 3. as it considers appropriate to be present in the meetings of the committee.

A director should not be a member in more than ten committees or act as the chairman of more than five committees across all companies in which he is a director. 16. The Board of Directors should decide the remuneration of the non-executive directors. 14. To expedite the process of share transfers the board of the company should delegate the power of share transfer to an officer. 10. segment-wise or productwise performance. The company should arrange to obtain a certificate from the auditors of the company regarding compliance of mandatory recommendations and annexe the certificate with the directors’ report. resume of the director. The Board meetings should be held at least four times a year. the company’s financial and risk management policies etc. The management must make disclosures to the Board relating to all material. his expertise and the names of companies in which the person also holds directorship and the membership of committees of the Board. Non-executive Chairman should be entitled to maintain a Chairman’s office at the company’s expense and also allowed reimbursement of the expenses incurred in performance of his duties. 12. This is done to ensure that the members of the Board give due importance and commitment of the meetings of the Board and its committees. or a committee or to the registrar and share transfer agents. the Remuneration Committee should have atleast 3 directors.8. risks and concerns. 19. opportunities and threats. internal control systems and their adequacy and material developments in human resources/industrial relations front. As part of the directors’ report. 18. The Board should set up a Remuneration Committee to determine the company’s policy on specific remuneration packages for Executive Directors. (For private circulation only) 9. 3. nonreceipt of balance sheet. who should attend to share transfer formalities at least once in a fortnight. 17. outlook. 13. compliance with Accounting Standards. Full disclosure should be made to the shareholders regarding the remuneration package of all the Directors. This report should include discussion on matters such as industry structure and developments. all of whom should be non-executive directors. Banking Briefs 325 . financial and commercial transactions. In order to avoid conflicts. 15. reviewing any change in accounting policies and practices. dividend etc. the adequacy of internal control systems. which is sent annually to all the shareholders of the company. compliance with Stock Exchange and legal requirements concerning financial statements. The same certificate should be sent to the stock exchange along with the annual returns filed by the company. where they have personal interest. In case of the appointment of a new director or reappointment of a director. a Managing Discussion and Analysis report should form part of the annual report to the shareholders. There should be a separate section on Corporate Governance in the annual reports of the companies with a detailed compliance report. 11. Non-Mandatory Recommendations 1. The Audit Committee should discharge various roles such as. A Board committee should be formed to look into the redressal of shareholders’ complaints like transfer of shares. the shareholders must be provided with a brief 2.

The Committee felt that some of the recommendations are absolutely essential for the framework of Corporate Governance and virtually form its code. 5. Half-yearly declaration of financial performance including summary of the significant events in the last six months should be sent to each shareholder. The Chairman of the Remuneration Committee should be present at the Annual General Meeting. Banking Briefs 326 (For private circulation only) .4. to answer shareholder queries. while others could be considered as desirable and hence settled for two classes of recommendations. All the members of the Remuneration Committee should be present at the meeting of the Remuneration Committee. SEBI has given effect to the Kumar Mangalam Committee’s recommendations by a direction to all the Stock Exchanges to amend their listing agreement with various companies in accordance with the ‘mandatory’ part of the recommendations. 6.

For both inter-bank and intra-bank applications. 2002. Each bank should chalk out a time-bound programme for the purpose. setting up of certification Agency (CA). credit and Smart cards based operations. The technology should be allowed to evolve into standard-based solutions for multivendor heterogeneous environment working co-operatively and collectively for EFT including the debit. 5. Data Warehousing. 3. 4. 2.(On Technology Upgradation in the Banking Sector) Report Submitted in 1999 Report submitted in 1999. l The RBI and IBA should pursue with the Department of Telecommunications (DoT)/ other competent Authority to permit encryption of data files/messages transmitted through communication channels for facilitating easier access to remotely located branches to the INFINET network. Legal Framework for Electronic Banking l The Reserve Bank may promote amendment to the Reserve Bank of India Act. A task force may be set up by IBA to explore feasible methodology. 1934 and assume the regulatory and supervisory powers on payment and settlement systems. VASUDEVAN COMMITTEE l l l Some of the major recommendations of the Committee are as under: 1. computerization of government transactions and education of staff on IT. the RBI may promote a new legislation on Electronic Funds Transfer System to facilitate multiple payment system. and synchronising them with the computerisation of bank branches dealing with Government transactions. to be set up for banks and financial institutions. Dealt with technology upgradation in Banking Sector. 6. and data mining at individual bank level is essential. it is necessary to have an application architecture. Computerisation of Government transactions l There is a need to computerise all branches of banks dealing with Government transactions. Standardisation and Security l There should be an appropriate institutional arrangement for key management and authentication by way of a certification agency. l Education of staff on IT should be given due importance. Simultaneously. Other Related Issues l Re-engineering: Banks may choose the branches and areas of operation where they have already introduced a certain degree of automation and computerisation and review the systems and procedures in these branches/areas to adapt them to the technology that is newly introduced. 2001 and DDO/ Treasury offices before March 31. Banks should adopt widely used standard of cryptography procedures to prevent data tamper during transmission. l The meetings of Bank’s Chief’s should be sufficiently frequent to facilitate sharing of experience on Technology Implementation. All PAOs/Circle offices should be computerised not later than March 31. Data Mining and Management Information System l A robust MIS founded on data warehousing Banking Briefs 327 (For private circulation only) . Some recommendations: Effective usage of INFINET. Communication infrastructure and usage of INFINET l The approach for improving the effectiveness of VSAT network aims at enhancing the transponder capacity to the extent feasible and the number of outroutes.

the Panel has suggested the option of wage reduction/freeze for 5 years. former Chairman of SBI to find out a solution for weak banks. With regard to the business development. viz. The Panel has opposed merger or closure of weak banks and noted that it should be exercised as a last option.S. reduction in staff strength in weak banks is unavoidable. Apart from three weak banks. The Panel has suggested for setting up of an independent agency .29%). with the risk of turning into weak banks. Punjab & Sind Bank. mergers and acquisitions and recommended conditional recapitalisation and restructuring. upgradation of technology and creation of Asset Reconstruction Fund for NPAs. Verma. The Group has developed a four-dimensional comprehensive restructuring programme covering operational. Corporation Bank (60. the RBI in consultation with the Government constituted the Panel headed by Shri M. Indian Bank. Central Bank of India. introduction of VRS and wage freeze. financial and systemic restructuring. Union Bank of India and Vijaya Bank) showing incipient signs of distress. The Panel observed that the percentage of total staff cost to the operating cost for UCO (81.a Financial restructuring Authority (FRA) . improve their performance. organisational. Therefore. This is a welcome effort and will enable these banks to Banking Briefs 328 (For private circulation only) .increase income and reduce costs.94%). VERMA COMMITTEE l l l The Committee which submitted its report in October. up-gradation of technology. the entire package recommended by the Panel for the weak banks is two pronged . All the three weak banks will have to resort to a VRS covering at least 25 per cent of the staff strength. In case VRS does not yield the desired results. The Panel has identified six other banks (Allahabad Bank. 1999 Report submitted in 1999. creation of ARF/AMC for NPAs and rationalisation of branches. the Working Group has placed the rest of the 24 nationalised banks into four categories. introduction of VRS or wage freeze. In a nutshell.. The entire exercise is expected to cost the exchequer Rs.(Working Group on Restructuring Weak Public Sector Banks) Report Submitted in October. the Panel had observed that the weak banks had left the traditional areas of business in which they had experience and moved into areas for which they neither had skills nor the experience. 1999 has ruled out privatisation. without losing time.57%) is high compared to similar other PSBs for instance. Indian Overseas Bank. Earlier this year. United Bank (82. The major recommendations of the Panel include reduction in staff strength by 25 per cent to reduce costs. Dealt with restructuring of weak coordinate and monitor the restructuring of three weak banks. UCO Bank and United Bank of India.500 crore over three years. Some recommendations: Reduction of staff strengh by 25%.5.

which would help in setting up an efficient recovery system as well. Banks should also look at the non-farm sector and design specific products for this sector. whereby it is possible to initiate collections before the due date. 1998 l l l Report submitted in 1998. Following is a glimpse of what the committee has suggested: l Recovery of dues should be brought under a system. l l l Banking Briefs 329 (For private circulation only) . l The R. Doing away with the requirements of scales of finance altogether. financing of tenant farmers issues regarding margins and security as these should be left to the discretion of the banks.RV GUPTA COMMITTEE (On New Norms For Rural Credit) Report Submitted in April. Tenant farmers should be brought under the purview of the banking sector. Doing away with the system of the No Dues Certificate (NDC) since banks are now in a better position to determine the creditworthiness of the borrower. Incentives for early repayment would also help speed up recovery. State governments should appoint revenue officers who are dedicated to recovery of bank dues. Gupta Committee on agricultural credit has sought to improve the functioning of rural credit through some operational changes. Banks should strictly follow RBI’s instructions on compounding of interest. There should be a review of land tenancy rights. which would help in setting up an efficient recovery system as well. doing away with cash-kind system. The cash-kind system. SHGs etc.). removal of scale of finance and stamp duty. Incentives for early repayment would also help speed up recovery. RBI should prescribe formats for banks to enhance credit to the informal sector (NGOs. State governments should appoint revenue officers who are dedicated to recovery of bank dues. which has partial disbursals in cash to the farmer and the rest to the supplier of goods/equipment has found much disfavour with farmer and hence it should be done away with completely. non-insistence of NOC. Reserve Bank of India should keep out of Borrowers should be allowed to decide what kind of insurance they need for their assets.V. Doing away with stamp duty on agricultural loans as it inhibits funds flow to that sector. Dealt with rural credit system Some recommendations: Establishment of proper recovery system. whereby it is possible to initiate collections before the due date. l l l l l l Following is a glimpse of what the committee has suggested: l l l Recovery of dues should be brought under a system.

Doing away with the requirements of scales of finance altogether. Doing away with stamp duty on agricultural loans as it inhibits funds flow to that sector.The cash-kind system. RBI should prescribe formats for banks to enhance credit to the informal sector (NGOs. Banks should strictly follow RBI’s instructions on compounding of interest. Reserve Bank of India should keep out of issues regarding margins and security as these should be left to the discretion of the banks.). l l l l l l l l Banking Briefs 330 (For private circulation only) . There should be a review of land tenancy rights. Borrowers should be allowed to decide what kind of insurance they need for their assets. which has partial disbursals in cash to the farmer and the rest to the supplier of goods/equipment has found much disfavour with farmer and hence it should be done away with completely. SHGs etc. l Doing away with the system of the No Dues Certificate (NDC) since banks are now in a better position to determine the creditworthiness of the borrower. Banks should also look at the non-farm sector and design specific products for this sector. Tenant farmers should be brought under the purview of the banking sector.

Thus the need was felt to examine the problem issues and review some of the recommendations made earlier to see their relevance in the changed environment. CRAR be increased from the existing 8 per cent to 10 per cent. should have a 5 per cent weight for market risk. Asset quality. be treated as NPAs. l l l l l Financial sector reform process in India. transferring NPA to ARC as a one time measure. a Committee was set up under the chairmanship of Shri M. The following are the important recommendations of the Committee: Strengthening Capital Adequacy l Risk weight on a government guaranteed advance should be the same as for other advances. bringing down government holding in nationalized banks. policy and institutional development. Systems and methods in Banks and structural issues Some recommendations: Marking government security to market.NARASIMHAM COMMITTEE . increase in CAR. An asset be classified as doubtful if it is in the substandard category for 18 months in the first instance and eventually for 12 months. Foreign exchange open credit limit risks should be integrated into the calculation of risk weighted assets and should carry a 100 per cent risk weight. and loss if it has been identified but not written off. especially with reference to the recommendations made by CFS. It implies taking into account the larger exposure of banks to off-balance sheet risks.1998) Report submitted in 1998 To review the progress in Banking sector reforms Major areas covered: Strengthening capital adequacy. Prudential norms & disclosure requirements. advances covered by Government guarantees. One approach can be that. all loan assets (For private circulation only) l l l Banking Briefs 331 . which have turned sticky. 1998. an intermediate minimum target of 9 per cent be achieved by 2000 and the ratio of 10 per cent by 2002. l l l Asset Quality l Capital adequacy requirements should take into account market risks in addition to the credit risk. For evaluating the quality of assets portfolio. In the next three years the entire portfolio of government secu­rities should be marked to market and the schedule for the same announced at the earliest. There have been major changes in the macroeconomic environment.II (On Banking Sector Reforms . as a part of the broader programme of structural economic reforms. government and other approved securities which are now subject to a zero risk weight. For banks with a high NPA portfolio. This should be made prospective from the time the new prescription is put in place. two alternative approaches could be adopted. provision for standard asset. was initiated in 1992. The report of the Committee was submitted on April 24. Accordingly. PSBs which are in a position to access the capital market to be encouraged. reduction in transit time from substandard to doubtful. Narasimham mainly to review the progress in banking sector reforms over the past six years.

small industry and agriculture. 2 lakhs should be deregulated for scheduled commercial banks as has been done in the case of Regional Rural Banks and cooperative credit institutions. Small local banks should be confined to states or cluster of districts in order to serve local trade. l l Banks and FIs should have a system of recruiting skilled manpower from the open market. An alternative approach could be to enable the banks in difficul­ty to issue bonds which could form part of Tier II capital. Public sector banks should be given flexibility to determine managerial remuneration levels taking into account market trends. eschewing high cost funds/borrowings etc. Merger should not be seen as a means of bailing out weak banks. the DFIs should. GIC and Provident Funds. Mergers to Public Sector Banks should emanate from the management of the banks. which should be reduced to 90 days in a phased manner by 2002. As an incentive to make specific provisions. LIC. There may be a need to redefine the scope of external vigilance and investigation agencies with regard to banking business. l l Banking Briefs 332 . ‘Weak Banks’ may be nurtured into healthy units by slowing down on expansion. Banks may evolve a filtering mechanism by stipulating in-house prudential limits beyond which exposures on single/group borrowers are taken keeping in view their risk profile as revealed through credit rating and other relevant factors. There is need to develop information and control system in sever­al areas like better tracking of spreads. and Disclosure l Prudential Norms Requirements l In India. The minimum share of holding by Government/Reserve Bank in the equity of the nationalised banks and the SBI should be brought down to 33%. These assets could be transferred to an Assets Reconstruction Company (ARC) which would issue NPA Swap Bonds. Public sector banks should speed up computerisation and focus on relationship banking. Mergers between strong banks/FIs would make for greater economic and commercial sense. Introduction of a general provision of 1 per cent on standard assets in a phased manner be considered by RBI. (For private circulation only) l l l Systems and Methods in Banks l l There should be an independent loan review mechanism especially for large borrowal accounts and systems to identify potential the doubtful and loss categories. should be identified and their realisable value determined. they may be made tax deductible. income stops accruing when interest or instalment of principal is not paid within 180 days. backed by government guarantee to make these instruments eligible for SLR investment by banks. over a period of time convert themselves to banks. accurate and timely information for strate­gic decision to identify and promote profitable products and customers. costs and NPAs for higher profitability. Structural Issues l With the conversion of activities between banks and DFIs. l l l The interest subsidy element in credit for the priority sector should be totally eliminated and interest rate on loans under Rs.

Non-bank parties be provided free access to bill rediscounts. and not get involved in credit-decision making and other aspects of day-to-day management. only exception to be made is primary dealers. especially for appointment of nonofficial directors. Functions of banks’ boards and management need to be reviewed so that the boards remain responsible for enhancing shareholder value through formulation of corporate strategy. The Committee made a strong pitch for professionalising and depoliticising of bank boards. Treasury Bills. Inter-bank call and notice money market and inter-bank term money market should be strictly restricted to banks. l l l l Banking Briefs 333 (For private circulation only) . CPs. RBI should totally withdraw from the primary market in 91 days Treasury Bills.l There is a need for a reform of the deposit insurance scheme based on CAMELs ratings awarded by RBI to banks. MMMF. CDs.

phasing out SLR for banks. Supervisory framework be risk-based with focus on macro-management.(On Harmonising the Role and Operations of DFIs and Banks) Report Submitted in April. reduction in CRR. Definition of priority sector should be modified to reflect the growing importance of infrastructure finance. l l State Level Institutions (SLIs) l Statutory obligations l CRR should be confined to cash and cashlike instruments. thorough revamp of the 1993 Act on Recovery of Debts from Banks and Development Financial Institutions. Structure and Operations l Enabling Indian financial institutions and commercial banks to compete in a deregulated and increasingly global market place. progressively within a time-bound frame to international levels. There is a need to develop an alternative mechanism for financing specific sectors which require concessional funds which can be provided by specifically targeted subsidies rather than via statutory obligation on the entire banking system. l l l Legal Framework and Supervisory Practices l Undertake legal reforms with focus on debt recovery area of Banks and FIs. However. a progressive move towards universal banking. the need for SLR has declined. SIDCs and SSIDCs in each state into a single entity. 1998 l l KHAN COMMITTEE Report submitted in 1998. infra­structure lending may not be included in the definition of “net bank credit” used in computing priority sector obligations. Banking Briefs 334 (For private circulation only) . DFIs them­selves to continue to play their existing role. Management and shareholders of banks and DFIs should be permitted to explore and enter into gainful mergers. restructuring of state level institutions. it should be brought down Eventual merger of SFCs. SLR may therefore be phased out in line with international practice. Pending a full banking licence. Dealt with harmonizing the role and operations of Developmental Financial Institutions (DFIs) and banks. Such mergers can be between banks or between banks and Developmental Financial Institutions. and overall ceiling in deposits in DFIs to be 100% of Net owned funds (NOF). DFI’s be permitted to have a banking subsidiary (with holdings upto 100 per cent). To facilitate sound credit planning and efficient disbursal of loans. l l Role. l Given the stringent asset classification and provisioning norms and Government borrowing at market determined rates. priority sector obligation should be linked to the net bank credit at the end of the previous financial year. Some recommendations: DFIs to have a banking subsidiary. supported by an enabling regulatory framework.

Ownership of SIDBI to be transferred to RBI/ Govt. Banking Briefs 335 (For private circulation only) . removal of the following restrictions/stipulations be considered:i) Prior approval for bond issues by DFIs with either maturity of less than 5 years or maturity of 5 years and above but with interest rate exceeding 200 basis points over the GOI securities of equal residual maturity. Operations and Regulatory Framework l In view of the large amount of funding required. Transfer of present share holdings of IDBI in SLIs to SIDBI. CDs. iii) Maturity ceiling of five years on deposits from the public and the capping of interest rate on deposits of DFIs at interest rate offered by SBI for similar maturities. on the same lines as NABARD. iv) Minimum size of deposits to be accepted by DFIs. term deposits and intercorporate deposits at 100 per cent of net owned funds of DFIs.l Strong SFCs to go public with state government holdings gradually brought down to below 50 per cent. ii) Overall ceiling for DFIs’ mobilisation of resources by way of term money bonds. both DFIs and Banks have a role in working capital finance and long-term fund­ing with different levels of emphasis on each segment. l l Harmonising the Role. Since the basic functional differences will continue (at least for the present).

The recommendations of the Task Force are as under: 1. To promote healthy growth of NBFCs and safeguarding depositors’ interest. 3. Limit of public deposits l l The Finance Minister had announced in July 1998 the setting up of a Task Force for reviewing the regulatory framework for non-banking finance companies.5 times NOF or Rs. it may not be necessary to link the quantum of deposit to the rating perse provided the rating is above the minimum. Norms for exposures to connected companies to be tightened The norms for exposures to connected companies need to be tightened to prevent deployment of public deposits in high risk and speculative avenues. the proposed ceiling could be as under: Type of Company l No access to public deposits. easing flow of credit from banks to NBFCs. providing an enhanced degree of comfort to the depositors in NBFCs. Ceilings on exposure to real Estate and Unquoted Investment The RBI should prescribe ceilings for exposure to the real estate sector and also investment in capital markets specially unquoted shares. have been guided by the twin considerations of creating an environment for healthy growth of sound NBFCs. at the same time. (For private circulation only) l l Banking Briefs . enhancement of minimum capital requirement. The information should be prominently disclosed in all application forms for public deposits and in all advertisements. However. In summary. Some recommendations: Graded ceiling in deposits from public for different types of companies. The recommendations of the Task Force.5 times the NOF l l 2.(New Regulatory Frame Work for NBFCs) Report Submitted in October. Credit Rating and enhanced Capital to Risk Assets Ratio It is appropriate for the Reserve Bank of India to stipulate a higher ceiling for public deposit for those companies which have obtained credit rating for their instruments. Loan/Investment companies (higher 336 l 4.10 crore whichever is lower. ceiling on exposure to real estate and capital market. 4 times the NOF (Net Owned Fund) 1. Disclosure in Application Form and Advertisements for Public Deposits RBI should also stipulate that the NBFCs seeking deposits should disclose their credit rating or that the quantum of public deposits is less than 1. 1998 VASUDEV COMMITTEE l l l Report submitted in 1998.5 times or Rs. NBFC with NOF less than Rs. submitted in October 1998. while. Equipment Leasing/Hire Purchase (EL/HP) company (higher without credit rating with CRAR of 15 per cent). CRAR of 15 per cent) with investment grade credit rating or above. 1.10 crore and as such they are exempted from obtaining a credit rating.25 lakhs. EL/HP company with investment Grade credit rating or above.

25 lakhs beyond January 2000 to be made conditional The three year period for attaining minimum NOF of Rs. 7. seminars. sustained depositors’ awareness campaign. Any extension granted by the RBI should be made conditional upon the concerned NBFC having taken adequate steps to increase NOF in the initial three year period and satisfactory arrangements to attain the minimum capital requirement as may be applicable at that point of time within the extended period. 10. 8. 6. etc. Publicity campaigns should be through print and electronic media. Associations of NBFCs and various investors’ forums such as Consumers’ Education Research Centre. should also be actively involved in these campaigns.5. The Committee has recommended for setting up of a ‘Depositors’ Grievance Redressal Authority’ with specified territorial jurisdiction. conferences. Annual Inspection of NBFC’s There should be an annual inspection of the NBFCs at least in the transitional period. Investors’ Grievances Forum. 9. Depositors’ Associations. Reserve Bank to conduct publicity campaign for depositors’ awareness There is a need for the RBI to continue to take more intensive measures for a Banking Briefs 337 (For private circulation only) .2 crores).25 lakhs (for new NBFCs incorporated after 20-04-1999 it has been raised to Rs. The Committee had unequivocally put its views against extending deposit insurance to NBFC’s. Off-site Surveillance Mechanism The off-site surveillance mechanism should pick up any significant spurt in NPA’s and any bunching of repayment of deposits. etc. 2000. It is of the view that introduction of deposit insurance carries a moral hazard and the consequent negative impact on the growth of a healthy NBFC sector. It emphasises that global experience also does not favour the introduction of deposit insurance for the non-banking sector.25 lakhs would expire in January. Enhancement of minimum capital requirement from present level of Rs. Easing flow of credit from banks to NBFCs The RBI should consider measures for easing the flow of credit from banks to NBFCs and then consider prescribing a suitable ratio as between secured and unsecured deposits for NBFCs. Extension of time for attaining minimum NOF of Rs.

placing persons with credit management skills in branches having sizeable NPAs. steps to revive capital markets.PANNIR SELVAM COMMITTEE REPORT (On NPAs of Public Sector Banks) Report Submitted in 1998 l l l Report submitted in 1998. upgrading credit appraisal/credit monitoring system. separate bench in civil courts for dealing with recovery cases of banks/FIs with time bound disposal and compulsory arbitration by senior retired judge or ex-ED/CMD of banks/FIs before reference to High Court/DRT. paripassu charge for banks and FIs. setting up of ARF. according to the Committee. Thus. Incentive schemes for staff achieving exceptional results in recovery. the Committee has recommended improving functioning of BIFR by providing more benches and adequate infrastructure. incentives for staff for recovery. banks need to strengthen credit monitoring by setting up special recovery cells. and obtaining additional security to strengthen the loan asset and reduce the provision requirements. banks have to upgrade their system/techniques of credit appraisal. In contrast. Some recommendations: legislative changes. The Committee has suggested that on their part. legislation (including by State Governments) to accord priority for recovery of banks’ dues. Debt Recovery Tribunals and the judicial system. unless the legal system in the country is thoroughly overhauled/reformed. putting in place a suitable recovery and compromise policy for all banks. exploring possibilities to quickly get the account adjusted by compromise/write off where provisions have been made for doubtful and loss assets. and closely monitor their standard assets to prevent their slippage into NPA category. To suggest measures for reduction in NPAs and effective recovery of banks’ dues. Therefore. upgrading information technology in banks to facilitate better credit administration. improve credit monitoring including exchange of information about borrowers. (For private circulation only) The Pannir Selvam Committee has pointed out that the main reason for growth of NPA’s and slump in recoveries in banks in India is the antiquated legal system and the laws prevalent in the country. To streamline the BIFR. Measures that need to be initiated by the Government/RBI/IBA include legislative changes to facilitate mergers and acquisitions. and production of No Objection Certificate from financing agency before renewal of permit or transfer of vehicle in the case of road transport operators. relief in interest to borrowers who are prompt in repayment of loans. Banks as second charge holder are left with nothing after disposal of assets to adjust dues of FI’s. constitution of special recovery teams. banks abroad have been able to contain their NPAs because of quick disposal of litigation by their judicial systems and stringent laws facilitating expeditious disposal of assets to realise their dues. adopt improved credit risk rating systems. interest relief to promptly paying borrowers. strengthening DRTs and setting up tribunals in states where they are yet to be set up. setting up Asset Reconstruction Fund as a one time measure. In order to reduce existing NPAs. The Committee has suggested several measures for effective recovery of bank dues and reduction of NPAs. details of assets of defaulting borrowers to be provided to Income Tax authorities by banks. Other measures recommended by the Committee include periodic meetings with borrowers. it would be increasingly difficult to tackle the NPA problem. statutory powers under Section 29 of SFC Act for taking over assets of medium scale industries and SSIs to be extended to banks. the Committee has suggested pari-passu charge of banks with FI’s on the fixed assets and reciprocal charge of FI’s over current assets financed by banks. standard assets for their upgradation. and Arbitration Act 1996 to be made applicable to banks are some other suggestions. and intensive follow up of sub- Banking Briefs 338 .

e. l to get the filled in application forms submitted by the borrowers examined by a bank official to facilitate quick disposal of applications. l extend this facility to all SSI units requiring loans up to Rs. opening of more specialised branches or converting existing branches into special branches for SSIs and making customer grievance machinery more effective. J&K. l normally accept.2 lacs. vii) giving statutory powers to state level interinstitutional Committee (SLIC). vi) change in the definition of sick SSI units. iii) sorting out issues relating to the mortgage of land.25. The Reserve Bank of India has accepted 35 out of 126 recommendations of the Committee for immediate implementation by banks. The Reserve Bank has asked banks to: l introduce tri-lingual loan application forms.S. in case of new units. The Reserve Bank has also favoured Kapur Committee’s recommendations. the projections accepted by the term lending institutions. l out of the total funds allocated by banks to SSI sector give at least 40 per cent to the units with investment in plant and machinery up to Rs. iv) allowing access to low cost funds to SIDBI for refinancing. ii) removal of procedural difficulties to facilitate SSI advances. l extend necessary help to applicants in filling up the application forms.25 lakhs. l adopt committee approach for sanction of applications and to dispose off loan applications in a time bound manner. in Hindi. for the first year of operation unless there are specific reasons for not doing so. time-bound disposal of loan applications. MP and NE States.. opening of specialized branches and attention to backward areas. applications for amounts upto Rs. viii) enhancing of SIDBI’s role and status to match that of NABARD. i. l enhance the limit of composite loans from Rs. Banking Briefs 339 (For private circulation only) . i.e.K. 35 were immediately implemented Some recommendations: Introduction of tri-lingual forms. such as.5 lakhs so that the entire requirement of such units is met by single documentation and security and charge creation process. l The overall interest payable by an SSI should remain within the existing parameters fixed by the Reserve Bank.25.000 within 8 to 9 weeks. 1998 l l l l Report submitted in 1998 To suggest measures to improve credit delivery to SSIs Out of 126 recommendations. English and local language.. KAPUR COMMITTEE (on Credit to Small Scale Industries) Report Submitted in June. v) non-obtention of collaterals for loans upto Rs. l pay more attention to the backward states such as Bihar. l Its major recommendations are as follows: i) special treatment to smaller among small industries.000 within a fortnight and those for amounts above Rs.5 lakh irrespective of their location. powers to BM to sanction adhoc limits.2 lakh to Rs. maximum of Prime Lending Rate (PLR) plus four per cent.5 lakhs and 20 per cent to the units with investment in plant and machinery between Rs.5 lakhs and Rs. including removal of stamp duty and permitting equitable mortgages. delegate powers to branch managers to grant adhoc facilities to the extent of 20 per cent of the limits sanctioned.

revitalizing DICs. The Premises: The guiding princi­ple of the future of small scale enterprise (SSE) development policy should be their accelerated growth and competitive­ness. credit rating and creation of data bases on the credit record of companies. In the case of small scale enterprises and ancillary units. The government must make simultaneous transitional arrangements to assist small scale units affected by this deres­ervation. Support for Research and Development: A National Research Institute for Small Scale Industries be established. infrastructure and low transaction costs were the hallmarks of the proposed strategy for promotion of SSE’s. it should earmark a minimum of 70 percent of the priority lending allocated to the small scale sector to the tiny sector.ABID HUSSAIN COMMITTEE (On Small Scale Enterprises) Report Submitted in January 1997 l l l Report submitted in 1997. Abolish Reservations: The removal of reservations so that adequate new investment and technology upgradation take place in these indus­tries and that existing units are allowed to upgrade.25 lakhs for tiny units. Other Fundings Sources for SSEs: Other sources of finance can also be tapped if the 24 percent ceiling on equity participation by large companies and foreign direct investment in SSE’s is removed. Focus on clusters: The centre-piece of the new approach is an increasing public private partnership in setting up support systems. backward areas) to such centres of growth. Revitalising District Industry Centres (DICs) : DICs need to be redesigned as autonomous District Enterprise Promotion Agencies (DEPA’s) with participation from business associations. Transitional Arrangements for Small Scale Industries Affected by Dereservation: The Ministry of Industry to identify specific industries/ items in which small scale units are likely to be affected by the proposed dereservation. Raising Investment Limits: An investment limit of Rs. and must have a special focus on the assist­ance of tiny units.. Banking Briefs 340 . SIDBI should also be allowed to raise funds in interna­tional markets. (For private circulation only) Recommendations of the Abid Hussain Committee in its Report submitted in Jan. Finally. promoted jointly by the Central govern­ment and apex industry associations. The Reserve Bank of India should promote the speedy establishment of the local area banks in the districts where SSI clusters have been identified. Specialised Commercial Bank Branches and Local Area Banks: Mechanisms for credit recovery should be strengthened by community guarantees. particularly in clusters of small scale enter­prises. services. Adequate supply of credit. the threshold level is to be raised to Rs. technology assistance.e. Some recommendations: Easing out of protection. etc.3 crore. government agencies. 70% of loans to SSIs should go to tiny sector and training of workforce in enterprises. To promote accelerated growth and competitiveness of small scale enterprises. the fund base of venture capital funds can be increased considerably if FII’s are allowed to invest in them. establishment of growth centers (clusters). 1997. abolition of reservation. Addressing the Credit Needs of tiny Enterprises: For ensuring that the tiny sector is not by passed by the commercial banking system. Mechanisms of Promotion: The policy of protection be replaced by promotion. The concept of the small scale sector to be widened to include small scale business and service enterprises. The thrust of the future policy for SSE’s should be to bolster growth in existing clusters by redirecting current investments in regional development (i. banks.

The Kannan Committee on working capital finance had suggested that banks try out the syndi­cated form of lending as an alternative to the multiple banking system and the consortium system. Any shift from the existing system of working capital assessment must keep in view the size of various banks. The first is that there should be free exchange of information by banks on borrow­er’s accounts. l Small banks may require more freedom in their assessment of working capital. The Ministries of Industry. single window concept where the lead bank will disburse the entire amount initially and thereafter collect the share of other banks and reduce its own exposure. Labour and Educa­tion should set up a special Task Force to work out the modali­ties for a special training scheme for SSE’s. Under the syndication arrangement. exposure limit. The borrower will route all transactions through the lead bank. a credit information bureau is needed to be floated independently by banks without regulatory guidelines. Such a bureau could “provide information on a client at a cost with utmost confidentiality”. To facilitate working capital finance. with or without risk participation. Public sector banks will have to exercise freedom by blending commercial considerations with socioeconomic responsibility.50 crores limit prescribed by the Reserve Bank of India for mandatory consortium lending should be done away with. mode of disbursement and follow-up. However. Asset classification of the account by all banks will be that of the lead bank’s. The lead manager will tie up with other banks in case the re­quirement cannot be met alone. the advantage for both the borrower and lender would briefly be the following: l The borrower will be required to submit periodical information to the lead bank which will be responsible for the overall monitoring of the account. Disbursement of the facility can be on the l l l Banking Briefs 341 . The committee has also said two vital aspects need to be ful­filled for the system to operate smoothly. This bank will prepare the information memorandum with details of borrowing required by client and credit pricing. On the basis of recommendations of the committee the RBI has since issued guidelines making MPBF not mandatory for arriving at working capital limits in banks. l Training: Technology upgradation in the small scale sector will throw up large requirements for training of entrepreneurs. The Rs. Syndication may be by way of disclosed or undisclosed participa­tion. manag­ers and employees. Secondly. the legal implications need to be examined before syndi­cation is tried out. corporate policies relating to financing various industries/product groups etc. their delegation system. It emphasized flexibility of operation in the new system. setting up of credit information bureau and dropping of Maximum Permissible Bank Finance (MPBF). Some recommendations: Syndicated form of lending. A credit information bureau be floated independently by banks.KANNAN COMMITTEE (on Working Capital Finance) Report Submitted in 1997 l l l Report submitted in 1997. (For private circulation only) Borrower will approach only one bank to act as lead manager or syndicate leader.

Need for derivatives trading in India In India. GUPTA COMMITTEE l l l Report submitted in 1997. forward contracts are extensively used for covering currency risk. It is against this background. l Cash market needs to be purged of critical weaknesses Derivatives need not wait for the cash market to be cleaned up Index based futures are the best possible starting point as they are a cost efficient hedge against market risk Futures market must have a hedging participation and speculator appeal Actual establishment of a futures exchange will require detailed plans The regulations must be changed to allow mutual funds into deriv­atives market Mutual funds must provide in their offer document on use of derivatives for risk reduction/strategy Strict supervision of cash/futures market a must Introduction of derivatives should be phased out over time Uniform settlement cycles must be introduced as a precursor to rolling settlements Enforcement machinery of the stock exchange must be independent of the trading members Stocks that are part of index to be used in futures must be in depository mode.C. countries not providing such globally accepted risk-hedging facilities are disadvantaged in today’s rapidly integrating global economy. introduction of uniform settlement cycles and independent enforcement machinery. allow mutual funds into derivative market. (For private circulation only) l l l l l l l l l l l Introduction of derivatives to be part of market development efforts 342 Banking Briefs .(On Derivatives) Reported Submitted in December. Key recommendations of the Committee are. 1997 L. There is also no forum for trading in derivatives and market players have often expressed a growing need for active use of derivatives to manage risks. But this need not be a pre-condition for introduction of deriva­tives: only the current process must be accelerated. In mid-1997. Some recommendations: Index based trading to be the starting point. Purpose: To suggest measures for introduction of derivative trading in India. Gupta Committee on Derivatives Trading in India submitted its report to the Securities and Exchange board of India (SEBI). the Tarapore Committee on Capital Account Convertibility had also expressed the view that “the time is ripe for introduction of futures in currencies and interest rates to facilitate various users to have access to a wide spectrum of costeffective hedge mechanism”. The Committee also opined that “a system of trading in futures is more transparent and cost-efficient than the existing system of forward contracts”. that the L. but there are neither currency futures nor any other financial futures in India.C. l Introduction Derivatives have come to be recognised as the most cost efficient way of hedging risks in certain types of commercial and financial transactions and therefore.

The ARF should be provided with special recovery powers. Alignment with Income Tax Rules. where (For private circulation only) Some of the important recommendations of the Committee are as follows: 1. entry of private/new banks. For redistributive objective. the fiscal system should be used rather than the credit system. liberal opening of foreign offices. Balance Sheets of banks and FI’s should be made transparent with full disclosures. which may be difficult due to their weak capital position. Deregulation of Interest Rates. removal of dual control of RBI and Govt. Creation of Assets Reconstruction Fund (ARF). borrowings gradually brought in line with market-determined rates. Desirable to provide for a prime rate. Criteria recommended for NPA’s and provisioning requirements be given due recognition by the tax authorities. Directed Credit. An asset would be considered non-performing if interest on such assets remains past due for a period exceeding 180 days as at the balance sheet date.I (On Financial Sector Reforms-1991) l l l Report submitted in 1991 Purpose: To suggest measures for banking sector reforms Some key recommendations: Reduction in SLR/CRR. All bad and doubtful debts should be transferred to the ARF in a phased manner. SLR to be brought down in a phased manner in about 5 years. shift to syndicated lending. Reduction in SLR/CRR. 8. Banks/DFIs would have to write off the losses incurred on account of transfer of doubtful assets to ARF. Priority sector should be redefined to include the weaker sections. The BIS standard of 8% should be achieved by Banks & FIs by March 1996. Interest rate on Govt. 2. which would be the floor of the lending rates of banks and DFI’s. 7. RBI should have the flexibility to operate the CRR to serve its monetary policy objectives. creation of ARF. Capital of ARF to be subscribed by the public sector banks and FI’s. 5. Directed credit programmes should be phased out. Income Recognition & Classification of Assets. Banks and FIs should pursue recovery through the special tribunals.NARASIMHAM COMMITTEE . Deregulation to reflect emerging market conditions. introduction of IRAC norms. The credit target for the redefined priority sector should be 10% of the aggregate credit. An Assets Reconstruction Fund should be established to take over from the banks and FIs a portion of the bad and doubtful debts at a discount. SLR should not be a major instrument for financing the Public Sector. Capital Adequacy. abolition of branch licensing. No income to be recognised in NPA’s. the level of discount being determined by independent auditors on the basis of clearly stipulated guidelines. Banking Briefs 343 . Rates on SLR investments should be progressively market-related while that on the CRR above the basic minimum should be broadly related to banks’ average cost of deposits. 3. Interest rate on SLR investments and on CRR in respect of impounded deposits above the basic minimum should be increased. Interest rate structure should bear a relationship to the Bank Rate. 6. 4. deregulation of interest rate. GOI should. Transparency of Balance Sheet.

Various RBI/GOI guidelines/directives in relating to internal administration such as creation/categorisation of posts. 15. Entry of Foreign Banks. A separate authority to operate as a quasiautonomous body under the aegis of RBI should be set up.necessary. there is scope for one or more of the large banks to have operations abroad in major international financial centres and in regions with strong ethnic presence. as hitherto. Banking Briefs 344 (For private circulation only) . Supervision to be based on evolving prudential norms and regulations. 18. international in charac­ter. Appointments to CMD’s posts may be made by the Govt. should not engage in directing regulatory functions. Supervision over Banks. and Rural banks (including RRB’s) whose operations would be confined to the rural areas and predominantly engaged in the financing of agriculture/allied activities. Freedom from RBI/GOI Directives in Internal Administration. subject to meeting statutory and other requirements. and where appropriate. Interest rate structure of RRBs should be in line with those of the commercial banks. Foreign banks should be placed on par with domestic banks. Local banks whose operations would be generally confined to a specific region. Rationalisation of Foreign Operations of Indian Banks. provide a subordinated loan counting for capital to meet this contingency. 14. Branch Licensing/Expansion. c) d) The revised system should be marketdriven and based on profita­bility considerations and brought about through a process of mergers and acquisitions. promo­tion procedures etc. Removal of Dual Controls. Suggested Structure: a) b) 3 or 4 large banks (including SBI). Entry of Private/New Banks. Each Public Sector Bank to set up one or more rural banking subsidiary. They should be based on a convention of accepting recommendations of a group of eminent persons. 9. Such rural banking subsidiaries should be treated at par with RRB’s in regard to SLR/CRR requirements and refinance facili­ties from NABARD. depending on the size/administrative convenience of the sponsor bank. Govt. RRB’s may have the option to merge with the sponsor banks (becoming a separate 100%. 12. affecting the banks should be rescinded. 13. and not excessive controls. Private Sector Banks should be on par with Public Sector Banks. subject to fulfilling usual requirements. Depoliticising Appointments of CMD’s. Setting up of Rural Banking Subsidiaries. 10. 8 to 10 National Banks with a network of branches throughout the country engaged in universal banking. There should be no bar for entry of new banks in the private sector. swap its rural branches with those of other banks. Proposed Structure of the Banking System. 11. 16. In addition to SBI. RBI should allow foreign banks to open branches/subsidiaries more liberally. 17. Greater emphasis on internal audit and inspection systems. Branch licensing should be abolished.owned subsidiary) or to maintain a separate identity. to take over all its rural branches. RBI should be the primary agency for regulating the banking system and dual control of RBI and Ministry of Finance-Banking Division should end. No further nationalisation of banks. Opening/closing of branches (other than rural branches for the present) should be left to the commercial judgment of the individual banks.

DFI’s should increasingly engage in providing core working capital. Existing Consortium lending system should be changed to syndication or participation in lending. Consortium Lending. and autonomy in the internal operations of banks and FI’s. Conclusion The Committee sought to consolidate the gains made in the Indian financial sector while improving the quality of portfolio. thus enhancing. healthy competition between banks and DFI’s. Commercial banks should be encouraged to provide term finance to industry. so as to usher in a healthy competitive and vibrant financial sector. To be distanced from the State Governments and to function on business principles based on prudential norms.19. State-level Financial Institutions. Banking Briefs 345 (For private circulation only) . 20. providing greater operational flexibility. at the instance of not only the lenders but also the borrowers. and to have a management set-up suited for this purpose.

amendment to SICA & ID acts.GOSWAMI COMMITTEE (On Industrial Sickness) Purpose: To suggest measures to speed up recovery for sick industrial units. increase in retrenchment compensation. Setting up of five recovery and five winding up tribunals to hasten the recovery of dues and winding up of sick units. l l l The committee proposed : l Change in definition of sickness : If a company defaults for 180 days or more on term loans. working capital or cash credit. l Banking Briefs 346 (For private circulation only) . setting up of recovery tribunal. reduction in stamp duty for mergers. l l l l The recommendations sought to (i) make it easier for a company’s creditors to spot symptoms of sickness for taking effective action (ii) Speed up winding (iii) provide for better compensation to workers in case of retrenchment. it should be labelled sick. Some recommendations: Change in definition of sickness. The Centre should try to convince the State Governments to reduce stamp duty in cases of merger. The committee also redefined sickness. including land. Raise retrenched workers’ compensation from 15 days wages per year of completed service to 30 days. SICA to override the Urban Land (Ceiling and Regulations) Act so that creditors will be able to sell a sick company’s assets. to recover the dues. The creditors of such a unit can then go to the recovery tribunals or High Courts to get their money back. The Sick Industrial Companies Act (SICA) should override the Foreign Exchange Regulation Act to permit foreigners to buy sick companies. Amendment to sections 25(N) and 25(O) of the Industrial Disputes Act so that the State Labour Commissioner’s permission is not needed for retrenching labour.

9. setting up of factoring services. Setting up of factoring organisations in all parts of the country and allowing the private sector to enter this field. Banking Briefs 347 (For private circulation only) . Working capital requirements upto Rs. required to financing norms to SSI’s as per Tandon/Chore committee norms and (iii) revisions. and follow up with various authorities for their resolutions. 11. Definition of a sick SSI unit is sought to be modified. SSI association to set up technical wings to be able to look into the problems of units. Abolition of system of levying the DICGC guarantee fee on SSI borrowers. 5. 4.10 lacs for tiny units. opening of specialized SSI branches. 10. 13. if any. 7. 6. or when there is erosion in the net worth due to accumulated cash losses to the extent of 50% or more.” Indexation of value of investment in plant and machinery to ensure a uniform application of the definition of SSI. Reduction in service/collection charges and overdue interest charged by banks on the bills of SSI clientele. Some recommendations: Min 20% of turnover as working capital limits. 100% finance for Working Capital for limits upto Rs. required to rehabilitate sick SSI units. 10 lacs for all tiny units should be fully met. (ii) modifications. The norms for inventory and receivables should not come in the way of SSI units getting 20% of the turnover as working capital from banks. Opening of specialised branches to cater to SSIs. ombudsman within banks to address SSI grievances. Creation of ‘ombudsman’ type of authority within banks to look into grievances of SSI borrowers. 12. as “when any of its borrowal accounts remains overdue for a period exceeding 2 1/2 years. Creation of separate modernisation fund for SSI’s. 3. redefinition of sick units.NAYAK COMMITTEE (On credit to SSI sector) l l Purpose: To facilitate easy flow of credit to SSI sector. or when its peak net worth is eroded during the preceding two accounting years. 8. Nayak Committee looked at (i) adequacy of institutional credit to SSI sector. Allocation of districts exclusively to SFCs and banks for intensive financing of SSIs. 2. Special norms for SSI units in the north-eastern and hilly regions may be considered. if any. reduction in charges/overdue interest. Working capital requirements of other SSI units to the extent of 20% of the output should be met by banks. Recommendations of the Committee : 1.

award of contracts.50. printing of stationery. Proper scrutiny of personnel posted in sensitive spots. and thereafter too. i) l Preventive Measures a) j) Banking Briefs 348 (For private circulation only) . and evolve clear cut systems which would enable fixing of responsibility quickly. surprise inspections. A Senior/Top Management Committee should scrutinise the ap­proved proposals for acquisition of premises. Bankers Receipts should be redeemed only with security. Banks should examine the need for introducing a separate divi­sion of the internal inspection machinery to scrutinise credit portfolio only. it is implied that the same is dishonoured. Maintaining proper surveillance on officers of doubtful integ­rity. Ensuring prompt observance of conduct rules relating to integ­rity such as i) ii) iii) iv) g) h) Critical scrutiny of Assets and Liability statements Receipt of gifts Relatives employed in private firms or doing private business Benami transactions l l Some of the important recommendations of the Committee are as under: A) B) Concurrent Audit by external auditors made mandatory for large branches Apart from internal audit once in 12 months. Unreconciled clearing transactions and entries in inter office accounts Sundry/Suspense accounts-entries of Rs.GHOSH COMMITTEE (On Bank Frauds) Purpose: To suggest measures to contain bank frauds. short surprise inspections should be made. in order to eliminate or minimise factors which provide opportunities for corruption/malpractices. Otherwise. scrutiny of personnel in sensitive posts. photograph in accounts mandatory. C) A system of revenue audit to plug the loopholes in income D) Banks should ask the officials/employees to disclose information regarding other accounts opened in other branches E) F) Photographs in accounts made mandatory To keep a close watch on heavy withdrawals/receipts in newly opened accounts for the first 3 months. surveillance of doubtful officers.and above outstanding for more than six months Detailed examination of the existing organisational setup. G) Bankers’ Receipts not to be outstanding for more than 15 days. Vulnerable areas l Quick disposal of disciplinary cases Banks should look into the system of appraisal. sanction. speedy disposal of disciplinary cases b) c) d) e) f) Planning and enforcement of regular inspections and surprise visits. Some recommendations: Concurrent audit by external auditors in large branches. supervision and follow up of credit.000/. Location of sensitive spots and regular and surprise inspection thereof.

l l l The following are some of the major recommendations of the Committee: l Introduction of notes/coins counting machines where volume of work warrants. optimum branch size. Banks may accept term deposits in units of Rs. also for safe custody articles and safe deposit lockers.GOIPORIA COMMITTEE (On Customer Service) Purpose. (For private circulation only) Commencement of employees’ working hours 15 minutes before commencement of business hours at branches in metropolitan and urban centres. at one or more branches for cash trans­actions upto Rs. Monitoring by RBI of cash handling by bank branches and functioning of currency chests. passbook system for TDRs. nomination facility. like postal orders.or in its multiples. Provision for one or more Teller counters at area 1 centres. extension of business hours. intimation regarding deposit becoming due should be sent. Provision for enquiry counters near the entry point at all branches.5. unless customer decides otherwise. to be confirmed later on by receipt of official communication. Attending to all the customers who enter the banking hall before the close of business hours. introduction of bank order. except very small branches. and issue pass books (doing away with deposit receipt system). l l l l l l l l l l l l l l l Banking Briefs 349 . Nomination should be made a rule. value dating of TTs. Encouragement of Savings Bank accounts by offering better rate of interest. ‘Bank orders’. To suggest measures to improve customer service Some recommendations: Employees’ working hours to be 15 minutes earlier. single window approach for consortium finance. Manning of all counters during the business hours. 5000/. based on which branches should be enabled to accept deposits at new rates provisionally. Change in interest rates on deposits should be made known to customer as well as bank branches by press notifications. as a rule. instant credit for outstation cheques. pay telephones in large branches. Advance instructions from depositors for disposal of the deposit on maturity may be obtained in the application form itself: wherever such instructions are not obtained. 5000 and for noncash transactions upto Rs. may be introduced in denominations of Rs. wearing Identity badges. to cover all other existing and new accounts. Providing more user friendly service relating to exchange of mutilated and soiled notes. 10000/-. including state capitals. Acceptance of small denomination notes from customers as well as from noncustomers for issuance of drafts. Extension of business hours for transactions except cash. up till one hour before close of the working hours. Change in interest rates on deposits should be made applica­ble to the existing deposits also.

Telegraphic Transfer (TT’s) issued and payable at Area 1 centres including state capitals may be value-dated on third day. Dishonoured instruments may be returned/ despatched to the customer within 24 hours. pro­viding for payee’s name to be filled in by the purchaser. Rs. designed so Facility of instant credit of outstation cheques may be raised to Rs. Each employee may wear on his person an identity badge with photograph and name. More centres may be notified for creation of equitable mortgages.100. Rs. Complaint book with perforated copies in each set may be introduced. Working capital applications may be processed by banks simultaneously with financial institutions dealing with term loan applications. other remittances may be credited on receipt of telegram or confirmation thereof whichever is received earlier. Disbursement of such agreed share should not be delayed for constraint of funds. At metro and urban centres work may be automated and modern techniques of working may be adopted.20. Employees’ unions and officers’ associations should be invited to radiate spirit of customer service towards one and all of the banks’ employees. l l l l l l l l l l l l l l l l l After agreeing at consortium meetings. etc. where necessary.I. More centres may be covered by National Clearing. Customer transactions. Reward and recognition system should be used effectively. In the long run. Induction training should be a must for all newly recruited clerical and officer employees. Periodic change of desk and entrustment of elementary super­visory jobs may be considered for clerical employees.F. processing and sanc­tioning its own share of credit facility by any member bank should be within 45 days. l l Single-window approach with regard to documentation of consor­tium finance may be promoted actively.1000 etc.Rs. by suitable statutory amendment. lead bank of the district may manage such clearing house. l Banking Briefs 350 (For private circulation only) . 5000 (from Rs. Where delay in crediting bill proceeds can be attributed to the bank.W. it should pay interest to the lodger for the delayed period at the rate of 2% above savings bank interest rate. Quality circles may be encouraged.T. Clearing houses may be set up at centres having ten or more banks. S. Training programmes should be with a customer service orientation. A separate type of pay-in-slip may be evolved for availing of this facility. Remote Area Business Message Network (RABMN). may be attended to by putting to effective use BANKNET. in consul­tation with the Unions. especially transfer of funds. 2500).500. Rs. notified centres concept may be done away with. which the bank should arrange on its own initiative. it should reimburse the collecting bank interest for such delay. If remittance of proceeds is delayed beyond two days by paying bank. covering district headquarters to start with.

by carving out certain functional areas to be spun off to new specialised branches. Optimum branch size may be determined. such as efficacy of com­plaints handling and grievance redressal machinery. may be intro­duced in banks also. adjusting weekly offs suitably. In predominantly residential areas. l l l l l l l l l l l l Banking Briefs 351 (For private circulation only) . Inspectors’ and auditors should give due importance in their reports to customer service aspects. Unwieldy large branches may be trimmed. to provide more working days. Time norms for specialised business transactions should be displayed predominantly in the banking hall. individu­al bank may do its own publicity campaigns: wherever public in general is the target group. Personalised service may be promoted by levy of higher service charges. if necessary. l l Branch level Customer Service Committees should be rejuve­nated. banks may observe Sunday working. Public relations oriented officers may be posted to complaint prone branches with a view to converting these into good customer service units. Specialised branches may be opened for catering to exclusive customer to instantly provide an acknowledgement to the customer and intimation to the controlling office. Senior officials from controlling offices may give priority to customer service aspects during their branch visits. Restricted holidays on Government pattern. For the present. Banks should arrange for pay telephones in large branches. Instead of joint publicity by public sector banks. Credit cards and other innovative products like ATMs may be floated on a joint venture basis. Best branches from customer service point of view should be rewarded by annual awards/running shield. branches should have staff strength not exceeding 100 and business level not beyond Rs 200 crores. The number of holidays in a year including restricted holidays should not be more than 15 days in any state. the Indian Banks’ Association may undertake publicity on behalf of the banks. cross-­checking actual atmosphere with a copy of the customer service report.

Setting up a clearing system for foreign exchange market. 5. Presently Indian companies are required to obtain permission from RBI to issue shares/ debentures to NRIs/OCB’s. 5. I. investment in housing and real estate with free repatriation.15 crores for open position was recommended. shares/debentures. 3. To remove these irritants. Market participants in the foreign exchange market be enlarged by including IDBI. The removal of the limit of Rs. The 40% scheme on repatriation basis and 100% repatriation scheme applicable to specified areas/sectors were merged. ICICI. Market intervention by RBI should be selective and discreet. Investments by NRI’s in educational institutions in medical. The restrictions on investment by NRI’s in sick units with a lock-in period of five years plus the eligibility criteria that the shares of the company should have been quoted below par for two years were recommended for removal. 4. abolition of restriction in investment of NRIs in sick units. removal of cumbersome procedure for subscription to and sale of shares Development banks to participate in forex market. management and technical areas were to be on nonrepatriation basis.SODHANI COMMITTEE (On Forex Markets) l l Purpose: To promote NRI investments in India & To widen and deepen forex market Some recommendations: 100% repatriation. 2. Further the power to grant loans to NRI’s for housing was given to the commercial banks. 3. thereby enlarging the scope of investment on 100% repatriation basis. Recommendations for widening and deepening of foreign exchange market : 1. Banks should be allowed to borrow and lend upto six months in overseas markets. This limit has since been replaced by the limits specific to the size of the bank. Thereafter NRI’s/OCB’s are required to come to RBI for approval for making investment in II. existing condition involving lockin period of 3 years and ceiling of 16% on profits from investments in housing and real estate were removed. etc. Recommendations for promoting NRI investments : 1. Banking Briefs 352 (For private circulation only) . 2. companies may take general permission from RBI. Investments in housing and real estate is permitted with repatriation of principal and profit freely. and again at the time of disin­vestment. l The Sodhani Committee was set up to look into various issues relating to promotion of NRI investments in India and also for widening and deepening of foreign exchange market. 4. freedom for banks to borrow in forex market and setting up of forex clearing.

(BOT : Build. (IV) A Simple Regulatory Framework l l l (II) Fiscal incentives for Capital Markets l l l l l (V) Fiscal Policies l (III) Debt Market Reforms l l l l Banking Briefs 353 . and once the project becomes viable. Existing sector specific enactments be unified into a single statute. removal of investment restriction for FIIs. Such SPV’s should be able to vary their capital with ease. A clarification be provided in section 801A stating that entire project income inclusive of income from ancillary development will qualify for tax holiday. Private sector infrastructure companies be permitted to issue tax-free bonds. (BOO : Build. Operate and Transfer) Take significant equity positions in projects to crowd in commer­cial equity and debt. they should be easy to wind up. tax reliefs for equity investment. The definition of “infrastructure facility” be expanded to include all infrastructure sectors. Dividends payable on equity investments be made cumulative for payment for the period till the project goes onstream. develop atleast 2 ports as mega ports. Special Purpose Vehicles (SPVs) be used for funding infrastruc­ture projects. An overarching legislation be made for project formats such as BOT.(On Commercialisation/Funding of Infrastructure Projects) Purpose: To suggest measures for commercialization/funding of infrastructure projects. BOO and the like governing projects across all sectors on the lines of the BOT Law of the Philippines. Some recommendations: Setting up of transparent regulatory framework. apply “Polluter Pays” principle. l RAKESH MOHAN COMMITTEE l l l (I) Commercialisation of Projects For meaningful commercialisation of infrastructure projects. ‘Repo’ transactions be re-introduced for listed debt securities with suitable safeguards. disin­vest and reinvest in new projects in the nature of a venture capitalist. FIIs be allowed to participate in debt market. (For private circulation only) l Set up a transparent regulatory framework so that BOT-type projects are easier to negotiate and implement. government to subscribe to equity. Suitable changes be made in the Incometax Act to provide for sharing of depreciation charges. the Government must l A single TDS rate be developed for all debt instruments. Private sector participation in long gestation projects. especially in the case of joint/ leveraged leasing for infrastructure projects. permission to private companies to issue tax free bonds. Operate and Own) The present restrictions for invest­ment in infrastructure projects be removed from FII guidelines. cost-based pricing for power. they should be tax-transparent. corporatisation of telecom. Debt market intermediaries be given access to institutional finance. Equity investments in long-gestation infrastructure projects be granted tax reliefs.

A pre-determined benchmark price per unit of energy as the basis for allowing private power projects. Micro-level systems need to be designed to recycle water at the household level. The property tax base be freed from the Rent Control Act. limited development or license rights (like running kiosks). long lease for trees and the right to use their product. N